Markets in Crypto-Assets Regulation: Law and Technology

Introduction

The Markets in Crypto-Assets Regulation or MiCAR is a game-changing regulation for crypto-assets and crypto-asset services, fully effective across the EU as of 30 December 2024. It was adopted with the objective of facilitating legal certainty and promoting a level playing field, curbing regulatory arbitrage and moral hazard, and protecting crypto investors and crypto markets. However, given the novelty of the regulation and its complex nature, it may be difficult to understand and apply in practice. Our new co-edited book Markets in Crypto-Assets Regulation: Law and Technology not only aims to explain MiCAR’s goals and key rules but also to offer a critical assessment of its potential weaknesses, uncertainties, and possible bottlenecks in the effective regulation of the crypto industry. For this purpose, the book also contains a comparison with the UK regime, which as currently conceptualised represents different solutions to many of the same issues covered by MiCAR. 

In this submission, we highlight some of the criticisms raised in the different chapters of this book by leading experts in the fields of financial law, regulation and technology.

1. Complex interplay with existing rules and regulations

A consistent application of MiCAR by supervisory authorities and market participants alike relies on a uniform understanding of how ‘crypto-assets’ are defined, as this determines the scope of the regulation. MiCAR has close links with various pieces of other EU financial law instruments, and MiCAR’s definition of ‘crypto-asset’ purports to exclude assets that fall within a category of financial products that are regulated elsewhere. In our view, this demarcation is not always straightforward, and the line drawn by MiCAR is not always clear or justifiable. This ambiguity may lead to legal uncertainty and create opportunities for regulatory arbitrage.

A significant part of the E-Money Directive (EMD2) applies to electronic money tokens (EMTs), although certain provisions of this directive are overridden by specific provisions of MiCAR. This patchwork of rules creates a complex and potentially unclear relationship between the various regulatory instruments. It also raises serious concerns regarding technology neutrality of MiCAR. For instance, EMTs are not subject to the same regulatory rules as ‘traditional’ electronic money, while in substance they are very similar to e-money. Perhaps a better approach would have been to extend the scope of EMD2 to cover EMTs, with targeted amendments where necessary. Another complex relationship discussed in the book is that between MiCAR and the Payment Services Directive (PSD2).

2. Crypto-specificity and a copy-paste approach

MiCAR, to a substantial extent, builds on paradigms found in other EU capital markets and banking regulations. This has sometimes led to a ‘copy-and-paste’ approach. For example, the legal regime for crypto-asset service providers (CASPs) is largely similar to that applicable to investment firms under the Markets in Financial Instruments Directive (MiFID II). This regime concerns, inter alia, obligations to act in the best interests of clients, avoid conflicts of interest, ensure best execution of orders and a suitability assessment. As crypto-asset markets are relatively young, there are no extensive legal frameworks or decades of regulatory experience compared to traditional financial markets. It is therefore understandable that the EU has sought to implement rules for crypto-asset markets that closely resemble those in place for traditional financial markets. Some legal concepts are well-suited for crypto-assets and are already long-established and tested. This contributes to legal certainty and potentially reduces transaction costs.

However, it can be questioned whether MiCAR is sufficiently crypto-specific. In other words, does it adequately account for the unique technological, organisational, and economic attributes of crypto businesses? In this respect, it is doubtful whether the prevailing ‘copy-and-paste’ approach effectively addresses the unique characteristics of crypto-assets, as well as the risks and needs of crypto-asset markets. The rules on market abuse may be a case in point. MiCAR recognises that since issuers of crypto-assets and CASPs are often SMEs, it would be disproportionate to apply all of the provisions of the Market Abuse Regulation (MAR). And yet, the market abuse provisions of MiCAR almost verbatim replicate those of MAR. While the European Commission intended to design a distinct market abuse framework for crypto-assets, this objective does not appear to always have been fully achieved.

3. Complex interplay of public and private law

MiCAR does not aim to harmonise private law. Instead, its rules are first and foremost rules of administrative or regulatory nature. Nevertheless, upon a closer look, it becomes clear that MiCAR has implications for private law, or at least is likely to serve as a catalyst for the adoption by Member States of certain rules and strategies to achieve desired private law effects. For example, MiCAR requires CASPs to establish the legal segregation of crypto-assets held for clients, so as to ensure that these assets do not become part of the CASP’s own estate. However, legal segregation is a private law outcome that can only be achieved through relevant – national and largely unharmonised – property and insolvency laws, which must often be amended. As a case in point, the Dutch regulator observed that ‘there is no Dutch law based on which crypto-assets held in custody are segregated from CASPs’ assets, as there is for banks and investment firms’. In practice, segregation must then be achieved through the establishment of a separate legal entity, which holds legal title to deposited crypto-assets. Yet this solution has many drawbacks, including increased costs.

In the same vein, MiCAR requires crypto custodians to make adequate arrangements to safeguard the ‘ownership rights’ of clients. However, not all national legal systems in the EU do recognise property rights in crypto-assets. Again, for example, this is currently the case under Dutch law, where the property law treatment of crypto-assets remains unclear. 

Private law is critical for consumer and investor protection, legal certainty for market participants, and for the determination of the exact scope of MiCAR. This is why we argue that to provide a solid basis for customers’ proprietary rights in crypto-assets, it is necessary to complement MiCAR with a robust and harmonised private law and private international law frameworks. For this purpose, inspiration can be drawn from UNIDROIT Principles on Digital Assets and Private Law.

Conclusion

MiCAR is a complex, multi-layered and evolving instrument that has sparked divergent opinions among commentators. While some praise it as a ‘structured and complete legislation on crypto-assets’, others emphasise that it ‘consists of repurposed material laws’ and argue that it results ‘in a heavy bureaucratic mix’, which can discourage start-ups and cause crypto firms to avoid the EU entirely.

The divergence in views about MiCAR underscores its complex nature, which is shaped by several interplays highlighted above: the interplay between MiCAR and other EU rules and regulations, the interplay between crypto-specific rules and those borrowed from traditional financial law, and the interplay between public and private law. Through further analysis of these interplays in our book, we hope to have provided insight into a fascinating and rapidly changing market, that raises serious questions about fundamental issues of regulation and law.

Matthias Haentjens is a Professor of Civil Law at the Leiden University.

Louise Gullifer is a Professor of English Law at the University of Cambridge.

Ilya Kokorin is a Research Associate at the Amsterdam Center for Law & Economics (University of Amsterdam) and Supervision Officer at the Dutch Authority for the Financial Markets (AFM).