New digital manifestations of financial services and European integration: what benefits for the European citizen

Ana Filipa Machado Ribeiro (Student at the School of Law of the University of Minho | Winner of the 2023 UMinho Award for Undergraduate Research) 

Initial considerations

In an era where digital transformation is reshaping the financial landscape, the European Union (EU) has taken a pivotal step towards harmonising the burgeoning realm of crypto-assets with the introduction of the Markets in Crypto-Assets (MiCA) Regulation. As we delve into the intricacies of the MiCA Regulation, it is essential to understand its objectives, the classification of crypto assets it covers, and the broader implications for European citizens and the digital economy at large. The following discussion offers a comprehensive exploration of the MiCA Regulation, also considering criticisms of the legislative adoption practised by the Union, while seeking to ascertain what advantages (if any) it offers European citizens.

MiCA – Statement of reasons

The EU has presented a Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets – MiCA Regulation. This legislative proposal is part of the Digital Finance Package, understood by the EU itself as a set of measures that include a new strategy on digital finance for the EU financial sector,[1] aimed at promoting and supporting the potential of digital finance in terms of innovation and competition, while simultaneously mitigating inherent risks. Thus, the EU is prioritising the preparation of Europe for the digital age and creating a future-ready economy, serving its citizens.

Regarding crypto-assets, the Union defines them in accordance with Article 3(1) of MiCA as a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology. It is important to note that the same normative provision understands distributed ledger technology or ‘DLT’ as a type of technology that supports the distributed recording of encrypted data, with security guaranteed by hashes.[2] This takes place between various participants in a decentralised, secure and immutable way, eliminating the need for intervention by a central authority.

Laura Shin[3] defines cryptocurrency as a digital asset produced by a blockchain that is highly fungible, divisible, and transportable and whose movement can be tracked, unless the chain has built-in privacy features.

The DLT underlying the cryptocurrency market is blockchain. Don Tapscott,[4] CEO of Blockchain Research Institute, presented the concept of blockchain in a very simple way during an interview with the Manuel dos Santos Foundation.[5] He said that for forty years, we have had the internet of information, through which when I send a document or a photograph, I am not sending the information itself, but a copy of it. And thus, the internet has become a great means of publishing and communicating information, which is excellent and needed. However, when we are dealing with something that is truly important for the economy and society, such as assets, valuable thing (e.g., money, stocks, bonds, art, music, etc.) we do not want them to be copied. For example, if I send someone a thousand euros, it is important that the money does not stay in my account.

In computer science, this is known as the double-spending problem, something that has been managed through intermediaries such as banks and fiduciary agents. These intermediaries execute all the businesses logic and transactions for each type of commerce: they identify the asset and the parties involved, settle, and clear transactions, and maintain records. Nevertheless, this is associated with increasing problems such as delays and high fees, in addition to the fact that they store all the data and consequently compromise users’ privacy. Given this, there has been consideration of the possibility of not only having the internet of information, but also the internet of value. What if there were a large distributed global ledger, where everything of value could be managed and transacted securely and privately? This is exactly what Satoshi Nakamoto did in 2008 when creating Bitcoin.[6] For the first time, people could communicate and conduct peer-to-peer transactions where trust is not ensured through an intermediary but through cryptography and smart code. So, in a nutshell, blockchain represents the internet of value.

In exact terms, blockchain is a distributed ledger for recording transactions or assets that is cryptographically secure, append-only, and transparent. In a few words, Laura Shin says that blockchain is a time-stamped, distributed, decentralised, historical ledger of all the transactions on a crypto network, that are held on a global network of computers. That can be seen as a chain of blocks that stores information in a decentralised and distributed network. Mainly, it acts as a golden copy of time-stamped transactions that can replace intermediaries normally tasked with executing the transactions.

The EU states its declared and reiterated political interest in the development and adoption of transformative technologies in the financial sector, including blockchain and DLT, in the MiCA Regulation.

Who is the Costumer?

When MiCA uses the term “consumer”, who is it referring to? In truth, it refers to any holder of European citizenship, as per the stipulations of Articles 18 et seq. of the Treaty on the Functioning of the European Union (TFEU). But how does it happen in practice? Take Mrs. Maria, who, when hearing about cryptocurrency, automatically thinks about the possibility of being deceived through scams and illegal schemes. How could Mrs. Maria become a consumer in the cryptocurrency market, and why?

By the end of 2021, it is estimated nearly three hundred million people worldwide owned some kind of cryptocurrency and by 2030, the worldwide market is expected to grow by 12.5% in compound annual growth rate.[7]

It has also become possible to exchange digital assets for physical assets without any conversion to fiat currency, as was the case on  Thursday 5 May 2022 in Braga, with the first apartment sold for three bitcoins (the equivalent of about one hundred and ten thousand euros). This means that for the first time in Portugal and Europe, a property deal has been completed only with cryptocurrency, without requiring any conversion to euros.[8]

Don Tapscott, in the aforementioned interview with the Manuel dos Santos Foundation, stated that blockchain is considered the greatest technological invention after the internet that it is therefore inevitable that exactly the same thing will happen as it did with the internet, that is, blockchain and everything it entails will become part of the daily life of the ordinary citizen. But why invest in this particular market?

First, the 2008 crisis demonstrated that traditional banking systems fail. The report from the German bank Deutsche Bank Imagine 2030 highlights precisely the fact that banks and the traditional financial system fail and emphasises the exponential evolution of the use of cryptocurrencies over fiat currency.[9]

Second of all, we speak of a form of investment and savings. If Mrs. Maria had saved a hundred euros eight years ago (2016) and hidden them, she would still have one hundred euros today. On the other hand, if Mrs. Maria had invested the same hundred euros in Bitcoin in 2016, today (27 February 2024) she would have approximately fourteen thousand, one hundred and sixty-five euros and twenty-eight cents.[10] This is because, despite the market’s short-term volatility, the long-term trend is for the amount initially invested to grow.

Cryptocurrencies are not affected by inflation. Like gold, cryptos are not created as a short-term solution to financial problems and are therefore not affected by inflation, making them a secure store of value. This happens because the quantity of each cryptocurrency is limited, and because the price is dictated by the market itself and not by an external entity.

Aware of all these advantages, my first question concerns who the potential consumer in the cryptocurrency market might be. Will it be Mrs. Maria, an elderly lady? And if we do not know who the real consumer is, how do we determine what kind of protection needs to be provided?

The purpose of MiCA

Let us return to MiCA. The proposal in question, whose legal basis rests on Article 114 of the TFEU, claims to be coherent with the Union’s policies aiming at the creation of a Capital Markets Union, insofar as it will eliminate obstacles to the establishment of the internal market, improving its functioning with regard to financial services, by ensuring the harmonisation of applicable rules.

It is with the MiCA Regulation that the EU aims to establish uniform conditions for the operation of companies located within it, overcoming the differences between national frameworks that cause market fragmentation and reducing the complexity and costs for companies active in this field. Similarly, they assert that a common framework will provide companies with full access to the internal market, as well as the legal certainty necessary to promote innovation in the crypto-asset market, while simultaneously contributing to market integrity, financial stability, and, above all, ensuring adequate consumer protection and clear understanding of their rights. Consequently, the Regulation sets forth four general and interconnected objectives:[11] legal certainty; support for innovation; incorporating adequate levels of market integrity and consumer and investor protection; and ensuring financial stability.

What type of crypto-assets are we discussing?

As a consequence of the fourth objective of the MiCA Regulation and following the statement of reasons presented, the EU believes that a division into three sub-categories of crypto-assets is necessary, which should be subject to more specific requirements.[12]

The first are also referred to as utility tokens and their main function is to provide digital access to a good or service, available through DLT and exclusively accepted by the issuer of the crypto token. They may also have non-financial purposes, related to the operation of a platform or digital service. The Asset-Referenced Tokens (ARTs) have an underlying asset, to which their value is linked. By stabilising it, they are intended to be used by their holders as means of payment for acquiring goods and services and as a store of value. In turn, E-money tokens are intended for use as a means of payment and seek to stabilise their value by reference to a fiat currency. The Regulation also establishes an important distinction in this matter, namely between e-money tokens and electronic money: while holders of electronic money always have a credit on the electronic money institution and have the contractual right to redeem their currency at any time, crypto-assets do not (as a rule) confer to their holders a credit on the issuers of the assets or this credit does not have monetary parity with the reference currency and limit the redemption period.

How can the EU achieve these objectives?

To achieve the aforementioned objectives, MiCA sets forth two clear requirements: on one hand, the legislation must be specific, viable in the long term, and capable of keeping up with innovation and technological evolution, and on the other, it has the duty to fight against money laundering and combat the financing of terrorism.

A critical analysis of the current regulation

Having analysed the statement of reasons that led to the drafting of this proposal and the legal precepts adopted, it seems to me that there are some matters that should be properly raised and studied.

First of all, it is undeniable that the crypto-asset market needs regulation. We are talking about a somewhat volatile reality, which can change in a matter of seconds for countless reasons. The lack of normative harmonisation among Member States on this matter is conducive to instability, lack of transparency, and disruption of fair competition among cryptocurrency issuers. The importance of regulating the new digital economy and Web 3.0 cannot be overstated. As we venture deeper into the age of digitalisation, the emergence of decentralised platforms, blockchain technology, and digital assets has presented both unprecedented opportunities and challenges. The new digital economy, underpinned by Web 3.0, promises a more democratised internet, where users have greater control over their data, identity, and transactions. This shift from centralised to decentralised networks has the potential to transform various industries by fostering innovation, enhancing security, and ensuring more equitable access to information and resources. However, this rapidly evolving landscape also raises critical concerns that necessitate regulatory intervention. Among these are issues related to privacy, security, consumer protection, and the stability of financial systems.

The volatile nature of digital assets, coupled with the complex and often opaque mechanisms of decentralised finance (DeFi) platforms, poses significant risks to investors and the broader economy. Regulating the new digital economy and Web 3.0 involves striking a delicate balance. On one hand, it is crucial to establish clear rules that protect consumers, ensure fair competition, and maintain financial stability. This includes setting standards for transparency, security, and accountability for entities operating within this space. On the other hand, regulation must be flexible enough to adapt to the rapid pace of technological change and not hinder the growth and development of the digital economy. In essence, effective regulation of Web 3.0 and the digital economy should aim to foster an environment where innovation can flourish within a framework that safeguards the public interest. By doing so, it can ensure that the transition to a more decentralised digital world benefits all stakeholders, promoting not only economic growth but also a more inclusive and equitable digital future. Nevertheless, it does not seem to me that the EU is charting the correct path.

The proposal of this Regulation states that it is based on a risk weighting limited to the relatively small size of the cryptocurrency market to date.[13] However, on the same page, it asserts the need to define stricter risks for stablecoins, which are more prone to rapid growth, potentially resulting in higher risk levels for investors, counterparts, and the financial system. If the EU confines itself to the still limited size of the market in question and, worse, if it only regulates stablecoins in a more restrictive (perhaps even overly restrictive) manner, it will not be able to adequately protect the potential consumer, as it intends and states in its preamble.

In this aspect, my criticism mainly concerns what I believe to be an excess of regulation, particularly in the provisions aimed at e-money tokens and asset-referenced tokens. The requirements regarding the White paper (from its disclosure to the communication of possible changes) seem to me to be very well formulated and consistent, to a certain extent, with the transparency objective of the market itself. In this respect, I give due credit to the EU. However, it seems to me that there is an excessive delegation of powers to central authorities, notably through concepts that appear somewhat vague [like Article 19(2), a]. What should we understand as a threat or as interests of its clients and the integrity of the market? Or even, in accordance with the subparagraph c) of the same Article, the EU asserts that competent authorities must refuse authorisation if the applicant issuer’s business model may pose a serious threat to financial stability, monetary policy transmission or monetary sovereignty. In concrete terms, how does this manifest? In truth, it seems to me that there may be room for different assessments depending on the competent authority involved.

In reality, as I see it, this  excessive regulation will only serve to accentuate disparities within the cryptocurrency market, resulting precisely in the opposite of what is intended, namely, increasing market instability and volatility. Even worse, I believe that issuers of e-money tokens or asset-referenced tokens may refrain from making public offerings in the Union, as they do not want and cannot, at an early stage, bear the complexity that results from this, which penalises competition within the market itself.

In this regard, it is important to make another observation. Let me reiterate that we are dealing with the  cryptocurrency market, where decentralisation is a fundamental pillar. Instead, cryptocurrencies are based on the aforementioned DLT, through which peer-to-peer networks can be established. In fact, with the requirements for the aforementioned authorisations (and their constant reassessments), it seems to me that the Union has harmed this particular characteristic of the market, as stablecoins will necessarily be subject to the approval of a third-party. Even though the EU justifies that this is necessary for the protection of potential consumers, it does not seem to me a proportional justification because we must not forget that consumers entered this market aware of its characteristics, with decentralisation being one of the reasons for their participation. In fact, I believe that the EU may be contradicting the will of potential consumers (or even over-protecting them unnecessarily) and making substantial changes to the cryptocurrency market itself.

It is also important to criticise Article 12 of the designated Regulation, which enshrines the right of withdrawal. In its explanatory memorandum, the Union states that this right is introduced in order to strengthen consumer protection and ensure the successful completion of a public offering of crypto-assets. In theory, this right of withdrawal is granted by issuers of crypto-assets that are not referenced to assets and electronic money crypto-assets, in which any consumer has a period of fourteen days to exercise regret, without incurring any costs. Now let us see how this happens (if it can happen) in practice. Right from the start, it is important to note that it is not possible to carry out transactions on the blockchain at zero cost, be it a direct cost (transaction fees paid to miners as an incentive to process and validate transactions) or an indirect cost (data storage costs or computing costs to execute smart contracts on some blockchains). Now, this means that such transaction fees will be borne by issuers of crypto-assets (Article 12(1), 2nd paragraph, a contrario), which translates into an additional burden. The same Article also requires that such withdrawal be made via the payment method, something that in practice can also be very burdensome to comply with (or even impossible) due to the common practice of trading crypto-assets (the practice of trading crypto using other cryptocurrencies). Article 12 precisely increases the legal complexity for crypto issuers (and consequently for the market), while simultaneously putting them in a situation of constant uncertainty and insecurity, something that is contrary to the very explanatory memorandum of MiCA.

Final Considerations

In summary, the present research aims to raise considerations regarding the new MiCA Regulation, particularly regarding the position adopted by the EU in this regard. My opinion is inherently critical, especially of the aspects mentioned above. In reality, it seems to me that the EU will harm a market that aims to be decentralised and free from third-party intervention, making it burdensome for both cryptocurrency issuers or related services (of any kind) and for consumers themselves. Overall, I argue that this regulatory framework entails excessive consumer protection, far beyond what is necessary, contradicting their own private autonomy. However, I acknowledge the merit of some decisions, particularly those related to transparency and clarity of White papers and ensuing communications.

Once again, I assert that there must be a compatibility between consumer protection and the inherent characteristics of this new digital economy, without either aspect being harmed, something I do not believe has been achieved in the MiCA Regulation. Ultimately, I dare to conclude that the EU drafted the MiCA Regulation without knowledge of the market and without technical expertise.

Following the issues raised here, I intend to continue this research. The article you have just read is the result of an introductory approach and an exploration of the paths of scientific research, paths that I intend to continue pursuing with a more technical and in-depth approach.

[1] Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions on a Digital Finance Strategy for the EU, COM(2020)591, 23 September 2020.

[2] Chain of fixed-length numbers and letters that results from running an encryption function on a piece of data so that even changing one punctuation mark in the data will result in a wildly different hash. It is used to uniquely identify things like blockchain transactions or addresses.

[3] Laura Shin is a writer, crypto journalist, and podcaster from New York City. Shin has spoken about cryptocurrency at places such as TEDx San Francisco, the International Monetary Fund, Singularity University, and the Oslo Freedom Forum.

[4] Don Tapscott is a leading writer and consultant in the business and technology fields in Canada. He has contributed to 15 books that cover topics such as office automation and crowdsourcing. His most recent focus is on blockchain governance.

[5] Fundação Manuel dos Santos, “Don Tapscott: Blockchain não é assim tão simples”, 4 July 2023, video available at: https://youtu.be/X3oxGk_S168?si=qVJ5INBbDUTqB4xw.

[6] Satoshi Nakamoto is the name used by the unknown person or group who created Bitcoin, the first digital currency. They wrote a paper explaining how it works and made the software that runs it. Satoshi Nakamoto created Bitcoin by writing a paper that introduced a digital currency system using a decentralised ledger called blockchain, ensuring secure, peer-to-peer transactions without the need for a central authority. They then released software that allowed people to mine and exchange this new form of digital money, solving the double-spending problem inherent to digital currencies. See Satoshi Nakamoto, “Bitcoin: A Peer-To-Peer Electronic Cash System”, White Paper,2008.Available at:: https://bitcoin.org/bitcoin.pdf.

[7]Andrew Michael, “Cryptocurrency Statistics 2024”, Forbes Advisor, 7 February 2024. Available at:  https://www.forbes.com/advisor/au/investing/cryptocurrency/cryptocurrency-statistics/.

[8]Christiane Steinhoff, “A property in Braga is sold for 3 bitcoins: the 1st 100% crypto transaction in Portugal”, Idealista News, 13 May 2022. Available at: https://www.idealista.pt/en/news/financial-advice-in-portugal/2022/05/13/5003-house-in-braga-sold-for-3-bitcoins-1st-100-crypto-transaction-in-portugal.

[9] Jim Reid, “The end of fiat money?”, in Konzept # 17: Imagine 2030, Deutsche Bank, December 4, 2019. Available at:  https://www.dbresearch.com/PROD/RPS_EN-PROD/Konzept_%23_17%3A_Imagine_2030/RPS_EN_DOC_VIEW.calias?rwnode=PROD0000000000464258&ProdCollection=PROD0000000000503196.

[10] If Mrs. Maria had bought one hundred euros worth of bitcoin on 1 April  2016 (when one bitcoin was valued at 368,51€), she would have ended up with 0.27 bitcoins (100 ÷ 368,51€ ≈ 0,27). Today, on 27 February  2024 (when one bitcoin is valued at 52.464,01€), 0.27 bitcoin is equivalent to fourteen thousand, one hundred and sixty-five euros and twenty-eight cents.

[11] Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets and amending Directive (EU) 2019/1937, COM/2020/593 final, 24 September 2020, 2 – 3.

[12] Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets and amending Directive (EU) 2019/1937, 17.

[13] Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets and amending Directive (EU) 2019/1937, Articles 4 to 14,17.

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