Understanding MiCA: NFT Exemptions and the Future of Crypto-Asset Regulation in the EU

MiCA Regulation 

On 5 October 2022, the Council of the European Union adopted the final text of the Markets in Crypto-assets Regulation (MiCA) framework, and on 7 October 2022, the MiCA bill was passed. Even though there is a wide agreement of MiCA being adopted and implemented urgently, it has not yet been voted into law until now. As a landmark piece of legislation, MiCA aims to regulate the EU digital asset markets in those cases where existing EU legislation has not yet covered these matters.

NFTs Exception

MiCA’s final version strongly protects consumers from Crypto Asset Service Providers (‘CASPs’), who will become liable if they lose or mismanage investors’ crypto assets. MiCA also covers any type of market abuse related to any type of transaction or service, notably for market manipulation and insider dealing. The text, however, distances itself from unique and non-fungible tokens (NFTs) as Recital (6b) suggests that MiCA “should not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles, whose value is attributable to each crypto-assets unique characteristics and the utility it gives to the token holder.” 

Having this unique opportunity to craft a novel legal framework, the regulators took another step further and included a few clear exclusions of crypto-assets presenting services or physical assets that are unique and not fungible, such as product guarantees or real estate. 

The exemption of unique, non-fungible tokens is justified with a display of acumen, ranging from limited risks, features, and financial use. In addition, Recital 6b contains a remark that such unique and non-fungible tokens cannot be compared to existing markets or equivalent assets as they do not exhibit the potency to be interchangeable and of relative value to one another. The fact that these assets can be traded in marketplaces and accumulated speculatively shall not yet propose that the NFTs be regulated. 

Substance-Over-Form Approach

While Recital (6b) provides a premise for NFT exclusion from the Regulation by means of example, Recital (6c) instigates possible subsumption of NFTs under the regulation. The exception provided for in Recital (6b) is to be considered ‘without prejudice’ to the qualification of such crypto-assets as financial instruments. Recital (6c) thus sheds light on the qualification criteria, mainly the asset’s uniqueness and fungibility. The regulator provides two clear indicators of fungibility – fractionalisation and serialisation, both discussed further below. In addition, the regulator asserts crypto-assets uniqueness and non-fungibility cannot be presumed merely on the basis of a unique identifier as the assets or rights represented thereunder should also be unique and not fungible.

EUCI welcomes the fact that the regulator points out de facto features or features linked to de facto uses of such crypto-assets. We fully agree with the notion that when a crypto-asset exhibits features or is being used as a fungible and not a unique asset, it cannot be classified under the exception provided for in the Recital (6b). Indeed, the authorities should adopt a substance-over-form approach, under which the features of the asset in question should determine the qualification, not its designation by the issuer. 

The above necessarily suggests that the existence of large collections, serialisation, or fractionalisation of an asset denominated as a non-fungible token, doesn’t immediately serve as an indicator of a token’s fungibility and lack of uniqueness. Such characteristics could nevertheless indicate that a non-fungible token is issued to represent a large collection of tickets issued by event organisers. Each ticket is unique and held by one individual buyer, yet fungible with other tickets issued for the same event. Another example may be vested in non-fungible tokens, similar to wall posters, presenting various editions of one single print. Even though serialised, the editions presented through digital means hold unique value. 

Way Forward

Once MiCA becomes fully applicable, ESMA will be mandated to publish guidelines on criteria and conditions for the qualification of a crypto-asset as an excluded unique and non-fungible asset. Further, Recital (6c) instructs national competent authorities to adopt a substance-over-form approach and decide on the qualification of the NFTs in question based on their feature or features linked to the de facto use case of the NFTs. 

While the exclusion of NFTs from MiCA presents a general rule, the mere designation of NFTs won’t be enough. Both ESMA and National Competent Authorities will continue to play an important role when it comes to further determination, qualification, and regulation of NFTs. 

Stay tuned, we’ll be sharing more on some of the most important criteria that can contribute to a distinction between NFTs and other crypto-asset qualifications.