Towards a comprehensive framework for crypto-assets

In one of our previous newsletters, we mentioned that the Belgian legislature took a first step towards regulating cryptocurrency. This legislation will impose certain operational conditions on specific virtual currency service providers in Belgium. It appears that this legislation envisages only a very limited number of players. But the European legislature has been working on a more comprehensive framework for crypto-assets for quite some time: the Markets in Crypto-assets (MiCA) Regulation.

 

What will this broader legislative framework mean for cryptocurrency?

The MiCA Regulation aims to provide legal certainty for crypto-assets that do not fall under existing EU legislation on financial services, and at EU level, to lay down uniform rules for those who offer crypto-assets services and issue crypto-assets. The MiCA Regulation defines a crypto-asset as “a digital representation of value or rights that may be transferred and stored electronically, using distributed ledger technology or similar technology.” Distributed ledger technology (or “DLT”) is a type of technology that supports the recording of encrypted data in a distributed ledger (i.e., a database of transactions that is spread across a network of many computers instead of being stored it in one central location).

The Regulation will lay down uniform conditions for transparency and disclosure as regards the issuance, functioning, organization, and governance of those who offer crypto-asset services. It also  lays down rules for consumer protection and measures to prevent market abuse. For example, the Regulation will therefore set rules that crypto-asset advertising must adhere to and set the operational conditions that such offerors/service providers must satisfy (e.g., requirements that are imposed on the governing body of such enterprises). Because of this Regulation, they will have to obtain authorization to operate.

Advising on crypto-assets falls under the scope of the offering/providing crypto-asset services. Consequently, anyone that offers a third party “personalized or specific recommendations” or gives or agrees to give them such recommendations “regarding the purchase or the sale of one or more crypto-assets, or the use of crypt-asset services” must obtain an authorization and comply with the MiCA Regulation. This is how the European legislature aims to protect the crypto-assets investor.

 

What is still being discussed?

In any event, certain provisions have been removed from the draft regulation, namely those that prohibit or restrict the use of proof-of-work cryptocurrencies. The effect of these provisions would be that, for example, the use of Bitcoin and Ethereum would be restricted because these crypto-assets use the proof-of-work consensus mechanism to mine new coins and to secure their network.

At this time, it is still being discussed whether non-fungible tokens (NFTs) and decentralized finances (DeFi), among other things, should be included in the MiCA package and which EU institutions must be responsible for supervising the cryptocurrency space.

Therefore, it is still unclear what the final text of the MiCA Regulation will look like and when it will enter into force. We will certainly follow up on this for you. It can surely be interesting for you to consider this (draft) piece of legislation if you offer specific services that relate to crypto-assets. If you have any questions about how you should best prepare for the MiCA Regulation’s entry into force, we would gladly answer them.

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