Introduction
The Markets in Crypto Assets Regulation (MiCAR) is about to be implemented and will create a uniform legal framework for trading crypto assets in the European Economic Area. This framework will be particularly relevant for startups operating in the cryptocurrency industry. MiCAR aims to strengthen the integrity, transparency and stability of financial markets while ensuring consumer protection. It will fundamentally change the way cryptocurrencies and related financial instruments are traded and regulated. For startups in the cryptocurrency space, this means they must prepare for stricter oversight and more extensive compliance requirements. They will be required to meet certain standards in terms of risk management, governance, transparency and information provision. In addition, MiCAR will also open up new opportunities. It will provide a clear and consistent regulatory framework that will allow startups to offer their services across the EU without having to worry about different national regulations. This could help to strengthen consumer confidence in cryptocurrencies and promote the acceptance of these technologies.
The basics
MiCAR initially regulates the well-known crypto payment methods such as stablecoins and utility tokens. Stablecoins are cryptocurrencies that tie their value to an external reference, such as a fiat currency or a market basket, to ensure price stability. They play a crucial role in the cryptocurrency landscape by combining the benefits of cryptocurrencies, such as fast and low-cost transactions, with the price stability of traditional currencies. Utility tokens, on the other hand, are used to provide digital access to a service or good. They are an essential element of many blockchain projects and allow users to access specific functions of a project, such as voting in a decentralized autonomous organization (DAO) or using a specific software. Stablecoins and utility tokens are interchangeable and thus fungible. A particular focus is on non-fungible tokens (NFTs). These often tokenize digital artworks or other digital objects and are unique in nature. The value of an NFT comes from its unique properties, such as rarity, authenticity, or association with a particular artist or event. NFTs are therefore generally considered to be non-fungible, as they are not interchangeable. They have the potential to fundamentally change the way we view property and value in the digital world. These three types of cryptocurrencies – stablecoins, utility tokens, and NFTs – represent different aspects and applications of blockchain technology. They all have unique characteristics and potentials that make them attractive for different users and applications, and they will all be affected by the upcoming MiCAR regulation.
The complex relationship between NFTs and MiCAR
Although NFTs are generally considered non-fungible, they may still be subject to MiCAR. The EU regulation defines fungibility in a unique way that goes beyond the traditional definition. There are two aspects of fungibility that are considered in the regulation. The first is technical fungibility. Many NFTs are based on technology standards that allow for a unique identifier, but can still mine a variety of technically identical tokens. This means that although each NFT is unique, the underlying technology used to create the NFT is often the same. On the other hand, the actual fungibility is decisive. If the rights embodied in an NFT are interchangeable, it is in effect fungible – even if the tokens appear technically unique. This can occur in a variety of contexts. For example, when a collection of digital artworks is offered in different quantities as NFT. NFTs in a “series” are interchangeable because they represent the same artwork. Music NFTs, which embody the right to listen to a particular music album, are another example. These rights are identical, therefore the NFTs are fungible. Similarly, NFTs for voluntary CO2 allowances all securitize the right to have one ton of CO2 offset. Again, there is fungibility because the underlying right – offsetting one ton of CO2 – is the same for all of these NFTs. This unique definition of fungibility by MiCAR shows that regulation is trying to capture the complexity and diversity of the cryptocurrency landscape. It also shows that startups and other players in this space need to be aware that regulation goes beyond traditional definitions and understandings of cryptocurrencies.
NFTs as financial instruments and the importance of MiCAR for startups.
NFTs can very well be considered financial instruments within the meaning of MiCAR. This is a notable finding as it shows that regulation is trying to keep up with the rapidly evolving cryptocurrency landscape. National law, especially in Germany, goes even further. Here, tradable NFTs are often considered crypto assets or wealth assets simply because of their transferability and investment purpose. This shows that regulators at both EU and national level are closely monitoring developments in the NFT sector. However, the classification of an NFT as a financial instrument depends heavily on its technical and actual characteristics. Only original, unique NFTs are not covered by MiCAR. This means that investors and issuers, especially startups, need to carefully review the new EU regulation and national law. They need to ensure that they understand the specific characteristics of their NFTs and how those characteristics might be interpreted in the context of MiCAR. MiCAR attempts a balancing act between the inclusion and exclusion of NFTs, which leads to uncertainty. In particular, the question remains open as to when the boundary to a “fungible” token is crossed. Here, regulators should provide assistance and clear guidance on how to interpret the regulation. For startups in the cryptocurrency space, it is therefore essential to look into the details of MiCAR.
