MiCA is here

Today, June 30th, 2024 marks the day when Titles III (Asset-Referenced Tokens, ARTs) and IV (Electronic Money Tokens, EMTs) of Regulation (EU) 1114/2023 (#MICA) enter into application. The "National Competent Authorites" (NCAs) as well as ESMA and EBA, had one year to prepare.

At the recent Nexus2050 event in Luxembourg I had the opportunity to take stock with the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg NCA.

^{The CSSF booth at the Nexus2050 event in Luxembourg}

ARTs and EMTs

I naturally started the discussion with the more pressing topics, those related to ARTs and EMT. Those who have read my Master's dissertation, dedicated to MiCA might remember that:

1. MiCA has been seen by many as a rushed reaction of the EU political level to defend its power over money against the danger that Libra, Facebook's project seemed to represent. As such, the EU came up with a dedicated category of crypto-asset, the "Asset Referenced Token" (ART), where Libra would have fit based on the descriptions available at that time. Aside from Libra, which never materialized, it was not clear what other existing cryptoasset fell into that "ART" category, especially since algorithmic stablecoins were explicitly not considered ARTs by the initial Proposal from Sept. 2020 (Recital (26)). When Libra and then its successor, Diem, were abandoned, the whole ART category was threatened by irrelevance. Therefore, the final version of the regulation has made a complete U-turn and explictly included algorithmic stablecoins - Recital (41).

2. The provisions of the Title IV are so draconian, they amount to a de facto ban on offering stablecoins in the EU.

I've asked the CSSF employees how things were looking out in this respect. I understood that they were not aware of any entity interested in offering an ART from Luxembourg, although it seemed like, at the european level, there were preliminary inquires concerning the opportunity to issue gold and other precious-metal-backed ARTs.

As for the existing ones, I was naturally curious about the status of HBD (now falling in the ART category, as per Recital (41)). HBD is not per se MiCA-compliant, so Europe-based exchanges (CASPs) cannot offer it for trading, but that is not very relevant as its low volume make it a thinly traded asset.

On the bright side, and more importantly, the CSSF employees present on the booth agreed that:

1. Peer-to-peer payment using HBD is not concerned by MiCA. EU citizens and legal entities can continue transacting in HBD without any worry as regards the new regulation, which has no provision covering the use of existing ARTs as a means of exchange.
2. Trading on DEx-es is not concerned by MiCA. Currently, HBD can be swapped for HIVE on the internal market or on Decentralized Exchanges (DEx-es). As MiCA does not cover Decentralized Finance, none of its provisions impact HBD trading which remains unencumbered by regulation.
3. Algorithmic granting of interest is not concerned by MiCA. Holding HBD is presently remunerated by a 20% APR. MiCA prohibits issuers of ARTs from granting interest, but as HBD has no identifiable issuer, the provision does not apply. MiCA also prohibits CASPs from granting interest on ARTs. HBD is only listed on Upbit Korea, accessible only to Korean users. Hence MiCA's Art.40 does not apply and holders of HBD can safely continue receiving 20% APR interest from the protocol itself.

As concerns EMTs, the "European innovation" outlook appears more positive as a few entities have approached the CSSF to inquire about the opportunity of offering an EMT. I can only hope that I was too harsh in my dissertation and that some euro-stablecoins will be successfully issued and attract users. We'll see whether the initial inquires and intentions are going to materialize into a competitive euro-stablecoin market of a volume at least comparable to the USD-stablecoin volume.

Other tokens

I was in fact more interested in learning about crypto assets other than ARTs and EMTs, for which MiCA will not apply until Dec. 30th. I have co-founded OffChain Luxembourg, a local chapter of a global non-profit, OffChain. As I will explain in more detail in a future post, our members are invited, as a fun experiment, to test-drive the European MiCA regulation by offering a newly created token, with the ambition to being the 1^st MiCA-compliant token in Luxembourg.

So I took advantage of Nexus2050 to make an initial contact and establish a communication channel with our future NCA, the CSSF.

I will remind here that MiCA has 4 stated goals:

1. Legal certainty
2. Supporting innovation
3. Protecting consumers
4. Financial stability

As regards the first objective, we have deplored together the confusion and uncertainty which MiCA raises by not always clearly distinguishing between "issuing a crypto-asset" and "offering a crypto-asset". Indeed, as I have underlined in my dissertation, the legal drafting in the Commission's proposal from 2020 was regrettably poor and used mostly "issuer". As people who know the technology will attest, "issuing" a crypto-asset is very similar to writing software or using a software product, thus is fundamentally "innovating". There is no moral, rational, nor legal justification for imposing conditions and restrictions on writing software or using a software suite.

As it turns out, and thanks to the better informed work of the co-legislator, the EP and the Council, it now appears clear that MiCA targets "offering crypto-assets to the public" rather than merely "issuing". Indeed, "issuing" a crypto-asset can be done by just about anyone in a few clicks, for example here and is barely different from filling-in a form on a web site. Trying to impose controls and conditions and restricting actions as natural as using a web site or filling-in a form would be demonstrably violating the principles of the EU Treaties, hence it cannot be a valid hypothesis.

To avoid the confusion, the regulation should have, from the get go, referred clearly and unambiguously to "offering a crypto-asset for sale to the public".

With that point clarified, there were a couple other points I wanted to touch:

1. Whitepaper. MiCA requires that offerors of crypto-assets other than ARTs and EMTs publish a whitepaper that fulfills certain conditions, including being "in a machine-readable format" to be specified in more detail by ESMA. It is said that the final draft should be issued on Jun 30th, yet I've seen very little. ESMA mentions their intention to use InlineXBRL as the required format. They have published (already in September 2023) a limited "taxonomy" , an XSD schema and a "proof of concept" macro-enabled Excel file to produce the InlineXBRL from simple table.
   The CSSF employees at the booth could not help further in this regard, so I guess it remains a matter of following closely ESMA's publications.
2. Intermediaries. If it was necessary to remind that, Satoshi Nakamoto wrote in the Bitcoin whitepaper:

the main benefits are lost if a trusted third party is still required [...]*

Yet MiCA requires precisely that for an offer of crypto-assets: Art 10 § 3 mandates that funds collected in crypto-assets be kept in custody by

(b) a crypto-asset service provider providing custody and administration of crypto-assets on behalf of clients.

As a blockchain smart contract does not qualify, it follows that a trusted third party is required by law. This indirectly confers the role of "gatekeeper" to that third party who can leverage its privileged position to extract financial benefits for itself, thus increasing the cost for everybody.

We see this already with Centralized Exchanges which often ask for $200,000 or more in order to list a new crypto-asset.

Here again, the CSSF staff could only acknowledge.

3.Crypto-asset classification and other issues
Art 8 § 4 places on the offeror the burden of explaining to the NCA why the crypto-asset should be covered by MiCA and is neither an ART nor an EMT. NCAs have the possibility to object to that classification at any moment. In general, the competente authorities are granted sweeping powers defined in broad terms in Art. 94 of the regulation. This markedly decreases the legal certainty (albeit MiCA's first objective) for all offerors.

The regulators pointed out, quite fairly, that some powers are needed if they are to enforce the legislation. And indeed this conundrum cannot be solved with the European approach to regulating technological progress. Indeed, "innovation" and "consumer protection" are, to a large extent, contradictory injunctions. As long as the EU legislator will not acknowledge openly this tension, European innovators will find "exile" a tempting option.

Meanwhile, the best that aspiring innovators and regulators such as the CSSF can do is to discuss and find the best solutions, in the best interest of both consumers and the competitivity of Europe.

Conclusion

Offchain Luxembourg has set out to test MiCA's suitability to support innovation, its second objective. When it will begin to apply, on 30 December 2024, we plan to offer for trading the 1^st MiCA-compliant token in Luxembourg. To this end, we have started approaching the Luxembourg regulator, the CSSF, in order to create a collaborative dialogue conducive to a successful offer.