EU Finalizes Legal Text for Landmark Crypto Regulations Under MiCA

The European Union has finalized the full text of its landmark Markets in Crypto Assets (MiCA) legislation. Officially, the text is still open to comments, but sources briefed on the talks have told CoinDesk that it is, in practice, finalized.

A leaked draft of the bill dated Sept. 20 and verified by CoinDesk urges EU enforcers to take a “substance over form” approach to the law, meaning its provisions could even apply to some assets categorized as non-fungible tokens (NFT).

MiCA, once passed into law, will require issuers of crypto assets to publish white papers containing technical roadmaps, for platforms to register with the authorities, require stablecoin issuers to hold capital and be prudently managed.

The new draft also features changes that could indicate how the EU might treat algorithmic stablecoins, which were notably excluded from MiCA's scope when it was first introduced in 2020. Algorithmic stablecoins – similar to the recently collapsed terraUSD (UST), which used another cryptocurrency and a bit of code to balance its price and supply – should fall within the scope of regulation "irrespective of how the issuer intends to design the crypto asset, including the mechanism to maintain a stable value."

"Offerers or persons seeking admission to trading of algorithmic crypto assets that do not aim at stabilizing the value of the crypto assets by referencing one or several assets should in any event comply with Title II of this Regulation," a Recital in the draft said, referring to the section of the law that lays out requirements for crypto asset issuers.

A Recital is a text that introduces an EU law and sets out its motivation. Though not – unlike the substantive articles of the regulation – legally binding, a recital can be used by supervisors and courts when interpreting the scope of the legislation.

An older draft also sought to limit the issuance of stablecoins that reference a non-EU fiat currency like the U.S. dollar which the industry feared would block popular U.S. dollar-pegged stablecoins like USDC out of the EU market. The new draft seemingly removes this cap.

Are NFTs in or out?

NFTs are typically designed to have a unique digital identifier that cannot be copied, interchanged or subdivided, but the rise of fractionalized assets – where a set of fungible tokens are issued to represent one NFT – have been drawing some attention from regulators as they could resemble traditional securities.

While the leaked draft – thrashed out in a series of technical meetings following a June 30 deal – shows MiCA doesn’t apply to NFTs that are genuinely unique and incapable of being traded with each other, “the issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility,” the final compromise text says in a Recital, even if the issuer gave it a unique identifier.

The details of the provision have caused concern within the industry. The exact drafting used could determine whether in practice the regulation covers the bulk of the NFT market – such as similar, but distinct Bored Apes, implying issuers and trading platforms would be caught by its strictures.

When considering whether to regulate a particular asset, national and EU regulators “should adopt a substance over form approach under which the features of the asset in question should determine the qualification, not its designation by the users,” the text added.

Read more: EU Agrees on Landmark Crypto Authorization Law, MiCA

UPDATE (Sept. 21, 2022 16:17 UTC): Adds more detail on the contents of the draft.

UPDATE (Sept. 23, 2022 16:05 UTC): Clarifies reference to caps on stablecoin issuance in paragraph six.