MiCA and TFR Regulations: Crypto-asset Market Participants See the Light at the End of the Tunnel

Paris, October 10, 2022– The European Parliament’s committee today approved the final versions of the Markets in Crypto-Assets (MiCA) Regulation and the revised Regulation on Money Transfers (TFR), which had been presented on October 5 by the Committee of Permanent Representatives of the Council of the European Union (COREPER). While further clarification is still needed, these Level 1 texts represent a step toward unifying the framework applicable to crypto-asset market participants in the Union.  

MiCA and TFR: Political visions Finally Taking Shape

The two regulations are the result of months of negotiations under the French and then Czech presidencies of the Council of the European Union, aimed at harmonizing rules across European crypto-asset markets. The Union’s stated objective is clear: to better protect citizens of the European Economic Area while effectively combating financial crime. 

With MiCA and TFR, Europe is thus establishing a regulatory framework specifically designed for this new asset class; in some cases, it even goes beyond the recommendations of the Financial Action Task Force (FATF) by extending traceability and identification requirements (the “travel rule”) to crypto-asset transfers. 

A mixed picture of Europe’s ambitions in the field of crypto innovation

The committee’s approval of the MiCA and TFR proposals has put an end to the suspense and uncertainty that had been hanging over an industry eager to see how the provisional political agreements reached earlier this summer would be implemented. 

The industry is satisfied with wording that aligns with the political vision outlined by European institutions on a number of points. Thus, the emergence of decentralized finance (DeFi) in Europe should remain possible at this stage; this segment of crypto-assets has indeed been excluded from the scope of MiCA pending a report from the Commission in the coming months. Similarly, the requirement for issuers and service providers to inform their clients about the environmental and climate impact of the consensus mechanisms used is deemed proportionate by the sector. This new obligation will effectively align crypto companies with the European Union’s environmental objectives. Finally, the application of the travel rule will remain limited to crypto-asset transfers involving a regulated service provider and will not require information sharing for peer-to-peer transfers between two European citizens. 

However, the technical implementation of political agreements is causing concern within the industry regarding issues that are nonetheless of major importance. For instance, while most non-fungible tokens (NFTs) were previously considered excluded from MiCA’s scope (thus acknowledging that they do not constitute a homogeneous class of financial assets), new clarifications have significantly narrowed the scope of this exclusion (notably by including so-called “broad” collections and series of NFTs). Additionally, algorithmic stablecoins will not be eligible for the exemptions granted to DeFi, as European co-legislators—wrongly—deny the existence of such decentralized crypto-assets. Furthermore, when providing crypto-asset services related to stablecoins, market participants will be prohibited from paying interest.

Finally, ADAN regrets that, despite numerous warnings, the industry’s views have not been taken into account on issues that are fundamental to the sector’s development in Europe. These include: increased regulatory rigidity regarding stablecoins (even as U.S. entities are already issuing crypto-euros in our place); the retention of reverse solicitation for crypto markets, creating a loophole that favors non-compliant foreign players; an expansion of the travel rule’s scope to include transactions starting at the first euro and those between platforms and private wallets; and the systematic verification of information regarding private wallet holders for transactions exceeding 1,000 euros. 

“MiCA and TFR aim to encourage the consolidation of the industry and the adoption of crypto innovation by European citizens while ensuring their protection. These two pillars of European crypto-asset market regulation will contribute in part to building a trustworthy environment conducive to these ambitions. However, despite the warnings and alternative proposals put forward by the sector, certain provisions will remain obstacles that undermine both the effectiveness of these regulations and the competitiveness of our companies,” warns Faustine Fleuret, president of Adan.

MiCA and TFR: the first building blocks of the regulatory framework for crypto-asset markets

While the path toward European regulation of crypto markets has been laid out, there is still some way to go before the two regulations are published in the Official Journal of the European Union (OJEU)—scheduled for early 2023—and come into effect 12 to 18 months later. 

In the meantime, and to ensure that companies can comply with the new rules, ADAN is calling for a number of clarifications. Among other things, the technical guidelines should shed light on the operational implementation of the travel rule for self-hosted wallets and define what constitutes active solicitation of customers. The association hopes that the upcoming secondary-level guidelines and reports will address stakeholders’ concerns and restore a level playing field with foreign competitors. 

“As the industry’s representative in Europe, ADAN will strive to maintain dialogue with public institutions and will continue to propose measures for the appropriate evolution of the regulatory framework governing crypto-assets,” adds Faustine Fleuret.