Yesterday the European Council published a significantly expanded proposed ‘Regulation on Markets in Crypto Assets’ (MiCA) document. This means the legislation progresses to the next step, a three-way negotiation between the Council, the European Commission and the European Parliament. Our interpretation of the expanded document is that a stablecoin like the DAI could be heavily restricted.
Most of the European Council members are the heads of state of each of the European Union countries. Its role is to define the EU’s political direction and it’s also responsible for appointing the Governing Board of the European Central Bank.
A proposed DLT pilot regime for Financial Market Infrastructures (FMI) is already being negotiated with parliament, so the topic wasn’t covered in yesterday’s documents.
The latest MiCA paper expanded from 187 pages to 405 plus a 55-page addendum. Unsurprisingly we didn’t have time to read it thoroughly, but below are some highlights.
MiCA divides crypto-assets into three buckets, asset-referenced tokens, e-money tokens (commonly viewed as fiat-backed stablecoins) and other crypto-assets.
Extending safeguards on asset-referenced tokens – like DAI
E-money tokens are already substantially covered by existing legislation (Paypal would be considered an example of e-money), which provides significant regulatory oversight. However, the EU has decided that asset-referenced tokens need more safeguards. This would include stablecoins backed by a basket of currencies, like the original Libra proposal, or backed by commodities or other crypto-assets.
The DAI is a good example. It tries to maintain parity with the dollar and is backed by collateral such as ETH, the USDC stablecoin, wrapped Bitcoin and other assets. If MiCA goes ahead as drafted, usage of the DAI could be restricted within the EU.
(Update: the DAI may not be an asset referenced token. The final legislation (vaguely) implied that the ‘reference’ means the valuation rather than the reserves. So in this case the DAI would reference the dollar, and hence be an e-money style token. Foreign currency e-money tokens are also subject to limits which only relate to retail transactions, not investments. MiCAR does not cover decentralized protocols and MakerDAO is relatively decentralized).
Under MiCA, if an asset referenced token is widely used as a medium of exchange, its average activity level should be less than one million transactions a day and €200 million ($224m) in value “within a single currency area”. Currently, the DAI has around $540 million daily transactions, but it’s been far higher. For example, it was $3.4 billion on one day in May this year and several days during that month were above a billion. However, only a proportion of that would be within the EU.
There’s also a general safeguard that authorization can be withdrawn for an asset-referenced token if there’s a threat to monetary sovereignty and policy.
The regulators are also wise to the fact that a significant proportion of crypto transactions happen off-chain at cryptocurrency exchanges, and it wants those transactions to be logged and included in the figures.
Other new legislation
Whitepapers for new crypto-assets and their content are outlined in some detail. It has to include details of discounts given to early purchasers. Venture firms and cronies often buy tokens days or weeks before a public sale. There have been some public shamings where those same funds have quickly dumped the tokens at a significant premium.
Additionally, securities regulator ESMA will keep a register of all whitepapers.
There are a fair number of additional safeguards included in the draft legislation, such as ensuring the best possible result for clients, avoiding conflicts of interest, and addressing insider information issues.
Apart from regulating the issuers of crypto-assets, MiCA also covers crypto-asset service providers, and the latest publication stipulates minimum capital requirements of €50,000, rising to €125,000 for custodians and €150,000 for exchanges.
Even at 460 pages, the legislation doesn’t cover everything. For example, it doesn’t address the lending and borrowing of crypto-assets. Proposals for additional regulation will be submitted 18 months after MiCA comes into force. This means lending regulations are at least two years away, probably much more. That might surprise some, as crypto lending is potentially one of the riskiest areas. Particularly those centralized lenders that target the less crypto-savvy consumers offering high rates for bank-like deposits.
