The European Council approved the Crypto Asset Markets Act (MiCA) and published the current version, but that is not the final step. The Council is mainly composed of the heads of state of the member countries. The European Parliament must still have its last word.

The Parliamentary Economy Committee meets next on October 10, when a vote is expected. After that, it will go to the rest of Parliament.

MiCA divides crypto assets into electronic money (stablecoins), asset-referenced tokens including stablecoins backed by other assets, and everything in between. Legislation on asset-referenced tokens and electronic money will come into effect 12 months after the bill’s passage. And everything else applies 18 months later. That means stablecoins in early 2024 and the rest in mid-2024.

Various regulators are responsible for drafting detailed rules. That is mainly EBA for electronic money and ESMA for the rest.

There has been some uproar about limits on tokens pegged to foreign currencies. In reality, the limit of 1 million daily transactions or 200 million euros refers to all tokens with reference to assets that are not considered electronic money. That would cover MakerDAO’s DAI in Europe. And if everyone started paying in gold-backed tokens, I would include them. It is pretty much anything that is seen as posing a threat to monetary sovereignty.

The legislation includes algorithmic stablecoins but does not cover DeFi, NFTs and loans. Reports on those three topics will be published within 18 months of enactment. In addition, there will be an additional report on “services associated with the transfer of electronic money tokens”.

Non-fungible fractional tokens are covered, because fractions are considered fungible.

Although the loans are not covered, they are to some extent.

Despite not being in scope, the legislation has a major impact on loans with clauses that have been included since early drafts.

There are clauses stating that issuers of electronic money and asset-referenced tokens cannot pay interest, nor can crypto service providers. Interest is defined quite broadly as almost any additional benefit. For example, if a crypto exchange gave users their own token, that would count. A significant proportion of crypto lending involves stablecoins, so this would inhibit centralized lending. It may not apply to DeFi lending, given the lack of an identifiable crypto service provider.

In the past, cryptocurrency lender Nexo had an interesting way of circumventing similar e-money rules. If a user paid in currency, a kind of stablecoin was issued to them, except that it could not be exchanged externally. We believe that the rules of electronic money do not apply if it is an internal platform.

In the meantime, other important legislation covering tokenized securities has been passed. The so-called DLT pilot regime allows blockchain-based financial market infrastructures to operate with some limited legal exemptions and will come into force in March 2023.