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November 24, 2020

The Unintended Consequences of MiCA for DeFi With INATBA and Stokr


After a lengthy consultation, the release of the European Union’s proposed regulation on markets in crypto assets, or MiCA, a few weeks ago didn’t seem to ruffle too many feathers among the service providers that are almost certain to be  affected by the new framework. Even less certain is how the regulation would affect software developers and end users operating in the DeFi space. 

Ian Taylor, chair of CryptoUK, spoke with Marc Taverner, executive director of the International Association for Trusted Blockchain Applications (INATBA), and Arnab Naskar, co-founder of Stokr, about the proposed regulation. Naskar is also co-chair of the financing working group at INATBA. 

INATBA has launched a task force in response to the EC’s proposed regulation. MiCA has the potential to change the landscape for crypto service providers and crypto assets in Europe and beyond. The proposed regulation leaves no stone unturned. 

Considering that it is far reaching and exceptionally detailed in scope, MiCA places an urgent requirement on all market participants to invest a significant amount of time to understand this regulation and how it would interact with the member states and the current laws that exist. In its current form, MiCA will create a significant disruption as all ecosystem participants scramble to understand the process and operationalize this set of regulatory and compliance proposals. 

In addition to its focus on finance, INATBA also focuses on 13 other use cases for blockchain apps and distributed ledger technologies. For the purposes of this discussion, however, Taverner will focus on MiCA. 

Naskar is the co-founder of Stokr, which is an investment platform helping companies to issue digital securities on the blockchain as well as investors to invest in those digital securities. 

Taverner explained that INATBA is focused on MiCA and the pilot regime, saying that the work they are doing is very exhaustive. They’ve got internal and external focus streams of work on MiCA. The internal aspect is where members come together and analyze clause by clause the MiCA proposed regulation with the view to submit evidence to the Parliamentary process that will support considerations that they think are for the benefit of the industry. 

Considering that the proposed regulation is so potentially impactful on such a young industry, they thought it would be prudent to secure the opinions of the wider ecosystem without the encumberments of an actual membership standing in the way, Taverner explained. As a result, they also launched an external MiCA task force that is open for anybody to participate. It consists initially of a questionnaire designed to gather evidence and opinions from market players, ecosystem  collaborators, adjacent industries, other trade associations and interested individuals so that they can fold the evidence inside the finance working group that will end up in a report that will be submitted as evidence that represents the wider voice of the industry. 

(6:18) – “The reason we’re doing this is because we think this moment in time is so significant and yet it’s massively under appreciated by the vast majority of market participants…We’re trying to cover a lot of ground at INATBA, and we’re really calling on the wider ecosystem to come with us to leverage our platform, leverage our proximity to both the European Commission and to Parliament, and to leverage the relationship we have in place with the council, which is where the deliberations are taking place,” said Taverner.  

He emphasizes that this is very much a piece of work that is in progress and not something that we should be talking about as a done deal, as it is in the process of being ratified into regulation “as we speak,” he noted. 

Stokr’s Naskar agreed, saying that this is a “very crucial time” in which the European Commission and the entire European legislative processes are looking into regulating cryptocurrency assets, adding: 

(7:47)  “The market participants need to be aware because any kind of law that is passed in this process, whether it be MiCA, be the part of the task force, be the part of the pilot regime, this will have a future impact. And this future impact will be not only for the companies that are operating in Europe and servicing Europe, but also for the companies that are operating outside Europe and want to access the European market. So it’s a very crucial moment.” 

According to Naskar, there are very interesting aspects of MiCA, the first of which involves issuance. If you are issuing any kind of crypto asset that is not qualified as a financial asset, so if you’re an issuer, service provider or digital asset exchange, you will be falling under this MiCA regulation. 

Structurally, if you’re providing support services for crypto assets such as security tokens, those crypto assets that are qualified as transferable securities or financial instruments, how they will be traded or how the secondary market will perform, it’s kind of a European level sandbox, what the DLT pilot regime is proposing. 

(9:15) “MiCA is a very elaborate framework, or regulation. And the European Commission has taken a lot of effort to develop it. But also we need to understand the aim in which MiCA was drafted. And after the consultation they did in March 2020 and how the process moved. Somewhere you can see MiCA went far beyond its original outreach and tried to cover a lot of aspects which it didn’t intend. Now in that sense, market participants need to come up and say what specific solution doesn’t make sense in mica,” said Naskar. 

Yet another crucial aspect of MiCA is that if you are issuing a digital asset or crypto asset, you need to have a legal entity. You can’t have it without a legal entity. How cryptocurrency assets like bitcoin will perform under MiCA is unclear. 

DeFi and MiCA

CryptoUK’s Taylor asked decentralized finance, or DeFi, and how MiCA has the potential to impact those projects. Taverner said it’s a critical focus for INATBA because it goes to the very heart of decentralized applications, which is the very essence of the technology which is blockchain and DLT. These are the apps that can be built and facilitated by the blockchain and DLT that create value, support different business models, mechanize trust and provide transparency, he explained. 

MiCA in its current draft requires an operator, service provider or an issuer to have a legal entity registered with the EEA, a group of 30 countries. So if you are a DeFi project, for example, based in the UK and decide you would like to trade within that group of 30 countries, under the terms of MiCA, you will need to have a registered legal entity within those 30 countries, Taverner explained, adding: 

(12:35) “There are two challenges there that require some consideration. The first is that by the very nature of a decentralized project, at least the way in which most of the projects are currently structured today, there is no center,  there’s no centralized point. That’s the very nature of decentralization, and that’s why we can establish mechanical trust and extrapolate all of the other values that create the attractiveness of these models.  So by the very essence of the structure, the construct of a decentralized autonomous organization or a DeFi project, trying to flip into an entity where there is a legal body is relatively tough.” 

Naskar agreed, adding, 

(14:20) “One of the most crucial aspects I would say about a lot of DeFi projects are not really taking care of here is the stablecoin matter and how MiCA is trying to manipulate that. Because a lot of DeFi products are being fueled by stablecoins like Dai, those kind of structures, and this will come under heavy regulatory scrutiny right now with the current draft of MiCA — if it’s published this way. That means all those DeFi applications that are relying on those stablecoins…automatically you are attracting regulatory obligations and a burden on your place. So for DeFi, it’s crucial that they follow at this point in time MiCA in the current draft and they also use the opportunity that we have right now until this draft becomes a published law. And we share all our concerns and all our points with the regulators, with the legislators right now and we try and address it. Because once we lose this moment, and once this window of opportunity goes away, there will be very little that we can do for this industry.”  

Raising Capital

Additionally, Taverner described one of the unique innovations that blockchain has introduced to young technology marketplaces, which has been an ability to raise funds. An impact of MiCA, however, would limit the ability of projects to raise funds to a ceiling of EUR 1 million over a 12-month period. If they are raising less than that amount, a white paper is sufficient to be able to raise those funds over a period of 12 months. To go over the threshold, however, companies must jump through regulatory hoops such as issuing a prospectus to demonstrate compliance. This, he says, places pressure on a very innovative model to fund in a new and quite forward looking way, projects that have a lot of tech merit. It also creates a friction point in which there is within the traditional channels established through regulation an upper ceiling of EUR 8 million to participants who are not raising for or using blockchain projects. As a result, the proposed regulation is not tech-neutral.

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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