MiCA and TFR at the finish line

The path to final approval of the European regulation on the crypto-asset market (the now famous MiCA or MiCAR) has been extremely long and laborious, but it is now at the finish line, having been scheduled for discussion and subsequent vote in the European Parliament on 19 and 20 April, respectively. 

By contrast, much quicker has been the path to finalizing the contents of another important regulation affecting the anti-money laundering sphere, namely the regulation on the transfer of funds (TFR), whose discussion and subsequent vote in the EU parliament is calendared for the same days as MiCA, but whose process was begun much more recently.

The spotlight has been on MiCA for some time: especially on the Web, specialized and non-specialized news outlets have been following its complex formation process and constantly reviewing its contents as they were implemented, every step of the way.

It is a highly articulated body of legislation, with as many as 126 articles, lengthy preambles (the so-called “recitals”) and numerous annexes. In short, it is a small European code of cryptographic assets.

Comments and controversies on the new regulations: MiCA and TFR

Many comments spread by insiders, lawyers and practitioners in the financial world, but also by authors and bloggers in the crypto world, some of them improvised and lacking specific expertise, especially in the legal field.

According to some, this is a regulation that was “already born old.” Others fundamentally object to the intent to regulate what was born not to be regulated. 

Still others welcome this set of regulations as balanced and not overly stifling. 

In short, there is something for everyone: from the “old school” maximalists, staunch supporters of libertarian or crypto anarchist ideals, to the proponents of positions at the opposite extreme, conservative, pushing hard for the world of crypto finance to resemble the world of conventional banking and finance as much as possible. All, passing through a range of intermediate nuances.

To pretend to comment on such an extensive body of law here would be unrealistic and probably also not very useful, not least because it would involve overly superficial analysis.

Nevertheless, a few considerations are nevertheless worth making.

Objective considerations and analysis

The first is that the regulation was born with a very explicit mission, stated in its very title: namely, to regulate the specific market sector of digital assets. 

In this perspective it brands a set of rules that, in the intentions of the European legislator, firstly aim to pursue the objective of creating a framework with equal access rules, to protect freedom of competition, and secondly aim to establish a set of protective barriers to protect users, consumers, investors or savers that they may be.

The pursuit of these objectives is entrusted first and foremost to the definition of certain peremptory conditions for access to the market of services related to crypto – assets, in which it is required that entities that in particular propose their projects to the Union market (and aim to raise economic resources from the public) must meet specific requirements.

These requirements, in addition to ensuring that operators access the market on equal terms for all (and this aims to ensure fair forms of competition) are at the same time also a guarantee tool for users, because they aim to oust from the market entities that lack the characteristics of professionalism and reliability and are unable to offer a minimum threshold of asset guarantees.

In addition, to protect investors and savers, certain behavioral obligations are set for market participants. Thus, first and foremost, offering services, promotion and solicitation to subscribe to them, must be manifested through white papers that must comply with a number of minimum content requirements and some essential disclosures.

This, of course, goes in the direction of transparency about the services and projects presented.

However, this whole set-up, in order to work effectively, must revolve around a set of clear and unambiguous definitions that assume relevance for enforcement purposes.

Now, one may or may not agree with this type of architecture, depending on whether one is more or less enamored with the romantic idea of a free, anonymous, uncontrollable and incompressible payment system. However, it is necessary to come to terms with reality.

And the reality is that there is still very little of that original romantic idea in the world of crypto finance, as long as mass adoption is not achieved, while speculative intent remains largely prevalent.

Moreover, the fact that a code of conduct is imposed on operators and that they are required to have even minimum capital guarantees in order to address the market and to initiate underwriting solicitations, does not sound too bad, if one thinks of how many have seen their investments fade away (beyond cases of outright scams), in the Wild West of the many fanciful initiatives, beautiful on paper but unrealizable or lacking in market in practice, or simply, managed in a totally unreasonable manner.

There is still plenty of uncertainty: DAOs and NFTs being left out of MiCA and TFR

Now, remaining at a more properly technical-legal level, what draws particular attention are the definitions and, more generally, the rules delimiting the scope of the regulation.

NFTs remain outside this perimeter, as Article 4 of the regulation excludes from the obligations imposed on crypto assets, those that are characterized as “unique and not fungible with other crypto assets.” 

In addition, in the stages of the regulation’s formation process, the definition of DAO, originally present in early drafts, was removed.

But that of the delimitation of the scope of the regulation, with respect to which definitions play an essential role, may be a problem for several member states, and for some of them, given that the regulation is a self executing source, which does not require transposition in order to find direct application in the law of the states of the Union, it will be necessary to harmonize the rules of domestic law.

In Italy, for example, the definitions of virtual currency contained in Legislative Decree 231/2007 (anti-money laundering law) and that of crypto – asset, contained in the recent tax legislation dedicated to the matter, are broader and end up including, for example, also NFTs, i.e., those that for European law are considered unique crypto – assets not fungible with other crypto – assets. 

Admittedly, the European regulation and the Italian laws referred to are different subject areas (competition and market regulation, anti-money laundering, and taxation, respectively), but it is to be expected that these divergences could create significant alignment problems in application.

Hence, in order to understand what the actual impact of MiCA may be, it will be necessary to arm ourselves with patience and wait to see how it is “put on the road.”

The case of self-hosted wallets

For sure, however, what could have an immediate impact on the economic fabric of the crypto world is the funds regulation that introduces a number of stringent restrictions on crypto – asset transfers with a value above 1,000 euros originated from self-hosted wallet addresses.

The regulation imposes the so-called travel rule.

This means that an obligation is imposed on service providers to verify the identity of the person who arranges a crypto-asset transfer.

Therefore, in the case of transfers in excess of 1,000 euros from self-hosted wallets, platforms must prevent the amounts from being made available to beneficiaries until the identity of the originator wallet holder has been established and, where this is not possible, return the funds.

Now, this kind of restriction is undoubtedly bound to wreak some havoc among cryptocurrency holders who have chosen to hold their funds on non-custodial wallets and will result in significant conditioning for users to use the services of centralized exchanges.

This legislative choice, in addition to generating tangible effects in the immediate term also raises a number of doubts at the conceptual level and, in essence, at the level of the individual freedoms of EU citizens.

First of all, because, for the sake of combating money laundering, it deals a blow that could prove fatal to the very concept of decentralization and disintermediation, where it effectively places every individual or entity in the Union with no other alternative but to turn to an intermediary to dispose of their assets and resources in the form of crypto-assets.

This, among other things, would also result in an overall alteration of the market for services in the crypto-asset world, much to the detriment of competition protection principles.

Secondly, because it introduces a kind of negative presumption about the legitimate provenance of funds merely because they are transferred from a self-hosted wallet: as if to say that anyone who chooses to hold their assets on self-hosted wallets has something to hide or should be presumed, by default, to be the result of some illegal activity.

A choice that, even in light of the recent chain of sensational crashes of centralized exchange platforms, frankly seems more than legitimate.

Not surprisingly, it is precisely on these kinds of considerations that in the United Kingdom, the adoption of provisions of a similar tenor was stopped by the Treasury itself.

In short, while many people have raised a thousand questions and issues about MiCA throughout its long gestation, it would seem that the provision that truly threatens to do the most damage to the fabric of the crypto-economy is instead the TFR.