This week the EU’s crypto legislation MiCA was formerly signed into law. A recently published EU Parliamentary report explores the potential for the next iteration of MiCA. It makes several suggestions that would be considered controversial for the crypto community.
- treating all crypto as securities by default (subject to MiFID, not MiCA)
- regulating decentralized autonomous organizations (DAOs) as entities
- requiring wallets used in the EU to be licensed.
The paper outlines two areas it considers still unclear under MiCA. One is the classification of crypto as either a crypto asset under MiCA or a financial instrument under MiFID. The other issue is the regulation of decentralized Finance (DeFi) because MiCA does not cover decentralized protocols.
Deem cryptos securities by default
On the first point of uncertainty, a clause in MiCA requires ESMA to issue guidelines on delineating the difference between a crypto that is a financial instrument (regulated under MiFID) versus a crypto-asset regulated under MiCA.
While MiCA puts the responsibility of the decision on the cryptocurrency issuer, the paper’s authors believe that’s not enough. Their rationale is that with 10,000 cryptos, smaller national regulators don’t have the manpower to go through a detailed analysis, dispute the issuer’s classification, and bring an enforcement action.
They propose that all crypto should be considered a financial instrument by default, which is equivalent to the SEC’s stance in the United States. It’s only subject to MiCA when a national competent authority deems it as such. The effect is that most crypto would be treated as securities undermining MiCA’s intent to encourage responsible innovation. Hence this is not likely to happen.
Turning to DeFi, MiCA applies to centralized or partly centralized entities. The paper’s authors are skeptical that many, if any, DeFi protocols are fully decentralized, so they believe most are in the scope of MiCA.
However, if some are fully decentralized, they believe a simple solution is to designate DAOs as entities. Then the entity is a crypto asset service provider (CASP) that is subject to MiCA.
Another controversial suggestion is to only allow licensed Euro wallets with embedded compliance, for example “allowing for transfers from wallets with a signature from cooperating jurisdictions only”.
It’s worth noting that this is simply a report for MPs to read at this stage. But these kinds of papers can be influential.