Extremely comprehensive legislative changes for the crypto sector are close to being implemented. Dusk Network is preparing for them, and in a series of articles on the subject, seeks to help the broader crypto community to understand its obligations in what can potentially be a difficult and complex transition into a new regulatory environment.
Dusk Network is a tip-of-the-spear project building a privacy-focused layer-1 blockchain from the ground up. At the same time as making ground-breaking advances in zero-knowledge technology, Dusk Network provides fully compliant smart contracts for businesses that need their privacy to be preserved.
Since early July of this year, Ryan King of Dusk Network has written and published a series of 5 articles aimed at breaking down the EU MiCA (Markets in Crypto Assets) regulation, which will have far-reaching implications for all crypto projects that wish to operate in the EU.
Key Terminology
The first article looks at how MiCA defines the various types of crypto assets, which can be confusing as they differ from what most in the industry understand them as.
There is no legal meaning to the word ‘stablecoin’ in the classifications, and this has been split into two categories: EMT (Electronic Money Token), and ART (Asset-Referenced Token). Neither algorithmically-backed tokens, nor security tokens, nor NFTs have been included in the classifications.
Who cares about MiCA?
In the second article Dusk Network looks at the various stakeholders as regards the MiCA regulation.
The European Union
The MiCA regulation takes into account the potential that stablecoins may have for inflationary effects on currency. Therefore MiCA includes strict clauses that oblige stablecoin issuers to ringfence their assets and have them frequently audited.
The article covers how there is potential for various scams and abuses in the crypto sector, and that when these take place investors look to their governments for protection and assistance, giving the EU the chance to step in and take enforcement actions under the incoming MiCA regulations.
It looks as if the EU is seeking to build a regulated and transparent ecosystem of crypto assets where companies can set up with the full knowledge that guidelines are clear across the whole 27 countries that make up the union.
The finance industry
The clear guidelines to be put in place with MiCA aim to allow TradFi and DeFi to co-mingle without any barriers, and in full compliance.
Dusk Network
A stated aim of Dusk Network is to give everyone full control over all their digital assets, so it recognises that MiCA can be a step in the right direction.
By building compliance in at the foundational level users will have the confidence that Dusk Network services can be accessed without having to worry if they meet regulations. With this in mind, Dusk Network will continue to observe MiCA and any other EU regulations with close attention.
What MiCA means for you
The third article in the series looks at the requirements for new crypto projects. The MiCA regulations are not retroactive and so will only apply to projects that are launched once the regulations are in place at some point in 2023.
The MiCA regulations want to make a project’s whitepaper a legally binding document. All relevant information needs to be in a whitepaper and any promises made within it are binding and have to be carried out or consequences will result.
There will also be rules for CASPs (Crypto Asset Service Providers) in that they must register a legal entity in any one of the 27 EU member states. They must show that they have enough funds in order to carry out planned operations; and they must demonstrate evidence of proper compliance.
Stablecoins are redefined
Although MiCA makes frequent reference to stablecoins, it does not legally define the word. Instead, two types of stablecoins are categorised, which are Electronic Money Tokens (EMTs) and Asset-referenced Tokens (ARTs).
The rules recognise that EMTs are a one-for-one equivalence, with one electronic euro having the same value as a physical euro. They must also be backed by only one fiat currency.
By contrast, an Asset-Referenced Token is denominated in a single currency, but is backed by any combination of two or more fiat currencies, one or more cryptocurrencies, and/or one or more other assets.
Right of redemption
Within the MiCA regulations but stemming from the 2014 EU Consumer Rights Directive, is the right of redemption after sale, within a 2-week cooling off period. This gives the right to a full refund without any valid reason, as long as funds are returned in their original form. This law will apply equally to both EMTs, ARTs, and any crypto assets.
The issue for a project wishing to raise funds for its launch is that potentially a significant amount of its coins could be returned within two weeks of the token sale.
This could mean that stablecoin issuances might only be attractive to large institutions that already have a lot of capital and who don’t need to raise funds in order to build.
Will the MiCA rules on stablecoins be too restrictive?
The EU appears to be concerned that stablecoins could threaten its control of the money supply, but it seems to be trying to balance this with the desire not to totally suppress the undoubted beneficial innovations that come with stablecoins.
Also, with the rule that interest cannot be paid to consumers on their stablecoin holdings, this takes away one of their utilities and could eventually lead to them putting their money into the bank instead, which is of course exactly what governments are after.
And finally, there is to be a $200 million euro cap on daily stablecoin transactions. At first glance this might seem a high limit, but in practice it isn’t. Many of the stablecoins operating today exceed this amount many times over.
The good, the bad, the ugly, and the unknown
The good
It does appear that the EU is genuinely trying to strike a balance between providing a clearly regulated environment for crypto assets while at the same time attempting to still allow for innovation to happen.
Regulatory clarity would hopefully attract those risk-averse sectors such as finance to come and set up in the EU, therefore, helping the European economy to compete with the United States and Asia as a place in which to do business based on DLT and other innovative technologies.
The bad
Regulatory compliance is a good thing, but it may be seen that the cost involved here could be prohibitive. Just the legal costs of writing a whitepaper could be great. Lawyers would have to comb through every word given that it would need to be a legally binding document.
Also, while not just involving huge costs for a project, it also greatly increases the chances that it might be taken to court, with the ensuing costs of litigation to be added to the bill, and possible fines or worse to be faced.
With the 2-week redemption period there is the possibility that potential attacks on social media attempting to put would-be investors off, will mean that no project can consider its fund raise safe until the 2-week period has ended.
MiCA provides a loophole for the 2-week redemption period if a company is able to get its token listed on an exchange. However, this can have the effect of giving a lot more power back to the exchanges, which might do creative deals with projects that will allow them to list quickly.
The ugly
Two odd exemptions from the MiCA specified categories are those of Bitcoin and Ethereum. Although they are covered by MiCA, they don’t fit into the EMT, ART, or utility categories, so they would likely have to fit into the catch-all ‘cryptocurrencies’ category.
The problem arises that bitcoin has no ‘issuer’, so a whitepaper can’t be written by it. However, the 30 June agreement gets around this by obliging the exchanges that list it to write the whitepaper themselves.
After writing the whitepaper they would then have to go through the same process for any project wishing to be accepted, and they would also assume the same liability and risks for everything written in the whitepaper, even though they did not create the crypto asset itself.
According to the Dusk Network view, a ‘grandfather’ rule might be expected to be applied, whereby a whitepaper wouldn’t be required of existing exchanges, but would be needed by any new exchanges, and also existing exchanges if they added these tokens after the rules came into effect.
Finally, an oversight by MiCA means that as the regulations come into effect and exchanges are required to obtain licences as CASPs, the current Anti-Money Laundering Directive 5 will still be in force, which requires fiat/crypto exchanges to have a licence for each EU state in which they operate.
Therefore, for the first 18 months after MiCA comes into force, crypto exchanges will need both national and EU licences which effectively doubles the amount of work for them.
The unknown
Even though the EU has been working on MiCA for 2 years, several key elements remain unaddressed. For example, although the rules for EMTs and ARTs are fairly well described, it does not appear that the utility token category contains enough specifics.
Issuers of utility tokens will still have to follow the same burdensome rules such as writing a whitepaper, but the possibility of additional rules for this category remains for the future.
On the subject of sustainability and energy usage, nothing concrete has been laid down, but this still leaves token issuers with a requirement to report their sustainability details without knowing if they will break any rules.
NFTs were not covered in the final draft of MiCA, and therefore it is not known if an amendment will be added or if entirely different regulations will cover them.
GDPR was also not covered in the final draft, therefore this is likely to be added as an amendment in the future. The issue regarding the publication of public addresses and the related metadata is one that Dusk Network is seeking to solve.
Algorithmic stablecoins is one further area that has not been comprehensively covered by MiCA. It does state that ‘algorithmic’ stablecoins are categorically not real stablecoins since they have no assets backing them.
But because of this, it would appear that they would fit into the ‘cryptocurrencies’ category and would require a whitepaper, but not a licence. They would also be able to be handled by CASPs and listed on exchanges. This would mean that an entire sub-category of stablecoins would not be under the same restrictions as other stablecoins which would seem to be very unreasonable and a source of frustration for projects working in this arena.
Final thoughts
MiCA looks to be quite restrictive and limiting for issuers and providers, adding to their work burdens and also to their risks of operating, which is likely to impact on the decentralised and revolutionary potential of the technology.
However, it could add the much needed regulatory clarity that will hopefully give the confidence to both innovators and consumers to enter and remain in the European crypto assets space.
If successful, other jurisdictions around the world could copy parts of the MiCA regulations, and therefore it could have an impact that goes far beyond European borders.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
