While crypto assets appear to be subjected to a pioneering regulatory framework – MiCAR – this perception masks the reality that MiCAR largely consists of repurposed material laws, and that other laws, notably MiFID and EMD, have an equally big role in regulating crypto-assets. Within its 149 articles, MiCAR mainly interlaces text borrowed from MiFIDR or EMD, often echoing them verbatim. It also contains direct references to existing rules in EMD and integrates novel, innovative provisions that lack historical precedent. The logic behind these design choices is unclear2 and an area this article aims to elucidate.3 As the juxtaposition of novel rules amidst a mix of repurposed norms comes without information on why and how relevant design choices have been taken it remains unclear whether resources have been allocated in a way that the law achieves its rationales in the most efficient way. Overall, it shows that true innovation in rule-making is less frequent than it may appear.
However, it is questionable whether the creation of novel rules is imperative or if existing frameworks can be adapted to meet the relevant regulatory objectives. In relation to the case study – MiCAR – this paper will show that the choice between innovating rules and adapting existing ones has not always been made in a way that provides for the most efficient outcomes. Same activity, same risk?
In the realm of financial services regulation, the axiom ‘same activity, same risk, same rule’ has often functioned as a cornerstone for policy formulation.4 According to this principle, regulatory measures should align coherently with the risk profiles associated with specific categories of market activities.5
However, the efficacy of this conventional axiom frequently falters upon practical application. Recent drafting of financial regulation underscores that both ‘same activity’ and ‘same risk’ require contextual evaluation, particularly in emerging market sectors. Contrary to initial assumptions, it is not so much the technological features, such as blockchain for crypto assets or artificial intelligence for customer identification, that challenge traditional risk analysis. Rather, it is elements of the market environment, intricate links with established financial services, and other markets like the data economy, along with the rapid pace of market adoption facilitated by the Internet, that defy straightforward regulatory application.
The principle commonly denoted as ‘same activity, same risk, same rule’ is cited in both academic and policy literature to underscore the necessity for regulatory consistency. It also appears in, or informs, adjacent regulatory conceptualisations like ‘functional regulation’ and ‘activity-based regulation’.
Originating from the need for regulatory coherence, the principle serves multiple ends. It aims to establish a market environment that, in EU parlance, ensures a ‘level playing field’. This incorporates equal market access, fairness, simplicity, predictability, and the mitigation of regulatory arbitrage.
The principle may also enhance the mitigation of systemic risk and bolster the efficacy of macroprudential oversight. Financial stability benefits from this approach, as it prevents similar activities from evading regulatory scrutiny due to their presentation in disparate institutional frameworks.
Critics note that not all activities lend themselves to straightforward comparison, particularly in an era of rapid financial innovation. Concerns arise about the feasibility of implementing a uniform risk assessment across intrinsically diverse activities, particularly those involving intricate financial products and services.
While standardisation fosters consistency, it may prove inadequate for activities with yet-to-be-understood risk profiles. This uniform approach could result either in excessive regulation, hampering innovation, or in insufficient regulation, exposing the financial system to unforeseen risks.
Particularly, the ‘same activity, same risk, same rule’ principle encounters limitations when deployed in emerging sectors, struggling to fully accommodate their distinctive risk profiles. The real impediments to effective application are less technological than environmental. The idea of ‘tech neutrality’ – the notion that regulation should remain agnostic towards technology – appears appealing but proves misleading. It is not technology alone that complicates regulatory implementation; rather, it’s the swiftness of technological evolution, shifts in user behaviour, emerging interconnectedness, and the accommodation of traditional financial services within new market conditions.
Lastly, jurisdictional challenges complicate rulemaking. Unlike traditional markets confined by geographic limitations, many emerging financial activities operate beyond such boundaries. This challenge is not a recent development, nor is it exclusive to digital financial services or crypto-assets. For instance, the global derivatives market, the issuance and reconfiguration of securitised assets, and the rise of shadow banking have long demonstrated this trend. These markets have expanded significantly following the internationalisation of capital markets and the removal of capital controls. The vast opportunities for regulatory arbitrage and the consequential threat of regulatory race to the bottom regularly require a significantly more detailed approach to rulemaking, reflecting in the rules an international perspective that may go contrary to categorisation of an activity and the ensuing risk in the purely domestic context.
Against this backdrop, a more nuanced, case-by-case risk profiling appears indispensable, transcending the ‘one size fits all’ paradigm inherent in the ‘same activity, same risk, same rule’ principle. By dissecting the risk characteristics of individual categories of financial activities within their respective environments, the result is better tailored regulation, which could reduce regulatory costs while enhancing supervisory effectiveness.
However, this notably granular approach also introduces challenges, eliminating some advantages inherent in a broader ‘same activity, same risk’ categorisation. The complexity of constructing and maintaining comprehensive risk profiles for each financial activity poses analytical challenges and is likely more costly. This greater granularity risks spawning regulatory fragmentation, thereby escalating compliance cost and complicating international regulatory coordination.
Consequently, the analysis of the risks posed by specific activities must adhere to established categories wherever feasible, to preserve efficiency. Where individual analysis reveals deviating risk levels, for instance where multiple activities coming together in the same entity or group, adjustments to existing rules or the introduction of supplementary regulations become essential. For maximum transparency, predictability, and legal certainty, any deviations from the ‘same activity, same risk’ principle must be rationalised and documented.
This section delves into specific facets of the EU’s crypto-asset regulatory landscape. It scrutinizes how and where applicable rules are ‘sourced,‘ be it through self-standing regimes, novel formulations, repurposed provisions, or direct applications of pre-existing provisions. By contrasting relevant choices with alternative rule-sourcing methods, the section assesses the efficiency of the legislative process in achieving the key regulatory goals: stability, efficiency, consumer protection, and crime prevention, etc.
Beyond these (basic) key regulatory goals, this evaluation incorporates criteria pertaining to (broadly) the sphere of legal certainty, which in turn is part part of the efficiency axiom, notably coherence, clarity, accessibility, adaptability and predictability. This section also considers arguments from the sphere of political economy, notably international compatibility and the power to influence international standards, as well as qualitative and quantitative thresholds fro regulatory intervention.
The section concludes by articulating a set of principles for regulatory design that can guide future choices in financial market regulation, including that of crypto-assets.
Tokenised securities, or, to use the correct term, tokenised financial instruments in the EU are primarily regulated under the MiFID II/MiFIR framework. Essentially, these are traditional financial instruments such as bonds or equities that have been issued as crypto assets. Other types of crypto-assets are regulated elsewhere, in particular in the MiCAR and the CRD/CRR (for tokenised deposits).
From a functional standpoint, they serve the same purposes as their traditional counterparts; what changes is the technological medium. The EU’s decision to regulate tokenised financial instruments under the existing MiFID II/MiFIR framework can therefore be seen as an application of the principle of technological neutrality, which posits that the law should not discriminate between technologies that perform the same function.
Analysing the decision to fit tokenised financial instruments under MiFID II/MiFIR requires scrutiny through the lens of the rationales and further criteria set out above. The MiFID framework is well established in this respect, albeit for traditional financial instruments. Using existing rules offers clarity and predictability to market participants. The well-established nature of MiFID II/MiFIR in traditional finance lends credibility to the emerging tokenised financial instrument market. This can bolster international compatibility, as global stakeholders are already familiar with the EU’s approach to financial regulation. Additionally, by not creating a separate legal framework, the EU avoids regulatory fragmentation between two types of products which are essentially the same in terms of their functions.
However, the application of MiFID II/MiFIR to tokenised assets may present a challenge as well. While technological neutrality is maintained, questions arise concerning adaptability and the fitness of these regulations for digital assets. In particular, where the technology displaces the need for certain intermediary functions and with this the risk mitigation functions performed by these. Then, modifications to the existing framework would be needed. The EU has introduced the DLT Pilot Regime for blockchain based market infrastructures, with a view to addressing parts of this issue.
Electronic money tokens (EMTs) and asset reference tokens (ARTs) are both emanations of the concept of so called ‘stablecoins’, i. e. assets that are actually or purportedly backed by other assets in a way that guarantees their stable value. Both ARTs and EMTs are defined under EU law whereas ‘stablecoin’ is rather marketing terminology. The difference between the two, under EU law, lies in the fact that ARTs can refer to a range of different asset types, including baskets of goods, commodities, other crypto-assets, a combination of such assets or fiat currencies, while EMTs can refer only to a single fiat currency.
EU law provides a comprehensive framework for the issuance of both, however, despite strong conceptual parallels of the two asset types, different choices have been made as regards the design of their respective regulatory schemes.
ART issuance is governed by MiCAR, which is an EU instrument of the ‘regulation’ type, i. e., a single legal framework directly applicable in all 27 EU jurisdictions. The content of the relevant Title II is a comprehensive, self-standing regime. However, the rules are to a largest extent transplants from pre-existing rules, including from financial markets legislation such as the EMD, MiFID/R, the Prospectus Regulation, the Money Market Funds regulation, and the Directive on UCITS.
There is a significant number of near verbatim copies. For example, the provisions relating to acquisitions of qualifying holdings in issuers of asset-referenced tokens6 are almost identical to those in MiFID but for the modifications to reflect the inclusion in a Regulation rather than Directive. For example, issuers of ARTs are prohibited from granting interest in relation to ARTs; the same requirement applies in the case of e-money under the EMD “to reduce the risk that [ARTs] are used as a store of value”.7
Yet others are only inspired by pre-existing laws. For example, the provisions on own funds are similar to, but not fully aligned with the requirements under the EMD.8 Similarly, the requirements for the reserve of assets (e.g. the investment policy) can be seen to be highly inspired by the Directive on UCITS,9 as can the requirements for recovery planning10 which have as a clear point of inspiration the recovery planning obligations for credit institutions under the BRRD. For redemption planning,11 inspiration can be found in the Money Market Fund Regulation.12 And it is clear that the framework for the white papers to be prepared for ARTs13 is heavily inspired by the Prospectus Regulation.14
Some rules seem to be truly novel. For example, Article 23 MiCAR sets out restrictions on the issuance of ARTs used widely as a means of exchange, further to MiCAR’s objectives of mitigating threats to monetary policy transmission. Moreover, central banks are given power to request a competent authority revoke authorisation to issue an ART where a “serious threat” to the smooth operation of payment systems, monetary policy transmission or monetary sovereignty is identified.15 Other more novel elements relate to the procedure for switching the supervision of the ART issuance from national competent authorities to EU-level supervision by the EBA: namely, the criteria for determining an ART as ‘significant’, the voluntary ‘opt-in’ and the somewhat unusual configuration and function of supervisory colleges the EBA is required to establish.16
By contrast, the regulatory architecture for EMTs diverges significantly. EMTs are conceptually similar to ARTs but also fit into the concept of ‘electronic money,‘ a well-defined asset category under EU law covered extensively by the EMD. A majority of EMT issues would unambiguously fall under the ‘electronic money’ classification and, therefore, be subject to EMD regulations. The rest may not qualify as electronic money due to definitional ambiguities, even though there are no conceptual barriers to categorising them as such.
Against this backdrop, the EU legislator has opted for a convoluted regulatory framework. First, the EMD remains intact, leaving the rules for the issuance of ‘non-tokenised’ electronic money unaltered. Second, concerning the prudential elements of EMT issuance – including initial capital, own funds, permitted activities, and fund safeguarding – MiCAR makes an unexpected volte-face. It stipulates that Titles II and III of the EMD apply unless explicitly stated otherwise.17 In essence, EMTs, many of which would already fall under the EMD, are incorporated into the MiCAR framework. However, MiCAR then refers back to the EMD for several critical regulatory questions. Adding another layer of complexity, MiCAR’s own rules subsequently override the EMD regulations on issuance and redeemability to which it initially referred.18 This intricate design is not only hard to follow but raises two questions.
From a substantive perspective, it appears that those EMTs which would already qualify as electronic money, are not governed by the same rules as ‘non-tokenised’ or ‘traditional’ electronic money. Additionally, the reference to Titles II and III of the EMD seems to elevate a text that is not originally directly applicable – the EMD, being a directive, necessitates national transposition – to one that is directly applicable. MiCAR is difficult to interpret in any other manner. Notably, this resulting fragmentation, which lacks a clear rationale, is solely the outcome of employing different technologies. The asset category of ‘electronic money’ is thus divided into 28 separate regulatory regimes (27 national transpositions of the EMD for traditional electronic money, and the MiCAR regime directly applicable to EMTs), the boundary between which remains ill-defined.
It is fair to say that the EU’s regulatory approach to the issuance of so-called ‘stablecoins’ is both fragmented and opaque. Functionally, EMTs and ARTs have common features but they may also differ. E.g., some ARTs might have rather a payment function quite like EMTs, others are much closer to financial instruments (see below) – yet they operate under wholly separate frameworks even in parts where they functionally overlap. The ART framework predominantly consists of imperfect transplants but remains internally cohesive and is made ‘of one piece’. Whereas there is a significant regulatory demarcation line towards EMTs, inside the ART category, all crypto assets are treated the same even through the ART definition is very broad, covering tokens that may be more payment like, more investment like, or a hybrid of both.
Conversely, the EMT framework features a significant entanglement of EMD and MiCAR regulations, also relying on transplants. This setup poses significant challenges in terms of predictability, applicability, and international compatibility, lacking the clarity and consistency needed to set international standards.
Where an ART or EMT issue is classified as ‘significant’ the supervisory competency in respect of the issuer are transferred from the EU member state to the EBA (with the exception of EMTs issued by credit institutions)19 and the relevant issuer is subjected to additional, more stringent prudential obligations.20
The complexities affecting the regime for significant ‘stablecoins’ add to those affecting all ‘stablecoins’, as seen above. In particular, the cross referencing between the rules for significant EMT and ART rules and the EMD rules becomes even more convoluted, aggravating the concerns raised before. Further, the fragmentation between ‘traditional’ electronic money and tokenised electronic money, as described above, becomes even starker, and the framework applicable to significant EMTs consists, for its most significant parts, of the rules on significant ARTs. In the same vein, it seems odd that significant ARTs issued by credit institutions are subject to EBA supervision, whereas significant EMTs issued by credit institutions remain with the regular, national, supervisor of the relevant bank.
The European nomenclature identifies crypto assets which are neither tokenised financial instruments, nor ARTs or EMTs (all described above) only by way of exclusion, calling them ‘crypto-assets other than ...’ .21 For users of the regime, it would have been clearer to create a category with a proper denomination, e.g., ‘crypto-assets’, on which the category of ART and EMT could have been built as crypto-assets with specific additional features. This would have helped acceptance of and intellectual access to the law.
‘Other’ crypto assets22 are subjected to a significantly lighter regulatory regime. It consists of three main strands of obligations. First, obligations in relation to the drafting, notification and publication of a ‘white paper’ (largely comparable to a securities prospectus) and of marketing material23; second, obligations in relation to the offering of ‘other’ crypto assets within the European Union.24 Issuers and other offerors who comply with these rules have the right to offer the relevant crypto-assets throughout the EU and these assets may be traded on relevant exchanges.25
As regards the white paper and marketing regime, most of its elements bear similarities to those in the Prospectus Regulation26, which governs the offer of securities to the public and the admission of securities to trading on a regulated market. Notably, both require documentation for public offers (crypto-asset white paper in MiCAR vs. prospectus in Prospectus Regulation), and, both have exemptions for certain types of offers or investors.27
The white-paper framework is clear and self-contained, and the deviations from pre-existing rules are induced by the fact that the risk profile of crypto-assets in part differs from the risk profile of traditional financial instruments. Another question is more interesting for our purposes, relating to the reasoning for creating, in MiCAR, three different white paper and marketing regimes.28 As a consequence of product-specific risks, the different whitepaper regimes naturally require the inclusion of different information. A large part of the rules are, however, identical across the three regimes. Still, the legislator has chosen to create three fully fledged, self-standing regimes. The result is a regime that works without back-referencing, which enhances readability at the price of a certain bulkiness.
The analysis yields complex insights into the efficacy of MiCA’s regulatory structuring. On one axis, the transposition of rules from existing frameworks into MiCAR is not inherently problematic if these rules align with the specific risk profiles of the asset types or services they regulate. This practice constitutes the lion’s share of MiCAR, leveraging familiarity with existing regulatory strategies, e.g., disclosure, to facilitate compliance and acceptance. This approach inherently offers clarity and predictability, minimizes the scope for regulatory arbitrage, and contributes to a level playing field. Furthermore, the international compatibility of the foundational rules may help in carrying over compatibility into the new regulatory landscape.
A second layer of complexity arises when examining the disparate treatments of tokenized financial instruments and EMTs. Both asset types conceptually nest within existing legislative frameworks – MiFID for tokenised financial instruments and EMD for EMTs. However, the regulatory structuring diverges sharply.
For tokenised financial instruments, they are regarded a MiFID financial instrument. No adaptations to MiFID were considered necessary, with the addition of the DLT Pilot regime to address technological innovation.
In contrast, EMTs are awkwardly shoehorned into MiCAR, resulting in opaque cross-references and exemptions to and from EMD. This incongruence poses significant issues, particularly in terms of the framework’s clarity, coherence, and potential to set international standards. The EMT framework, in this light, marks a regression. A more convincing approach would involve amending and extending the EMD to the extent needed to accommodate EMTs, mirroring the assimilation of tokenized financial instruments into MiFID, if needed with necessary changes to ensure definitional clarity.
Such an approach would have reserved the text of MiCAR for genuinely ‘novel’ types of assets – i. e., ‘other’ crypto assets and ARTs, neither of which is regulated anywhere else in respect of issuance and services. This approach would also leave sufficient conceptual room within MiCAR to address the multifaceted functions ARTs can serve – be it payment, investment, value storage, or any combination of these. At the moment, the ART regime is silent on these differences.
The slightly awkward structuring of the rules for crypto-assets comes with heightened cost for all sides – for consumers, as it is next to impossible to grasp what rules apply to what types of assets. For issuers, as the fault lines between asset categories are not entirely clear, as a consequence of which they may face significant difficulty in classifying an envisaged issuance in regulatory terms. Further, issuers and service providers need to create additional processes to ensure compliance with a multitude of different rules.
From this analysis, key principles surface:
– Financial instruments that function within the ambit of existing legislation should be incorporated into that legislation’s scope;
– Regulatory regimes addressing new market developments can consist of both novel and repurposed rules;
– Repurposing established rules is sufficient when they fulfil the regulatory objectives in respect of the creation, offering or servicing of a financial product;
– In the repurposing process, keep changes to a minimum;
– In cases where emergent products or service delivery methods present distinct risk profiles, established rules can be tailored through the addition of novel regulatory concepts;
– Test everything against the criteria of coherence, clarity/predictability, adaptability, international compatibility, and capacity to influence international standards. This may alter decisions made on the basis of the other criteria. n
