MICA REGULATION MOVES FORWARD : WHAT IMPACT FOR THE NFT ECO-SYSTEM ?
22 March 2022
On March 14th, 2022, the Economic and Monetary Affairs Committee (ECON) of the European Parliament adopted its negotiating position on the Markets in Crypto-assets (MiCA) draft regulation published in September 2020. This constitutes an additional step towards a European Union harmonized regulatory framework for crypto-assets. The NFT (non-fungible token) eco-system should be impacted by this new regulation.
So far, the official versions available are the European Commission September 2020 Draft and the Council of the European Union November 2021 Draft. The ECON position has been made available last week non-officially here.
For several weeks, strong negotiations took place in the European Parliament on many topics including transparency, disclosure, authorisation and supervision of transactions; information of consumers on risks, costs and charges; regulating public offers of crypto-assets; measures against market manipulation and prevention of money laundering, terrorist financing and other criminal activities. The most debated proposal indirectly aiming to ban specific consensus protocols in Europe, such as Proof-of-work, for environmental reasons, was finally abandoned. Instead, members of the European Parliament asked the EU Commission to work on a cross-sector legislation covering the environmental impact of mining activities, within the EU taxonomy, by 2025.
MiCA 2020 Commission draft did cover NFTs, with very limited specificities:
- A large definition of crypto-asset: digital representation of value or rights which may be transferred and stored electronically, using Distributed Ledger Technology (DLT) or similar technology;
- An unprecise definition of utility token that can include NFTs: a type of crypto-asset which is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token;
- A lighter regime provided under article 4 for NFTs, i.e. when “the crypto-assets are unique and not fungible with other crypto-assets”, or when the crypto-assets are offered for free.
MiCA 2021 Council draft excluded all NFTs from the scope of the Regulation: the November 2021 draft released by the Council of the European Union clearly stated under article 2 that the Regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets.
MiCA 2022 Parliament draft provides a case-by-case regime for NFTs:
- Recitals 8a and 8c aim at clarifying the scope of the Regulation to exclude some types of NFTs: crypto-assets that are unique and not fungible, not linked to financial instruments and not accepted to trading at a crypto-asset exchange, should be excluded from the scope of this Regulation. For example, the Regulation does not apply to crypto-assets representing services, digital or physical assets that are unique, indivisible and non-fungible, such as product guarantees, personalised products or services, or real estate. Nevertheless, there are many situations in which the NFTs would still fall within the scope of the Regulation;
- A more precise definition of utility token: a type of fungible crypto-asset which is accepted only by the issuer, is used for purposes other than as a means of payment or exchange for external goods or services and is intended to provide digital access to a good or service, available on DLT, and provided only by the issuer of that token;
- A more precise regime provided under article 4 for NFTs, i.e. when “the crypto-assets are unique and not fungible with other crypto-assets, are not fractionable and transferable directly to other holders without the issuer’s permission, are accepted only by the issuer, including merchant’s loyalty schemes, represent IP rights, guarantees, certificate authenticity of a unique physical asset, or any other right not linked to the ones that financial instruments bear, and are not accepted to trading at a crypto-asset exchange”, or when “the crypto-assets are specific-purpose crypto-assets that can only be used for purchases of a specific store or network of stores, cannot be transferred between holders and do not have a wider general-purpose use-case” or when the crypto-assets are offered for free.
This summary shows that the EU legislative bodies are not comfortable with the NFTs and whether they should be included in the scope of the MiCA Regulation, excluded from it, or partially included. The Parliament further proposed that the EU Commission considers whether a Union-wide bespoke regime for NFTs should be proposed. A trialogue discussion is now being open in order to accelerate the legislative process.