“NFT? See you on the next episode!”- The Cryptonomist

MiCA (European Commission’s Regulation of Markets in Crypto-assets) has reached a new milestone on its path to adoption: on 5 October, the Council of Europe approved a new release to the proposed regulation with some changes that are inserted on the text agreed upon last summer between the Parliament, Commission and Council, as a result of the so-called trialogue procedure. The next institutional steps will consist of a passage on 10 October in the Econ (i.e., the European Parliament’s Committee on Economic and Monetary Affairs) and finally the final passage in the European Parliament in a plenary session. Then all that will remain is to await its publication.

There has already been said quite a bit about this meaty piece of legislation: born old, and above all, incomplete, in spite of the petition of principle that would like to make it a kind of general and all-encompassing compendium on crypto assets.

Indeed, even reading the text that most recently came out of the Council of Europe’s pen on 5 October, it remains clear that DeFi and NFTs, as a rule and subject to specific assumptions, remain outside the scope of MiCA.

The current version of the MiCA does not cover NFTs

Speaking of NFTs, even after the latest textual adjustments, they remain a mystery object for European law, just as they are for Italian national law.

We have already had occasion to write about this issue: in Italian law, there are no specific rules defining the concept analytically. In addition, the definition of virtual currency contained in the AML law (Legislative Decree 231/2007) is so broad and overflowing (far beyond the definition contained in the European AML directives) that it risks including, unreasonably, also NFTs.

This results in a framework of serious uncertainties on both the tax and AML fronts.

Today it is clear that those who hoped that the European regulation would bring some more certainty on this specific type of asset will be disappointed.

In fact, an examination of the version of the regulation updated on 5 October shows, in a general sense, the explicit will of the European legislator not to bring the matter of NFTs within the scope of the regulation, except for those cases in which these assets, despite their formal appearances, de facto lend themselves to uses that in practice make them fungible, but to postpone specific regulation to a later date.

In short, for NFTs, the European legislator is taking its time and it seems as if saying: 

“NFTS? You will find out in the next installment.”

Reading the text reveals the European legislator’s willingness to defer to the ESMA (European Security and Markets Authority) and the ESAs (i.e., European banking, markets and insurance supervisors) the task of arriving at an analytical classification of the various types of crypto-assets.

Then the European Commission is given the task of producing a report, after consultation with both the ESMA and EBA (the European Banking Authority), on the state of the market for non-fungible and unique assets and the adequacy of the regulatory framework to the specificities of that market. All within 18 months of the entry into force of the regulation.

To be clear: It is not that the current wording of the proposed regulation lacks references to this type of asset.

How the new European regulation interprets non-fungible tokens

In the preamble part of the proposal, for example, there is the “recital” (6b) clarifying the legislator’s intent not to include in the regulation what are defined as “crypto-assets that are unique and non-fungible with other crypto-assets, including digital art and collectibles, the value of which is attributable to the unique characteristics of each crypto-asset and the utility it provides to the token holder.”

Recital (6c) then provides some guidance for attributing or excluding the nature of non-fungible assets. Thus it is stated that fractions of a non-fungible asset should not be considered non-fungible; that serial issuances or collections in large numbers should be an indicator of the actual fungibility of the asset; that the mere attribution of a unique identifier of a crypto-asset should not in itself be considered a sufficient indicator to qualify a particular asset as non-fungible; finally, that the regulation should also apply to those assets that, on the appearance of being non-fungible, in fact have substantive characteristics that do not make them so; and that, for appropriate qualification, the competent authorities should move toward a criterion of substance over form, regardless of the qualification that may be attributed by the issuer.

These preambles are followed up in the dispositive part of the proposal where the actual rules are dictated.

Thus, in Article 2, paragraph 2.a expressly states that the regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets.

Article 122b regulates that deferral in the adoption of specific regulation to the outcome of a report by the European Commission and, in paragraph 1 letter (da), defines the contents of the report on the basis of which the enactment of future regulation is to be evaluated.

Such a report thus must contain a recognition of the development of the markets for non-fungible assets, on the adequacy of the regulatory treatment of these kinds of assets, and a recognition of the need for and feasibility of regulation of entities offering unique, non-fungible assets and of entities providing related services.

It lacks a number of indications that were instead contained in the previous text referring to unique and non-fungible assets. For example, Art. 4 in paragraph 2, of the previous text while excluding for non-fungible crypto-assets the application of most of the obligations of drafting, notification and publication of the white paper, nevertheless imposed an obligation, even for those who offer this kind of crypto-assets, to be qualified as a “legal entity” and to observe some general obligations: to act in an honest, correct and professional way; transparency and intelligibility in communications; prohibition of conflicts of interest; obligation to observe security standards in accordance with the norm; to act in the interest of users, to apply principles of par condicio, etc.

Summing up, if in the upcoming passages in the Econ committee and in parliament the proposed regulation does not encounter unlikely significant changes, the text that will be approved will leave unresolved the many issues related to the lack of appropriate classification of this type of asset.

These are issues of crucial importance to operators and users. These include the issue of anti-money laundering regulations, but also the aspect of the correct application of VAT: both issues having relevance to the European Union.

A missed opportunity, probably conditioned by the exasperated tension towards the more strictly monetary and financial issues related to the crypto world, which has distracted from the real need to provide tools that facilitate an orderly development of economic initiatives and activities in the many fields of application of crypto technologies.