The substantive scope of the MiCA Regulation

In recent years, crypto-assets have been very popular both in practice and in the literature.^[2] That lead to i.a. two phenomena. First, the global trend regarding regulating them.^[3] Second, an announcement by the Facebook that it will be engaged in the issuance of Libra stablecoin (later renamed as: Diem).^[4] It seems that mainly the mentioned lead the European Union (hereinafter: the EU) to the conclusion that it should regulate the crypto-assets markets.^[5] The EU was afraid of the fragmentation of the market^[6] and the fact that such a big player (Facebook) will be issuing his own “coin”.

The discussed in this paper EU regulation is not a lonely legislative Island. It was proposed as a part of the Digital Finance Package presented by the European Commission in September 2020.^[7]

The mentioned package consisted of:

• Two communications from the European Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions:

1. One on a Digital Finance Strategy for the EU;^[8]
2. Second on a Retail Payment Strategy for the EU.^[9]

• Three legislative proposals, e.:

1. the Proposal for a Regulation of the European Parliament and of the Council on digital operational resilience for the financial sector and amending Regulations (EC) No 1060/2009, (EU) No 648/2012, (EU) No 600/2012, (EU) No 600/2014 and (EU) No 600/2014 and (EU) No 909/2014 (so-called DORA Regulation)^[10] – which, as the name suggests, refers to operational resilience;
2. two proposals regarding crypto-assets:

• Proposal for a Regulation of the European Parliament and of the Council on a pilot regime for market infrastructures based on distributed ledger technology (so-called DLT Pilot Regime);^[11]
• Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937.^[12]

The last of the mentioned is called MiCA Regulation (hereinafter: also as MiCA) and is discussed in this article. The main difference between DLT Pilot Regime and MiCA Regulation is that the first refers to those crypto-assets which are already governed by EU legislation, and the aim of MiCA is to regulate unregulated part of cryptoassets.^[13]

What is important, the initial and above mentioned version of MiCA has been changed many times during the legislative procedure.^[14] However four versions of it can be important to better understand the scope of the MiCA, i.e.:

• The above mentioned Commission version of MiCA (09.2020), hereinafter as: first version of MiCA;
• The European Parliament version of MiCA (03.2022)^[15], hereinafter as: the second version of MiCA;
• The version of MiCA after interinstitutional negotiations^[16], hereinafter also as: the third version of MiCA;
• The adopted version of MiCA, hereinafter also as: the current version of MiCA.^[17]

MiCA is a very long regulation – the adopted version, without annexes, is 144 pages long. Therefore, it is impossible to cover it in one short article. Thus, this article focuses only on the substantive, not entity, scope of MiCA (as the title of this article suggests).^[18] It does not also refer to the territorial scope of MiCA.

In the literature we often look at the scope of a legal act from an “entity” perspective and a “substantive” perspective. In practice such division may be seen as artificial since for a regulation to apply we must be within the entity and substantive scope of it. However, from the research perspective, this distinction makes sense because very often in one short article it is not possible to cover the entire scope of a complex legal act. For this very reason this paper focuses only on the substantive scope of MiCA.

Only shortly it may be indicated that the entity scope of MiCA can be found in art. 2 of MiCA. Art. 2(1) MiCA states that it applies to natural and legal persons and other undertakings.^[19] Art. 2(2) MiCA provides that it does not apply to certain entities and persons like, for example, the European Investment Bank and its subsidiaries.^[20] The indicated article contains certain entity exclusions where some of them are purely entity type exceptions^[21] and some have mixed character (entity-substantive type).^[22]

The MiCA’s title states that it is “on Markets in Crypto-assets”. In MiCA we can find the definition of a crypto-asset where ‘crypto-asset’ means a digital representation of a value or of a right that is able be transferred and stored electronically using distributed ledger technology or similar technology (art. 3(1) no 5 MiCA). Thus, in essence whether something is on DLT^[23] or not will constitute one of the main demarcation lines separating MiCA from other legislation.^[24]

Juxtaposing MiCA’s title with this very broad definition^[25] we may have an impression that the substantive scope of MiCA is very broad. Simplifying, it would apply to something digital what is on DLT or on similar technology. However, we have to bear in mind that the discussed regulation:

• Applies to only to certain activities regarding crypto-assets;
• Provides important and broad exclusions from its scope.

According to art. 2(1) MiCA this regulation applies to persons/entities that:

• are engaged in the issuance of crypto-assets;
• are engaged in the offer to the public of crypto-assets;
• are engaged in the admission to trading of crypto-assets;
• provide services related to crypto-assets.

Noteworthy, only the offer to the public and crypto-asset service have been defined in the MiCA’s glossary (art. 3 MiCA). It seems that complexity and variety of crypto-assets issuance processes caused that it to be impossible for the EU legislator to provide an uncontroversial definition. The admission to trading of crypto-assets means simply admission to trading platform for crypto-assets.^[26] It seems that the further clarification of these two notions will be left to the European Supervisory Authorities (ESAs) and the Court of Justice of the European Union.

Offer to the public means a communication to persons in any form, and by any means, presenting sufficient information on the terms of the offer and the crypto-assets to be offered so as to enable prospective holders to decide whether to purchase those crypto-assets (art. 3(1) no 12 MiCA). We can see that this definition is very similar to the one regarding ‘offer of securities to the public’ contained in art. 2(d) Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC (hereinafter: Prospectus Regulation).^[27] Thus, any interpretation provided in reference to art. 2(d) of Prospectus Regulation may be useful in case of interpretation of art. 3(1) no 7 MiCA.^[28]

According to art. 3(1) no 16 MiCA crypto-asset service means any of the services and activities listed below relating to crypto-asset:

1. a) providing custody and administration of crypto-assets on behalf of clients;
2. b) operation of a trading platform for crypto-assets;
3. c) exchange of crypto-assets for funds;
4. d) exchange of crypto-assets for other crypto-assets;
5. e) execution of orders for crypto-assets on behalf of clients;
6. f) placing of crypto-assets;
7. g) reception and transmission of orders for crypto-assets on behalf of clients;
8. h) providing advice on crypto-assets;
9. i) providing portfolio management on crypto-assets;
10. j) providing transfer services for crypto-assets on behalf of clients.^[29]

All of the mentioned services and/or activities have been defined in the following MiCA’s provisions (Art. 3(1) no 17-26 MiCA). Such an extensive list of services/activities and their broad definitions indicate that it will be impossible or at least very hard to be a professional ‘middleman’ in reference to crypto-assets and does not fall under the MiCA’s regime. As a rule such an intermediary needs to obtain an appropriate authorization or be a certain type of entity that is allowed to provide crypto-asset services.^[30] A crypto-assets service provider is a person who provides such services on a professional basis.^[31]

To somewhat summarize the above, it may be stated that MiCA will not apply, for example, to a natural person who buys on his/her own behalf crypto-assets for investment purposes.^[32] Such person would not be obliged to obtain any authorization under MiCA. In other words and simplifying, we may say that MiCA is more “business oriented”. However, MiCA, by regulating intermediaries, protects “non-business” holders of crypto-assets. Safeguards provided by MiCA include, i.a. capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer.^[33]  

The next question which arises is whether in reference to above indicated activities MiCA regulates all assets that are based on DLT or similar technology? Such a question comes up since, as it was mentioned above, crypto-assets are defined very broadly under MiCA. Furthermore, crypto-assets may fulfill different functions (like payment-one or investment-one) what causes that some of them may be very similar to ‘traditional’ financial assets.^[34] Thus, there is a problem of the demarcation line between current EU financial services legislation and MiCA Regulation. Indicated ‘conundrum’ is, at least to some level, solved by the art. 2(4) MiCA which excludes certain assets, even if they are based on DLT, from MiCA’s scope. These exclusions, saying quite imprecisely, refer to: financial instruments, deposits (including structured deposits), funds other than e-money tokens, securitization positions in the context of a securitization, insurance and reinsurance products, pensions products and schemes and social security schemes.^[35] Noteworthy, the discussed exclusions has changed quite a bit between the first version of MiCA, the second version of MiCA and the current version of MiCA.^[36]

Another very important exclusion can be found in the current version of MiCA.^[37] The first version of MiCA did not even consider non-fungible tokens (NFTs). However, in the period between the first and the second version of MiCA the NFTs started to be more and more popular. In the second version of MiCA Recital 8a has been added^[38] and it seems that its aim, i.a. was to indicate that NFTs are outside MiCA.^[39]The third and current version of MiCA is more explicit since it directly states that MiCA does not apply to crypto-assets that are unique and not fungible with other crypto-assets (see new art. 2(3) of the current version of MiCA and art. 2(2a) of the third version of MiCA). MiCA Recital 8a was changed and shortened and now reads:

Digital assets that cannot be transferred to other holders do not fall within the definition of crypto-assets. Therefore, digital assets that are accepted only by the issuer or the offeror and that are technically impossible to transfer directly to other holders should be excluded from the scope of this Regulation. An example of such digital assets includes loyalty schemes where the loyalty points can be exchanged for benefits only with the issuer or offeror of those points (Recital 17 of MiCA).

Only as a side note it may be indicated that Recital 8b of the second version of MiCA indicated that it is necessary to consider whether a Union-wide bespoke regime should be proposed by the Commission. This Recital cannot be found in the current version of MiCA however, it cannot be ruled out that such a bespoke regime will be drafted in future.^[40] Notably since art. 142 MiCA refers to report on latest developments on crypto-assets and in such future report should be included the information about an assessment of the development of markets in unique and non-fungible crypto-assets and of the appropriate regulatory treatment of such crypto-assets, including an assessment of the necessity and feasibility of regulating offerors of unique and non-fungible crypto-assets as well as providers of services related to such crypto-assets (art. 142(2)(d) MiCA). Thus, such a report can be an incentive for creating a bespoke NFT regime. It may be considered whether it was a mistake to not include NFTs at least in the MiCA’s market abuse regime.^[41]

As it was above indicated, exclusions included in art. 2(4) MiCA are quite numerous. Further in this paper only two of them, in the opinion of the author the most important ones, will be elaborated more precisely, i.e. exclusions regarding financial instruments and funds other than e-money tokens.

According to art. 2(4)(a) MICA this Regulation does not apply to crypto-assets that qualify as financial instruments.^[42] To avoid any doubts whether a financial instrument which is based on DLT is within MIFID II, art. 18 no (1) of the DLT Pilot Regime amends the definition of financial instrument included in MIFID II stating that Art. 4(1) point (15) MIFID II is replaced by the following:

(15) ‘ financial instrument’ means those instruments specified in Section C of Annex I, including such instruments issued by means of distributed ledger technology’ [emphasis added].

Thus, if a financial instrument, e.g. a share, is based on DLT it would still be subject to the current EU financial service legislation, not regulated under MiCA.^[43]

However, the above does not mean that any delimitation problems will not arise. As it is already indicated in the literature in case of MIFID II we are dealing ‘only’ with a directive.^[44] Different transposition of MIFID II could lead to MiCA regulatory arbitrage.^[45] This problem was noticed by the European Parliament and art. 2(2a) was added in the second version of MiCA. The mentioned article looked as follows:

Thus, in essence, substantive over formal approach in reference to qualification of financial instruments was proposed^[46] and the Commission was granted with the power, on the basis of the regulatory technical standards, to deliminate financial instruments based on DLT from MiCA’s crypto-assets.^[47]

The above cited provision cannot be found in the current version of MiCA. However, art. 2(5) MiCA states that by 30 December 2024, ESMA shall issue guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments.^[48] Thus in future these guidelines should be helpful to deliminate financial instruments from MiCA’s crypto-assets. Problematic issue is the fact that we will have to wait until 30 December 2024 for such guidelines.

Fortunately, competent authorities will be able to request opinions from ESAs on the classification of crypto-assets, including classifications that were proposed by the offerors or persons seeking admission to trading.^[49] In delimitation problems art. 3(2) MiCA could also be helpful to solve them.  This provision states that the Commission is empowered to adopt delegated acts in accordance with Article 139 to supplement MiCA by further specifying technical elements of the definitions laid down in paragraph 1 of this Article, and to adjust those definitions to market developments and technological developments. In those definitions there is a notion of ‘crypto-assets’. Thus, mentioned adjustment of it may help to determine whether we are dealing with a crypto-asset within MiCA or a financial instrument.

To sum up, it may be said that DLT financial instruments are a different area of law than MiCA. However, to draw a precise line between these two areas of law will not be simple in practice.^[50] Futhermore, it cannot be excluded that some potential overlaps between MiCA and MIFID II can be found.^[51]

In the first and second version of MiCA it was stated that this Regulation does not apply to electronic money as defined in Article 2, point (2), of Directive 2009/110/EC, except where they qualify as electronic money tokens under MiCA (art. 2(3)(b) MiCA – emphasis added).

In the third version of MiCA letter (b) was deleted and replaced by new letter (ca). In the current version of MiCA letter (ca) is letter (c) and states that MiCA does not apply to funds, except if they qualify as e-money tokens.^[52] Thus, the discussed exclusion has been broadened since electronic money falls under the definition of funds.^[53]

However, even more interesting is the part of the provision which in essence did not change, i.e. “except if they qualify as e-money tokens”. We should consider what this phrase means.

In essence, it means two-step model of analysis of MiCA’s applicability. Firstly, it should be considered whether a certain asset qualifies both as crypto-assets under MiCA and as funds. If yes, probably MiCA is not applicable and current regulations regarding funds will be applicable. However, to be sure of such a conclusion, the second step of the analysis has to be conducted. We have to consider whether we are not dealing with the MiCA’s subcategory of crypto-assets in the form of e-money token.^[54] Since if we are dealing with funds which can be classified as e-money tokens, MiCA is applicable. MiCA defines e-money tokens as a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency (Art. 3(1) no 7 MiCA).^[55]

Looking at the above reasoning from the end, if an asset can be qualified as an e-money token, MiCA will be applicable and it is not important (from MiCA’s application perspective) that such an asset can also be qualified as funds. However, the question arises whether in this situation only MiCA is applicable?

It seems that in such a case MiCA does not derogate regulations regarding funds.^[56] Thus, to e-money tokens both current regulations and MiCA are applicable. The problem may arise when the same issue will be regulated in different way by current regulations and MiCA.^[57] The question would arise whether:

• applicable is only MiCA as “(…) newer and more specialized legislation”^[58];
• applicable are the more stringent provisions; or
• we are dealing with cumulative application of current regulations and MiCA.

In the opinion of the author the cumulative approach is the right one.^[59] However, regardless whether we will choose approach no 2 (more stringent) or 3 (cumulative) the question of technological neutrality arises. This problem has already been indicated in the literature and it is difficult to understand, at least on the basis of MiCA wording, why in reference to “DLT money“ we may be dealing with more cumbersome regulations.^[60]

Title of MiCA and very broad definition of crypto-assets may suggest that MiCA’s scope of the application will be very broad. However, the aim of MiCA is only “to deal with the unregulated part of crypto-assets markets”^[61] [emphasis added]. Notably, the reason behind MiCA was to regulate global stablecoins.^[62] Assets based on DLT which can be classified as ‘currently existing’ financial assets, e.g. financial instruments, will be regulated by existing laws, not MiCA.^[63] Thanks to such approach MiCA tries to respect the rules of ‘same activities, same risks, same rules’ and of technology neutrality.^[64] However, the rule of technological neutrality may be questioned in reference to MiCA’s e-money tokens which will probably, at least to some level, fall under ‘double-standard’.^[65]

In other words and metaphorically speaking we may say that MiCA will not so much replace puzzles in the existing financial regulatory puzzle as it will add a new puzzle to it. The question is whether it will be a matching puzzle? The time will show.

[NOTES]