The EU Approach to Regulating Digital Currencies

33 Pages Posted: 27 Mar 2024

See all articles by Dirk A. Zetzsche

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; European Banking Institute

Julia Sinnig

Universite du Luxembourg - Faculty of Law, Economics and Finance

Date Written: January 26, 2024

Abstract

This article discusses the EU’s approach to regulating digital currencies after the coming into force of the Market in Crypto-assets Regulation (MiCA).

MiCA foresees product regulation for (partially) centralized digital currencies under the labels of asset-related tokens (ARTs) and e-money tokens (EMTs). The non-binding text of MiCA’s recitals exempts fully decentralized cryptocurrencies without an intermediary (like Bitcoin) from this product regulation. At the same time, crypto-asset service providers (CASPs) delivering certain crypto-asset services like brokerage, transfer, and custody on crypto-assets will be subject to licensing and supervision regardless of the extent to which the cryptocurrencies are decentralized.

Here, we overview the product rules on ARTs and EMTs, and find that the rules on ARTs are particularly burdensome. This may be best understood as rigid regulatory response to the Libra/Diem project that seeks to all but prevent large-scale global stablecoins. Compared to ARTs, the rules on EMTs are light-touch, piggybacking on large existing EU rules on e-money. Moreover, exempting fully decentralized cryptocurrencies creates delineation issues and, if broadly understood, runs counter to the increase in (apparently) fully decentralized cryptocurrency schemes.

We further discuss the basic pillars of MiCA’s CASP rules. Essentially, all CASPs are fiduciaries and subject to governance, asset segregation, and operational risk requirements. However, MiCA presupposes a crypto-insolvency law which is in its infancy. Second, MiCA’s activity-based definition of crypto-asset services is outdated. It does not cover currency services that are important today, such as crypto-lending and crypto-staking. Some of these services may qualify, however, under EU fund regulation as collective investment schemes. Ironically, MiCA, which is designed to fill gaps in EU financial law, relies itself on general EU financial regulation to remove its own shortcomings.

The article is structured as follows: after an introduction including a short summary of MiCA’s background (Pt. I), we lay out MiCA’s taxonomy in Pt. II. Thereafter, Pt. III discusses MiCA’s product regulation for ARTs and EMTs, Pt. IV addresses the CASP rules, and Pt. V concludes.

Keywords: cryptocurrencies, asset-related tokens, ARTs, e-money tokens, EMTs, decentralized finance, centralized finance, MiCA, digital assets, crypto-assets, tokenization

Suggested Citation

Zetzsche, Dirk Andreas and Sinnig, Julia, The EU Approach to Regulating Digital Currencies (January 26, 2024). Law and Contemporary Problems, Vol. 87, No. 2, 2024, Available at SSRN: https://ssrn.com/abstract=4707830 or http://dx.doi.org/10.2139/ssrn.4707830

Dirk Andreas Zetzsche (Contact Author)

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

European Banking Institute ( email )

Frankfurt
Germany

Julia Sinnig

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

4, rue Alphonse Weicker
Luxembourg, L-2721
Luxembourg

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