EU: MEP amendments to draft Markets in Crypto-Assets (MiCA) Regulation

Members of the EU Parliament proposed no less than 1,160 amendments to the draft EU Markets In Crypto-Assets (MiCA) Regulation, according to XReg Consulting, which published a high-level summary of the amendments.

The EU’s draft Markets in Crypto-Assets Regulation was published in September 2020. Members of the European Parliament had until the end of May this year to submit amendments to the draft text. The discussion below is based on XReg Consulting’s summary.

  • Environmental footprint: a number MEPs (mainly from the S&D and Green parties) propose sustainability indicators for crypto-assets. They want to require proof-of-stake (PoS) as consensus mechanism, instead of the energy-intensive proof-of-work (PoW) currently used for the most popular blockchains such as the Bitcoin and Ethereum blockchain. Crypto-asset service providers should not provide any services, allow trading or custody of crypto-assets that do not meet the sustainability standards, per the proposed amendments.
    • Note: PoS makes the energy-intensive mining mechanism of PoW obsolete. Another potential benefit is greater decentralization than the current mining on PoW blockchains. However, PoW has been around for much longer than PoS and has long been considered to be more secure than PoS. The Ethereum blockchain has been working on a PoS consensus mechanism for years – much longer than originally anticipated, which shows that a switch from PoW to PoS may not be as simple as some MEPs may assume. Nevertheless, PoS research and testing has made much progress. Some newer blockchains already rely on PoS instead of PoW. The Ethereum blockchain has been testing a PoS alternative in parallel with the current PoW blockchain and the plan is to complete the move (the ‘merge, in Ethereum-speak’) to the PoS consensus mechanism by the end of this year. This could reduce Ethereum’s energy consumption by at least ~99.95%. If the proposed MiCA amendments on PoS are passed, this would likely result in a de facto ban for EU crypto exchanges to trade bitcoin or for custody providers to offer bitcoin custody services, as it is unlikely the Bitcoin community will move to a PoS consensus mechanism anytime soon.
  • DAOs: some MEPs want to allow crypto-assets issued by Decentralized Autonomous Organizations (DAOs). The current MiCA text requires a ‘legal entity’ (such as a company or a foundation). DAOs do not have legal personality and new laws would need to be adopted if at some point lawmakers would want to change this. In the US, the state of Wyoming adopted a law that recognizes DAOs as a special type of limited liability company. It is a slightly odd, hybrid solution, merging the framework of a traditional LLC legal entity with rights and obligations tailored to a DAO, such as changes to fiduciary duties. MiCA’s current legal entity requirement was criticized for erecting barriers for decentralized finance (DeFi) to flourish in the EU. If the proposed amendments to MiCA makes it to the final text, this could certainly make life easier for DeFi developers and crypto-exchanges offering DeFi token trades.
  • Retail investors: many MEPs want to delete the requirement that public offers of crypto-assets must be restricted to qualified investors only. Although such a restriction could protect the retail public from outright scams, it also undermines the appeal of crypto-assets as a class of assets open to anyone, regardless of financial resources or financial sophistication. For example, a retail buyer was able to purchase Polkadot’s native DOT token before it was listed on Coinbase Pro. Views differ on whether that’s a retail investor protection concern or, on the contrary, a retail investor opportunity. Most MEPs appear to align with the latter (although they still favour strict rules on disclosure and marketing, auditing, etc.)
  • Prior approval of whitepaper: some propose that any whitepaper must obtain prior approval by ESMA. This makes a whitepaper look more like a prospectus for traditional securities (which may seem slightly odd, as any security token is excluded from MiCA’s scope and covered by existing EU financial regulation such as MiFID II and the Prospectus Regulation.) Some asked that any change to a whitepaper should be pre-approved by a ESMA or a national authority.
  • Anti-Money Laundering: AML has been high on the agenda for regulators keeping crypto on their radar. The Financial Action Task Force (FATF) published a proposed update to its AML guidance for Virtual Assets and Virtual Asset Service Providers, that attempted to bring more crypto activities under the AML rulebook. The public consultation on the draft update closed in April and FATF is expected to discuss any amendments during its meeting later this month. Some amendments want to ban so-called privacy-preserving coins. Note that one of those coins, Zcash, can be received and traded on Coinbase by its US users (not EU or UK users).
  • Copy/paste part of the traditional finance rule book: Several amendments propose to extend rules already applied to financial institutions and other companies to crypto-asset issuers and service providers. Examples include reporting and auditing requirements, own-funds obligations, disclosure of conflicts of interest, periodic stress-tests, EU-wide passporting rights, disclosure on pricing mechanisms for crypto-exchanges, prudential and insurance obligations, real-name bank accounts (a hot topic in Korea right now) and insider dealing and market manipulation rules.

 

It’s clear that MEPs take different views on how crypto-assets should be regulated. Although some amendments leave room for more crypto-tailored rules, the overall trend is to call for stricter regulation more in line with traditional market regulation. This mirrors the tougher crypto-stance taken in many jurisdictions around the world right now, including South Korea, the US, South Africa and China, and the approach by supranational bodies such as FATF and the BIS Basel Committee.

Next steps for MiCA:

  • The European Parliament will discuss the amendments over the summer and propose a revised text, likely in the Fall.
  • Negotiations will continue between the European Parliament, Council and Commission. A final text may be approved as early as the end of the year.

 

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