Crypto is a challenge for entrepreneurs. Not only is the crypto market itself and public confidence unstable to say the least, it also seems as if regulatory bodies and authorities are unable to keep up with technological and market-related developments. This looks set to change now that specific legislation is on the agenda in the form of a European ‘Cryptocurrency Markets Regulation’ or MiCa.
Text: Martin Michael
Regulatory and enforcement authorities face the challenges brought about by technological and societal developments: from a perspective of technical understanding, identification of risks and provision of appropriate solutions. In recent years, attempts have been made to apply some degree of regulation in this area by amending existing European anti-money laundering directives. By means of national implementing legislation, in the Money Laundering and Financing of Terrorism Act (Wwft), different types of service providers with respect to virtual currencies have already been identified in the Netherlands and subject to regulation.
The first crypto service subject to registration as a result is the business or professional exchange between virtual currencies and fiat currencies (such as euros). Virtual currency is defined in Article 1 of the Wwft as: ‘A digital representation of value that is not issued or guaranteed by a central bank or government, that is not necessarily linked to a legally established currency and that does not imply the legal status or has money but which is accepted as a medium of exchange by natural or legal persons and which can be transferred, stored and traded electronically.”
The other crypto service within the framework of the obligations prescribed by the Wwft is the provision of crypto wallets. The Wwft describes a crypto wallet provider (in the wording of the law: depotpung) as an ‘entity that provides services to secure private cryptographic keys on behalf of its customers for the purpose of storing, storing and transferring virtual currencies’.
How to proceed?
Where people currently settle for a stopgap measure, namely the inclusion of this relatively new market to be regulated in a law that in principle focuses on a related, yet significantly different domain (with a significantly different risk profile in terms of both the financial markets as well as society itself), specific legislation is now on the agenda. This takes shape in the proposal for a European ‘Regulation on Markets in Crypto Assets’ (also: Regulation on Markets in Crypto Assets or MiCa).
MiCa actually proposes crypto-friendly legislation. The proposed law focuses on defining the terminology and technology relevant to distinguish between different types of crypto services and related assets, such as different types of crypto tokens, involved. The law also covers providers outside Europe, provided they serve Europeans.
It is important to bear in mind that MiCa is not intended for assets already covered by existing legislation. Although they show similarities to what we currently understand, for example under Wwft, as crypto services – for example, as a result of the distributed ledger technology used. Think of:
– financial instruments;
– electronic money (unless also stablecoin);
– structured deposits;
Other crypto services and crypto assets fall within the scope of MiCa (ie also what is currently regulated under the Wwft).
MiCa has approximately four goals.
1. Provides legal certainty. The European legislator wants to achieve this by introducing a robust, harmonized legal framework for all forms of crypto-assets (with or without reference and respect to the above-mentioned laws).
2. Stimulating innovation by creating a safe and fair legislative framework to promote innovation and fair competition.
3. Ensuring the necessary degree of consumer and investor protection. It has been concluded that many of the currently unregulated or restricted crypto-assets pose risks to these groups that are as great, if not greater, than the more trusted financial instruments that are already subject to strict regulation.
4. Ensuring financial stability. The legislator rightly notes that the crypto world is developing at a furious pace and sees risks in the possibilities of wider social acceptance of especially stablecoins (in the legislation: e-money token (stable linked to one legal tender) or asset-reference token (stable ).linked to various legal means of payment, one or more goods and/or other crypto-assets). Considering the possibility of stablecoins becoming systemically important to society, the European legislator wants to give this category of cryptos a clear regulatory framework.
We cannot tell you in this article whether it is a wise choice for you as an individual or company to invest in, offer or accept crypto. The question of whether MiCa is the solution to the uncertainty that we see in the crypto world today cannot be answered either. The law appears to be a step in the right direction and the proposal shows a European attempt to catch up with the lag that the relevant legislation has incurred in terms of technology. The harmonized rules on crypto service providers’ capacity, transparency, licensing and accountability obligations, as well as rules on supervision and enforcement, have the potential to provide providers with a significant level of clarity, promote their legal certainty and stimulate competition, as well as improve the position of consumers and investors.
Martijn Michael is legal advisor at ICTRecht.