Members of the European Council have approved the full text of the Markets in Crypto Assets Regulation (MiCA), which will shape the regulatory landscape for how crypto assets and crypto asset service providers will be regulated in the European Union (EU) member states.
The European Parliament will now meet to vote on the proposal to formally adopt MiCA. If approved, MiCA will likely come into force in 2024.
MiCA is a broadly based regulation which will establish new EU rules for token and stablecoin issuers, crypto asset service providers including exchanges and custodians and market conduct in cryptocurrency markets. There are also specific restrictions on providing cross-border crypto-asset services from third countries into the EU.
While it had been anticipated that non-fungible tokens (NFTs) would be excluded from the regulation entirely, it would appear that lawmakers have backtracked requiring a more nuanced assessment of whether an NFT is in substance unique and therefore whether those who issue or deal in those NFTs will be required to comply with the MiCA regulation.
Article 2a of the draft Regulation excludes "crypto-assets that are unique and not fungible with other crypto-assets". However, the recitals to the regulation impose a number of caveats on how this exclusion is likely to be interpreted by European Courts.
Paragraph (6b) states:
This Regulation should not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles, whose value is attributable to each cryptoasset’s unique characteristics and the utility it gives to the token holder. Similarly, it also does not apply to crypto-assets representing services or physical assets that are unique and not fungible, such as product guarantees or real estate.
However, paragraph (6c) clarifies that fractional NFTs and large NFT collections which might be considered fungible will fall within the regulation. The relevant text leaves considerable scope for interpretation:
The fractional parts of a unique and non-fungible crypto-asset should not be considered unique and not fungible. 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 sole attribution of a unique identifier to a crypto-asset is not sufficient to classify it as a unique or not fungible. The assets or rights represented should also be unique and not fungible for the crypto-asset to be considered unique and not fungible. The exclusion of crypto-assets that are unique and not fungible from this Regulation is without prejudice to qualification of such crypto-assets as financial instruments. (emphasis added)
It appears that the EU will adopt an approach of substance over form which will require a detailed assessment of each NFT's features to determine whether an NFT is in fact unique and not-fungible and therefore excluded from the regulation:
This Regulation should also apply to crypto-assets that appear unique and not fungible, but whose de facto features or features linked to de facto uses would make them either fungible or not unique. In this regard, when assessing and classifying crypto-assets, competent authorities 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 issuer. (emphasis added)
This nuanced approach will add considerable complexity for NFT issuers and those who deal in them in applying the regulation.
Travelling across the North Atlantic, the White House is similarly making strides to regulate stablecoins and crypto-markets generally by releasing the first framework for regulating crypto assets following President Biden's Executive Order. The EU has also placed bitcoin and cryptocurrencies as a priority on its agenda for the upcoming International Monetary Fund (IMF) annual meeting, signaling that there may be a separate and dedicated response by the EU to cryptocurrencies and NFTs.
The EU Commissioner for Financial Services, Mairead McGuiness, has said:
"We have a crowded agenda for the US next week, and one of the items that won’t be at the bottom of the list, it will be in there right around the top is crypto... [Regulation], a little bit like climate change, addressing crypto alone in the EU is not enough, we need to have global engagement and sharing of experience."
The global regulatory environment for cryptocurrencies and digital assets continues to evolve at a rapid pace. We will further break down the full MiCA text in further posts in the coming weeks.