The EU Approach to Regulating Digital Currencies
33 Pages Posted: 27 Mar 2024
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 Second, MiCA’s activity-based definition of crypto-asset services is outdated.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
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