January 2021

INPUT ON EU CRYPTO-ASSET
MARKET REGULATION
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Authors:

Giulia ArangÜena as Blockchain and Fintech Partner at GIM Legal STA S.r.l., and Carlo Giuliano and
Edoardo Freschi Diana as Junior Associate at GIM Legal STA S.r.l.

Acknowledgement:

We would like to thank Pietro Azzara, President of the Board of Directors of the Italia 4 Blockchain
Association, and all other members of it for the opportunity to participate in today's consultation and
for their valuable contribution to the drafting of this document. Italia 4 Blockchain is a member of INATBA
- International Association for Trusted Blockchain Applications, and participated, through Giulia
Arangüena, a member of its Board of Directors, in the work of the INTABA- MICAR Task Force.

We would also like to thank Luigi Rizzi, Managing Partner of GIM Legal STA S.r.l., for believing in the
importance of participation in the regulatory improvement process set out in today's consultation on
the MICAR text and for providing the necessary guidance for the preparation of this document.

Contents

EXECUTIVE SUMMARY 3

ACRONYMS LIST 3

INTRODUCTION 4

PURPOSE OF THIS PAPER 6

QUESTIONABLE DEFINITIONS 6

NEED OF TOKEN TAXONOMY CLARITY 7

UNCLEAR DEFINITION OF ASSET-REFERENCED TOKEN 9

WEAKNESSES NOTION OF E-MONEY TOKEN 13

UTILITY TOKEN RESTRICTIONS 16

UNFOUNDED EXEMPTIONS AND THREAT TO COMPETITION 18

UNCERTAINTY IN PERMISSIONLESS FUTURE 22

CONCLUSION 25
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EXECUTIVE SUMMARY
This report aims to share our appreciation for the initiative of the European Commission in
dealing with the emerging world of crypto-assets. These assets and their technology will play
a central role in the times to come, and, fundamentally, our Europe shows an open and
welcoming attitude towards them.

We do support the four objectives upon which this proposal is based. Nevertheless, in this
document, we want to highlight some aspects that, in our opinion, can undermine the
achievement of such objectives. In particular, we have identified three areas which require
further discussion and eventually amendments to the text of MICAR.

Firstly we suggest amendments regarding specific definitions. Unclarity and confusion

regarding the basic classification of tokens may give rise to uncertainty about applying the
rules of MICAR. This would eventually jeopardize the harmonization of the legal framework for
the market of crypto-assets.

In the second instance, we criticize the regulatory approach considering the exemptions
given to credit institutions and EMIs. We suggest avoiding significant risks for fair competition,
applying a regime of "same activity, same regulation" or introducing exemptions favoring SMEs
and innovative start-ups.

Lastly, we point out that the current draft of MICAR, although technologically neutral,
appears to build a framework that practically would cut out permissionless Blockchain from
the regulation's perimeter. We hence suggest providing more clarity whether this technology
is meant to fall within the scope of MICAR, and we propose some amendments.

ACRONYMS LIST
4AMLD 4th Anti-Money Laundering Directive - Directive 2015/849/EU

5AMLD 5th Anti-Money Laundering Directive - Directive 2018/843/EU

ART Asset-Referenced Token

CASP Crypto-Assets Service Provider

CFT Counter-Financing of Terrorism

DLT Distributed Ledger Technology

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EBA European Banking Authority

ECB European Central Bank

EMD Electronic Money Directive - Directive 2009/110/EU

EMI Electronic Money Institute

EMR Electronic Money Regulation

EMT Electronic Money Token

ENCAs European National Competent Authorities

ESAs European Supervisory Authorities of the financial supervision system (EBA, ESMA, EIOPA)

ESMA European Securities and Markets Authority

EU European Union

ICO Initial Coin Offering

IPO Initial Public Offering

MICAR Markets in Crypto Assets Regulation

Mifid II Markets in Financial Instrument

SME Small Medium Enterprise

TGE Token-Generated Event

TTI Token Taxonomy Initiative

VASP Virtual Asset Service provider

INTRODUCTION
The general objectives of the MICAR are as follows:

- Providing legal clarity;

- Supporting innovation and fair competition by creating a conducive framework for the
issuance of, and the provision of services related to crypto-assets;

- To ensure a high level of consumer and investor protection and market integrity in the
crypto-asset markets;

- To address financial stability and monetary policy risks that could arise from the wide use
of crypto-assets and DLT.
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The specific objectives are as follows:

- Increasing the sources of funding for companies through increased Initial Coin Offerings
and Securities Tokens Offerings;

- Limiting the risks of fraud, money laundering and illicit practices in the crypto-asset markets;

- Allowing EU consumers and investors to access new investment opportunities or new types
of payment instruments, competing with existing ones, deliver fast, cheap, and efficient
payments, particularly for cross-border situations.

It is clear from all the above MICAR premises that it was intended to subject the crypto-asset
sector in Europe to an ex ante economic regulation to establish a larger cross-border market
for crypto-asset issuers and service providers.

In particular, with the MICAR - dedicated to crypto-assets other than security tokens – the
European crypto-asset sector should develop into a competitive market, entirely sustainable,
harmonized among the different Member States and able to mitigate the risk of financial
stability arising from the indiscriminate issuance and placement of digital tokens with
cryptographic techniques of DLTs.

But, reading the proposed text of MICAR, we believe that these goals cannot be fully
achieved. Specifically, pro-competitive goals cannot be reached, so much so that even the
legitimacy of the economic regulation underlying the MICAR proposal could also be somehow
questionable.

Some flaws in the formulation and some of the approaches and regulatory choices made
– i.e. the marginalization of crypto-assets issued with permission-less Blockchain and the
competitive advantages given to banks and other financial incumbents -, in our opinion, do
not allow the achievement of the ambitious objectives that the MICAR has set itself. Above all,
because it started from a fundamental assumption that is inverse to the state of affairs.

Numerous are the prescriptions of the MICAR that appear directed to limit the access and
operativity of crypto-asset markets, relegating to the significant outside quotas for providers
and users of services for European crypto-assets.
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As if the first twelve years had not already sufficiently demonstrated that it is not the crypto-
industry that needs the EU, but that it is, if anything, the future financial development of the EU
that cannot do without it.

PURPOSE OF THIS PAPER

The purpose of this paper is to highlight how some of MICAR flaws could lead to failure for
the fundamental goals taken and stated.

Our main concerns are upon:

(i) some ambiguities in the definitions, especially in the token taxonomy under article 3;

(ii) unfounded subjective exemptions in favour of banks, EMIs already established and
other financial incumbents, instituting competitive advantages in contrast with 1) the principles
of free and fair competition, and 2) the aim of preserving the financial stability which could be
undermined - together with the control of the money supply - when, for example, EMTs issues
are allowed without any significant constraints because of these exemptions;

(iii) the choice regarding crypto-assets issued through permissionless Blockchains which,
through the wording of articles 4 (1)(a), 4 (2)(b) and 68, seem to be marginalized if not
indirectly banned by forcing CASPs to disallow admission to trading platforms of crypto-assets
or native tokens automatically created through mining issued as a reward for maintaining
Blockchain permissionless.

Relative to these critical points, this paper will attempt to argue to try to convince the EU
Commission to modify certain wording in the MICAR text.

QUESTIONABLE DEFINITIONS
We wish to point out three of the total twenty-eight definitions catalogued in article 3.

In particular, we dispute the following definitions:

3 (1)(3) ‘asset-referenced token’ means a type of crypto-asset that purports to maintain a

stable value by referring to the value of several fiat currencies that are legal tender, one or
several commodities or one or several crypto-assets, or a combination of such assets;
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3 (1)(4) ‘electronic money token' or 'e-money token' means a type of crypto-asset the
primary purpose of which is to be used as a means of exchange and that purports to maintain
a stable value by referring to the value of a fiat currency that is legal tender;

3 (1)(5) ‘utility token’ means a type of crypto-asset which is intended to provide digital
access to a good or service, available on DLT, and is only accepted by the issuer of that token.

NEED OF TOKEN TAXONOMY CLARITY

Crypto-assets present an opportunity to deepen the Single Market for digital financial
services and promote a data-driven financial sector.

Because of the various treatments of the crypto-assets between the Member States, there
is very high uncertainty in how to progress and develop business per the laws in EU broad terms.
This increases the costs of doing crypto-business in the EU, deters further investment and
prevents the real development of an effective crypto-asset market in Europe.

Therefore one of the essential activities that the European Commission should focus on is to
positively support cross-national sharing of the best practices amongst the regulators, from the
member countries to crypto-asset treatment.

Harmonization should be considered especially in the case of the processing of security

tokens and their disclosure/reporting requirements to enable their issuance throughout the EU,
from within member countries.

But this can only pass through a fundamental definition of the clear distinction between and
various types of relevant tokens preceded by a primary industry's Token Taxonomy Initiative
(TTI), as a standardization effort to unify the general comprehension of the token economy
and enabling anyone to understand the various token types and progresses to token
properties and all related rights.1

1
In early November 2019, a wide-spanning group of blockchain organizations that included the core players in enterprise
blockchain—Accenture, Adhara, Banco Santander, Clearmatics, ConsenSys, Digital Asset, Envision Blockchain, EY, Hedera
Hashgraph, IBM, Intel, ioBuilders, Itau, J.P.Morgan, Komgo, Microsoft, R3, Web3 Labs, and members of the Enterprise
Ethereum Alliance, among others—released the TTF Version 1.0 as the first output of the Token Taxonomy Initiative, an
independent organization hosted by the Enterprise Ethereum Alliance (EEA).
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The MICAR initiative is not the result of independently conducting a preliminary TTI functional
to define tokens by developing an appropriate taxonomy capable of being uniform for all
Member States. Above all, it supports an explicit token taxonomy able to impose itself as a
unique model Europe-wide. But it does implicitly refer to the very basic tripartition indicated by
the EBA,2 which distinguishes payment tokens, utility tokens, and investment tokens based on
the fundamental classification coming from the industry.3

In fact, reading the text of the MICAR, the explanatory memorandum, the impact analysis,
and documents related to the public consultation phase before the development of the
regulatory proposal, linked to the further regulatory initiative of the DLT pilot regime, it is evident
that the Commission with this initiative has intended:

- to keep separate the tokens of financial nature subject to the relevant financial legislation
from other types of crypto-assets;

- to consider in the scope of MICAR the utility tokens, given both the relative definition in
article 3 (1)(5) and the general issuance and placement regime provided for them, named
cumulatively as crypto-asset other than asset-referenced tokens or e-money tokens.

- to include two distinct types of stable coins in the payment token category: the asset-
referenced-token (ART) and e-money-token (EMT).

However, the absence of an explicit taxonomic intention and, above all, the ambiguity, as
will be discussed below, of the definition of ARTs make the MICAR text insufficient and a
harbinger of legal uncertainty, despite the affirmation of the general objective of filling the
regulatory void for tokens that do not fall within the scope of financial regulation, namely
payment tokens and utility tokens.

2
Cfr European Banking Authority (EBA), Report with advice for the European Commission on crypto-assets, 9.1.2019,
https://eba.europa.eu/sites/default/documents/files/documents/10180/2545547/67493daa-85a8-4429-aa91-
e9a5ed880684/EBA%20Report%20on%20crypto%20assets.pdf. This tripartition, however, was officially proposed by
FINMA (the Swiss Market Supervisory Authority) in the "Practical Guide to Initial Coin Offerings" published on 16.2.2018
(available at https://www.finma.ch/it/autorizzazione/fintech)
3
This tripartition stems from the 2018 proposal of The Brooklyn Project, an industry-wide initiative to promote token-
powered economic growth and consumer protection led by ConsenSys Software Inc. and The Cardozo Blockchain Project
of the Cardozo School of Law.
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UNCLEAR DEFINITION OF ASSET-REFERENCED

TOKEN
The first objective of the MICAR is the legal certainty.

Having read the recitals of the MICAR and the explanatory report, for crypto-assets markets
to develop within the EU, a robust legal framework is needed that clearly defines all regulatory
treatment crypto-assets not covered by existing financial services legislation.

Based on the negative scope under article 4 (2)(a), we know for sure that MICAR does not
apply to crypto-assets that fall within the definition of financial instruments within the meaning
of Article 4(1)(15) of Directive 2014/65/EU.4

Given these purposes, we believe that the definition of the asset-referenced token is
concretely too ambiguous. Article 3 (1)(3) of MICAR cannot exclude from its own scope asset
tokens of a financial nature as all investment tokens are.

Claiming, as said by article 3 (1)(3), that an ART is a crypto-asset, that purports to maintain
a stable value by referring to the value of several fiat currencies that are legal tender, one or
several commodities or one or several crypto-assets, or a combination of such assets, is so
vague that it does not mean to rule out the possibility that it is an investment token. Nor that
this type of token outlined by MICAR certainly falls into the category of payment tokens as well
as stating.

Not to mention that both the heterogeneity of the collateral envisaged by definition itself,
as well as the indefiniteness of the custody percentages of the reserve assets resulting from
article 31, can have a significant impact on the nature of the tokens issued about these assets,
which might instead be that of investment tokens.

Let's think about commodities to simplify the argument.

4
It emerges from the provision of the negative scope in the article 2 (2)(a) where it is stated that MICAR “does not apply
to crypto-assets that qualify as (a) financial instruments as defined in article 4(1), point (15), of Directive 2014/65/EU”.
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With the underlying technology cryptocurrencies, we are now able to tokenize

commodities.

At its most superficial level, tokenization refers to the digitization of real tradable assets stored
on a blockchain which can then be traced, moved and traded much more easily. The token
itself has no intrinsic value, but it derives value from the underlying asset as a representation of
another real-world commodity. Like a stable coin pegged to another currency, a commodities
token is pegged to the price of a commodity such as gold, silver or coffee beans.

But this is simplistic reasoning that does not preclude a stable coin pegged to a commodity
or a group of tokenized commodities from behaving as a means of investment rather than as
a means payment. All the more so since the same abstract typology of asset-backed coins,
potentially falling into the general category of payment tokens, must be considered a cross-
category typology is having in itself a hybrid nature halfway between monetary instruments
and tokenized financial means.

Source: Autonomous NEXT in Crypto Utopia

A flexible and substantial criterion of scrutiny such as the so-called Howey Test could
undoubtedly help understand if a tokenized commodity falls within the category of simple
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payment tokens rather than in investment tokens.5 But the absence of a similar criterion in the
European financial legislation does not help legal certainty in the face of such an ambiguous
definition of ARTs. Significantly since in the specific meaning of the article 3 (1)(3), the MICAR does
not even add the specification of the “to be used as a means of exchange", as it did for e-
money tokens in the next definition. And this lack of reference does not help to understand
with certainty whether an asset-backed token should be considered a payment instrument or
an investment instrument as it can behave as both types of the token in question.

Everybody knows that commodities do not produce a return from a “common enterprise”.6
They are goods or property that get mined or grown where their value is intrinsic based on
market supply and demand. This distinguishes commodities from securities. But where there
becomes an issue is in how a crypto-asset project comes into existence. It’s much more about
the “how” than only the “what”.

If a crypto-asset comes into existence via an Initial Coin Offering (ICO) or a Token-
Generated Event (TGE) where the offering is a token in exchange for money upfront before a
working network or product yet exists or the same commodity has already been mined or
harvested. Where an investor expects to make a return, then there’s a problem.

Anything that falls into this category is most likely going to be classified as an investment or
a security, and it's going to have to follow securities laws.7

5
The basic framework used to figure out whether something is a security or not is called the Howey Test. The Howey
Test refers to a court case between the SEC v. W.J. Howey Co., 328 U.S. 293 (1946). It consists of 3 questions: 1) Is there an
investment of money with the expectation of future profits? 2) Is the investment of money in a common enterprise? 3) Do
any profits come from the efforts of a promoter or third party? In a nutshell, under this test, a token, to qualify as a form
of investment, requiring registration under the U.S. Securities Law, must meet specific requirements and involve: (i) the
making of an investment of money; (ii) the reasonable expectation of profits from the investment; (iii) the use of the capital
in a joint venture; and (iv) the fact that the profits come from the efforts put forth by the initiator of the venture, or a third
party. (For a detailed analysis, see J. C. Coffee, H. A. Sale, Securities Regulation - Cases and Materials, 12th ed., 2012, p.
247-269).
6
Securities produce a return to a common enterprise which can be argued to be a central organization. The equivalence
between a centralized organization and common enterprise came out of some SEC statements about Bitcoin and Ethereum
when the SEC announced that Bitcoin is not a security and announced that Etheruem is not a security.
7
Similarly to the approach set out by the Howey Test, EU Courts and financial authorities deploy a set of functional
criteria to identify what constitutes a security for MiFID and ancillary legislation. In particular, based on an interlinked
reading of the Prospectus Regulation and of MiFID, securities are characterised by the features of tradability, negotiability
on capital markets, and standardization. Moreover, they need to present a functional comparability with other forms of
secured debt, meaning that they must essentially incorporate a financial risk. For a comparison between the United States
and the European Union, see P. Maume, M. Fromberger, Regulation of Initial Coin Offerings: Reconciling U.S. and E.U.
 12

In terms of what an asset-backed coin must be to be defined as a payment instrument and

not as an investment, beyond the empty legislative affirmations that establish a priori
thoroughly that it is a means of exchange, it is good to consider some features that should
technically exist to mitigate the risk of being considered a security.

Firstly, an asset-backed crypto-asset must be a coin and not a simple token. Second, it must
be a native coin and have its own Blockchain, a protocol and a functioning network. And
third, it shouldn't be pre-mined.

The least risky crypto-asset is a mineable coin running on a functioning Blockchain network.
A coin is slightly less risky than a token, generally speaking. This is because it's running its own
Blockchain and network. If the coin is mineable, it has different economics than if people
bought it in an ICO because, in this case, miners received coins for their cryptographic work.
So these coins can capture part of their value from the complex activity done to validate
transactions and the computational power contributed by the underlying work- network.

Securities Laws, Chicago Journal of International Law 19 (2019), 572 et seq.; T. Maas, Initial Coin Offerings: When are
Security Tokens in the EU and the U.S.? (2019), available at the following link:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3337514; M. Mendelson, From Initial Coin Offerings to Security
Tokens: A U.S. Federal Securities Law Analysis, Stanford Technology Law Review 22 (2019), 52.
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None of these characteristics is present in the MICAR definition of ART. This, along with the
already noticed lack of the specification that is present in the purpose of e-money token,
about the function of "to be used as a means of exchange”, make the qualification of the
asset-referenced token as a payment instrument uncertain and open up the possibility of
reclassifying them as investment tokens on a case-by-case basis in contrast with the objectives
of achieving legal certainty theoretically held by MICAR.

WEAKNESSES NOTION OF E-MONEY TOKEN

Under MICAR article 3 (1)(4), electronic money token or e-money token “is a type of crypto-
asset the main purpose of which is to be used as a means of exchange and that purports to
maintain a stable value by referring to the value of a fiat currency that is legal tender”.

From this definition, it would seem, therefore, that the e-money token considered by MICAR
is a common stable coin pegged to only one fiat money taken as an underlying reference.

Traditionally, stablecoins are defined by the fact that they make the price of a crypto-asset
non-volatile relative to benchmark currency (predominantly, the USD). Historically, we have
seen stablecoins divided into three subcategories – fiat-backed, crypto-backed, and
algorithmic stablecoins.

However, the stablecoin industry's developments in 2018-2019 years, show that stablecoins
are not one asset-class category, and maybe the term stablecoin should not be used
carelessly. In turn, fiat-backed and crypto-backed stablecoins are widely used. But only the
former are crypto-equivalents of e-money and primarily used for settlement and payment.

This equivalence between this type of payment token and e-money was first considered by
the UK, starting by 2019, with the FCA, Financial Conduct Authority, Guidance on Crypto-
asset.8 In that document, it was explicitly stated that the e-money token has to be considered
regulated because this category refers to any token that reaches the definition of e-money.
These tokens are subject to the EMRs, and firms must ensure they have the correct permissions
and follow the relevant rules and regulations.

8
See https://www.fca.org.uk/publication/policy/ps19-22.pdf.
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In all honesty, we do not find such clarity in MICAR, and we do not know whether or not e-
money tokens under article the MICAR should be considered fully equivalent to electronic
money, or should not.

There are, in fact, apart from the definition of e-money tokens mentioned in the above
MICAR article 3 (1)(4), we have detected a series of contradictory provisions which do not
clarify what the application perimeters of MICAR and EMD for e-money tokens are, and thus
we fail to appreciate the proportionality of all MICAR provisions in the relevant regime.

In fact, on a side, we know that:

- Such crypto-assets' function is very similar to the function of electronic money, as

defined in article 2, point 2, of Directive 2009/110/EC of the European Parliament and
the Council (cfr Recital no 9).
- Despite their similarities, electronic money and crypto-assets referencing a single fiat
currency differ in some crucial aspects. Holders of electronic money as defined in Article
2, point 2, of Directive 2009/110/EC are always provided with a claim on the electronic
money institution and have a contractual right to redeem their electronic money at any
moment against fiat currency that is legal tender at par value with that currency. By
contrast, some of the crypto-assets referencing one fiat currency, legal tender, do not
provide their holders with such a claim on the issuers of such assets and could fall
outside the scope of EMD. Other crypto-asset referencing one fiat currency does not
provide a claim at par with the currency they are referencing or limit the redemption
period (cfr Recital n. 10).
- As per article 2 (2)(b), MICAR does not apply to crypto-assets that qualify as electronic
money as defined in Article 2, point (2), of Directive 2009/110/EC, except where they
are eligible as electronic money tokens under this Regulation.

From these elements, there may be tokens of electronic money - as they are on the
international markets - that do not coincide with electronic money's legal notion as regulated
by the EMD. Such tokens do not provide or limit the holders' rights towards the issuers, either
because they do not give a right of conversion at par with a fiat currency or limit the claim in
time.

In this context, the scope established in article 2 (2)(b) would have the sense of subjecting:
 15

1) to the EMD regulatory framework, all the e-money tokens that incorporate a full and
unconditioned claim against the issuer providing the holders with a contractual right to
redeem their electronic money tokens at any moment against fiat currency;
2) to the MICAR, all the e-money tokens which in any way limit the exercise of such right
against the issuer.

But, this solution, while the only one logically capable of encompassing the provision about
the objective scope of MICAR, is incorrect.

In fact, on the other hand, we know that:

(a) “The fact that holders of such crypto-assets do not have a claim on the issuers of such
assets, or that such claim is not at par with the currency those crypto-assets are
referencing, could undermine the confidence of users of those crypto-assets. To avoid
circumvention of the rules laid down in Directive 2009/110/EC, any definition of 'e-
money tokens' should be as comprehensive as possible to capture all the types of
crypto-assets referencing one single fiat currency that is legal tender” (Recital 10).
(b) “To avoid regulatory arbitrage, strict conditions on the issuance of e-money tokens
should be laid down, including the obligation for such e-money tokens to be issued
either by a credit institution as defined in Regulation (EU) No 575/2013 of the European
Parliament and the Council, or by an electronic money institution authorised under
Directive 2009/110/EC” (Recital no 10).
(c) The crypto-asset white paper should also explicitly indicate those holders of e-money
tokens are provided with a claim in the form of a right to redeem their e-money tokens
against fiat currency at par value and at any moment (cfr Recital no 47).
(d) There are strict requirements for issuance for the e-money issuing as settled by the Title
IV of the MICAR (i.e. the requirement for the issuer to incorporate and be authorized as
a credit institution or as an ‘electronic money institution’ within the meaning of Article
2(1) of Directive 2009/110/EC);
(e) The issuing of e-money tokens is only lawful if supported by the right to redeem at par
with the fiat currency taken as a reference at any moment, whilst it is banned any e-
money token that does not provide all holders with a claim against the issuer (cfr article
44 (2).

From all of the above, it follows that e-money tokens are only electronic money under EMD,
being able to be defined as an on-chain surrogate for coins and banknotes expressed as
 16

electronic money, resulting prohibited in the EU the issuance and any other activity related to
any stable coin pegged to a fiat currency with any, partial or limited right to redeem. A type
of electronic money issued through the use of cryptographic DLT techniques ultimately
governed and over-regulated by both EMD and MICAR provisions.

According to the design of the MICAR, then, EMTs are a select type of e-money that fall
under both the EMD and MICAR regulations. A particular kind of e-money in all respects subject
to EMD, but still digital tokens that "can also raise new challenges in terms of consumer
protection and market integrity specific to crypto-assets' (Recital no 10), so that they should
also be subject to rules laid down in the MICAR “to address these challenges to consumer
protection and market integrity”.

Thus, in such a reconstruction of the nature of EMTs, while it is difficult to understand the
provision formulating the MICAR scope under article 2 (2)(b), it becomes clear the regulatory
tightening, compared to the standard electronic currency, wanted by MICAR for the sole fact
that it is an electronic money issued and transferred with techniques based on DLT in
contradiction with both the general principle of technological neutrality and equal treatment
between operators.

UTILITY TOKEN RESTRICTIONS

Under the article 3 (1)(5), utility token’ means a type of crypto-asset which is intended to
provide digital access to a good or service, available on DLT, and is only accepted by the
issuer of that token”.

The definition, while tracing the features commonly attributed to a digital token to be
identified as a utility token, according to acquisitions made in the ICO markets since 2016, in
our opinion proves problematic in two respects.

The first aspect involves the limitation of utility tokens to access only services/products
developed through the use of the Blockchain implicitly derived from the phrase “available on
DLT”. This detail means that the token issuer could be only a legal entity that proposes to issue
virtual assets in connection to Blockchain technology and the methods of creation, distribution
or delivery of new product/service and not only as a financing lever through an ICO.

It is natural that this limitation is aimed at restricting access to the issuance and public
placement of digital tokens by companies outside the DLT sector, putting a brake on the so-
 17

called "every man’s ICOs" digital tokens", blocking the way for ICOs even to companies that
are entirely unrelated to the Blockchain sector. Companies and entities that, not producing
goods or services with the use of the Blockchain, will be able to take advantage of an ICO
involving tokens with very few chances of capturing the value of the assets implicitly
underlying, i.e. the platform and the business project based on the real use of Blockchain
protocols.

Such a limitation might be positive from an abstract point of view because it can drastically
reduce unfounded or dead-end ICOs projects and better protect consumers. But it is
undeniable that many SMEs not operating in the DLT sector and which are not active in
products or services enabled through the use of the Blockchain technology, they would have
no possibility to finance future goods/services developments by utility tokens issuing and
selling to the public. Thus, the fundamental objective of MICAR to strengthen the sources of
finance for SMEs would be irreparably frustrated because the financing instrument of ICOs
relating to user tokens would be reserved only for start-ups and SMEs already operating in the
DLT sector.

The second critical point of the definition is clarifying that the issuer only accepts utility
tokens. This clarification seems to prevent the collocation of utility tokens on exchange
platforms as we have seen commonly done in almost every ICOs procedure involving this type
of asset.

But it would be nonsense because it would deprive the utility tokens of the ability to capture
value through listing on an exchange platform during the period required to manufacture the
products and services for the financing of which the issuance and placement of crypto-assets
to the public are done.

But, fortunately, as indicated by article 10(1), crypto-asset issuers may offer their crypto-assets,
other than asset-linked tokens or e-money tokens, throughout the Union and request admission
of such crypto-assets to trade on trading on a crypto-asset trading platform.

The clarification made by the definition about the fact that the utility tokens are accepted
only by the issuer, therefore, remains unfounded. We suggest its elimination as it can only
generate further uncertainty.
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UNFOUNDED EXEMPTIONS AND THREAT TO

COMPETITION
We appreciate the aim of creating a harmonized framework that enhances fair competition
and promotes innovation to allow for a cheaper and more inclusive way of financing SMEs. It
is indeed well known, as summarized in the report issued by the OECD in 20199, that crypto-
assets carry a wide range of benefits for SMEs, including cost-saving and a better execution
speed for fundraisings.

It is a fundamental value that the implementation of innovation in crypto-assets relies on a

system that ensures fair competition among all the players and the possibility for start-ups to
face lower administrative costs and burdens represented in the second objective of MICAR.

Such goals seem to support a pro-competition policy, which has been described by the
OECD as “a process by which governments attempt to foster competition and create the right
environment for competition by prohibiting or putting restrictions on, certain types of business
practices and transactions that unduly limit competition.10". Among the practices that may
strongly affect competition and innovation are barriers to entry and increased costs for new
entrants.

In a field like the crypto-asset market, they are ontologically characterized by new
technologies, innovative techniques, and new entities' ideas. The different effects stemming
from the pro-competition or pro-regulation approach are particularly evident.

Thus, the highlighted objective of MICAR may be jeopardized if the concrete rules of the
proposal would lead to higher costs and burdens for new entrants compared to those carried
by older incumbents. An extreme pro-regulation policy could result in excessive restrictions on
entry for the new players, significantly affecting SMEs, that would bring detrimental effects for
the entire market of crypto-assets and eventually for consumers.

9
OECD (2019), Initial Coin Offerings (ICOs) for SME Financing.
10
OECD (2019), Competition Assessment Toolkit: Volume 2, Guidance, page 19.
 19

Sadly, we must acknowledge that the current draft of MICAR contains several heavy
obligations for the new entrants. At the same time, it grants unfounded exemptions to more
prominent players, namely credit institutions, established EMIs and other financial incumbents.

For example, focusing on the authorization procedure for the offer of ARTs, issuers need to
provide under articles 16 and 17 a rich set of information, sometimes very complicated for a
small new enterprise (e.g. proof of good reputation and experience of the managers,
description of cybersecurity system, legal opinion on the qualification of the crypto-assets,
etc.). Nevertheless, as already acknowledged by the OECD, issuing of tokens (contrary to IPOs)
are undertaken by start-ups that may not even be incorporated and may not have established
operations yet.11. Such enterprises can find in crypto-assets a faster, easier and cheaper way
to finance their projects even before entering the market. These start-ups may likely find an
incredible burden in proving their track record and experience, and they may not be capable
of carrying the costs of such compliance.

On the opposite, articles 2(4) and 15(4) introduce exemptions for credit institutions and EMIs.
Such players are simply requested to submit their white paper through a simplified procedure
without the need for any authorization. Therefore credit institutions are not asked to provide all
the specific and detailed information listed in article 16. In particular, they are not requested
to present technical details essential for the particular characteristics of crypto-asset, such as
the description of the policies and procedures regarding the functioning of DLT applied, the
protocols for the validation of transactions, the mechanism through which tokens are issued,
created and destroyed, the cyber-security policy or the business continuity policy that ensures,
in case of an interruption of systems and procedures, the preservation of essential data and
functions and the maintenance of the activities. And it is difficult to see how certain types of
issuers can be exempted from their duty to disclose such information simply because they are
commercial banks, established MEIs operating in the market or other financial incumbents.

Neither in the words of MICAR nor its objectives can we find a reason to justify an exemption
for EMIs and credit institutions to avoid providing such information through the same
authorization procedure as any other player. Neither we find effective instruments in favour of
SMEs to balance the exemptions made for certain players.

11
OECD (2019), Initial Coin Offerings (ICOs) for SME Financing, page 24.
 20

A similar exemption is introduced in the field of crypto-asset advice services, according to

article 2(5).

We can then imagine some professionals who intend to offer advice to enterprises on
different types of crypto-assets and their application. They would be requested, among the
rest, to be incorporated as legal persons and to provide specific information and description
of their systems.

Differently, let's think about a newly incorporated company, controlled by a commercial

bank, for example. We see that such a company can directly provide advice on crypto-assets
without applying and sharing the information requested under article 54. This company would
not need to give proof of specific knowledge and experience in crypto-assets or describe in
detail its IT and cyber-security policies. Consequently, a small enterprise that would offer
advice on the issuing of a utility token - having different characteristic than a financial
instrument - would need to go through an authorization process based on the Mifid II model.
At the same time, a commercial bank subsidiary could do it without even being requested to
show proof of specific expertise in the technical field of crypto-assets.

Again there is no apparent reason to exempt the credit institution from undertaking the
authorization procedure and comply with its requirements.

Hence, it appears clear that the regulatory proposal of MICAR includes, at its current stage,
substantial barriers to entry for the new players and unduly exemption for banks or EMIs. We
accept that the latter generate lower risk due to their status of strictly regulated entities, and
we don't reject the "same risk, same rules” approach. This notwithstanding, we also believe
that, in the possible extent, the principle “same activity, same regulation" deserves to be taken
into consideration to maintain a level playing field.

This means that, although undoubtedly, a certain level of entry barriers is needed to protect
consumers and create trust in new players, the application of considerably different treatment
in favour of credit institutions needs solid grounds. Moreover, to avoid a distortion of the
competition in this sector, historically driven by innovative start-ups, it would be convenient to
counterbalance exemptions for certain major players with instruments to help SMEs enter the
market. This point gains even more importance in consideration of the particularities of the
market in terms of technical elements that usually are at the core of projects involving crypto-
assets.
 21

Though, the grounds to introduce exemptions for credit institutions and other financial
incumbents are not anywhere explicit in this proposal's words. The peculiarities of crypto-assets
pose certain technical risks that are common also for banks and other players. It is indeed to
note that both entities must comply with the conduct and prudential requirements established
for issuers of ART and CASPs. And yet credit institutions and EMIs do not need to go through
any authorization procedure. We would expect that all these players be required to apply for
an authorization or that at least the smaller players be supported by exemptions based on
data stemming from the reality of this marker, rather than from a (not always immediate)
association with the legal framework of financial services (e.g. exemption from publishing a
prospectus).

Furthermore, it appears that the reason for the issuers of ART to be authorized is to avoid a
“serious threat to financial stability, monetary policy transmission and monetary sovereignty" as
stemming from Recital no 29. Then, through this authorization procedure authorities can have
evidence that the applicants have all the necessary settings and conditions to participate in
the crypto-assets market with low risk for consumers and the system in its whole. Nonetheless,
the reason is not given, why credit institutions should be excluded from this "screening process"
aimed at checking if all the required conditions are met to issue crypto-assets or provide
services on crypto-assets, and ultimately to keep the stability of the financial system under
control. The result is a simplified regime for banks and stronger entry barriers for the others.
Unfortunately, there is no effective exemptions or favourable measures for the other players (
especially the smaller ones ). However, several risks connected with the technical and
technological aspects are shared by both bigger and smaller players, including credit
institutions.

We can, a contrario, quickly understand the harmful effects of a similar limitation of

competition if we think about the findings of the recent evaluation of the reduction of barriers
to access the banking sector, as applied in the United Kingdom following the review of
prudential and conduct requirements in 2013. As the FCA reported in 2018 12 Such reform
increased the competitive challenge to existing banks, led to a broader offer of innovative
products and finally carried multiple benefits for the consumers. Similarly, keeping a fairly

12
See the "Evaluation Paper 18/3: An evaluation of reducing barriers to entry into the UK banking sector", issued by the
FCA in December 2018, available at the link: https://www.fca.org.uk/publication/corporate/ep18-3.pdf.
 22

competitive environment could bring incredible benefits in terms of innovation and

attractiveness.

We see in MICAR a different and differentiated line of action, a stronger pro-regulation

policy concerning new players (even the smaller ones) and a lighter approach with credit
institutions, EMIs already operating and other financial incumbents. The absence of adequate
countermeasures favouring SMEs to balance the competition could lead to an evident
disproportion that would even qualify MICAR as essentially anti-market regulation.

This would constitute a severe injustice, contrary to the core principles of the European
Union. Still, it would also represent the failure of MICAR to accomplish its second objective, the
creation of a harmonized framework that enhances fair competition and promotes innovation.
The price of this missed opportunity would be eventually paid by consumers and SMEs, the
same that MICAR declares to support.

In conclusion, we, therefore, suggest that credit institutions and other financial incumbents
favoured by MICAR be treated like the other players provided that (i) there are no grounds to
justify a special regime for banks and financial incumbents, (ii) these types of operators cannot
be considered native to blockchain technology, the high technological degree of which
suggests caution in handing out personal exemptions, and (ii) the introduction of exemptions
for incumbents would lead to a threat for the fair competition in the market of crypto-assets.
Alternatively, we suggest providing quantitative thresholds for exemption from obligations not
modelled on the Prospectus rules, but more consistent with the reality to support innovative
SMEs' position.

UNCERTAINTY IN PERMISSIONLESS FUTURE

MICAR aims to pursue diverse protection levels, ranging from the mildest to the most
stringent, depending on the type of crypto-asset considered among those falling within its
scope. In particular, in line with the expectations about the emerging category of so-called
"stable coins'', MICAR establishes - based on the ordinary regime for crypto-asset "other than
asset-referenced tokens or e-money tokens" - two different specific frameworks for each stable
coin under its scope, and that is asset-referred or e-money tokens.
 23

The rules set in regards to crypto-assets, other than asset-referenced tokens or e-money
tokens13, constitutes the ordinary regime laid down in articles 4 to 14. Building on this, the other
two regimes for the two stable coins covered by the proposal are grafted.

But, from the ordinary regime seems to stem some profound uncertainties about all the
cryptocurrencies, digital tokens and related services linked to fully distributed permissionless
Blockchains.

About all cryptocurrencies and digital tokens issued through decentralised and open DLT
protocols, consideration should be given to (i) the requirements for the authorisation and
admission to trading, (ii) the operating rules set out in article 68 which these crypto-assets must
comply with to be listed by the trading platform operators.

The heavy burden that the application of such provisions places on those involved in
developing solutions based on a permissionless distributed ledger technology is so evident that
the whole of MICAR, in essence, appears incompatible and virtually unworkable for crypto-
asset based on the use of permissionless Blockchain. And this incompatibility is so worrying that
we believe that MICAR may have counterproductive effects such as 1) disincentives to the
use of permissionless forms of DLTs, 2) limitations for all those initiatives of both issuance and
trading that are based on already running public Blockchain to refer to Europe as a market
choice and, ultimately 3) the adoption of a standard model based only on a permissioned DLT
instead marginalising permissionless forms of Blockchain.

As for cryptocurrencies or native payment tokens based on permissionless Blockchain (i.e.

Bitcoin, Ethereum etc.), the concern is very serious. But, while permissionless-based
cryptocurrencies appear to be exempt from regulation, as clearly indicated by the exemption
provided for in article 4 (2)(b)14, the same exemption does not apply to those permissionless

13
Indeed, the regulation of ARTs and EMTs as respectively set out in Titles III and IV does not point issues under this
perspective, since tokenization of physical assets or fiat money shall ever depend on the existence of a figure able to guarantee
both custody and the connection of the off-chain world with the Blockchain.
14
Offers of crypto-assets, other than asset-referenced tokens or e-money tokens, to the public, and admission of such
crypto-assets to trading on a trading platform for crypto-assets are subject to regulation and stringent requirements which
will not apply, as provided for in article 4 (2)(b), where “the crypto-assets are automatically created through mining as a
reward for the maintenance of the DLT or the validation of transactions". The provision in question clearly refers to native
cryptocurrencies produced as a reward by a DLT protocol for cryptographic work done during the mining process which, by
increasing the computing power of a working network, is instrumental in maintaining the security of that particular ledger.
 24

tokens that cannot be considered cryptocurrencies. For example, they do not have their own
Blockchain, or are pre-mined or do not have their own network to devote to mining. And this
is undoubtedly a problem because it could lead to the impossibility of economic emergence
of an entire sector based on the issuance of, for example, utility tokens based on Blockchain
such as that of Ethereum (at the moment most of them, moreover) and to remain marginal in
Europe, if not wholly banned even if indirectly.

Not covered by the exemption, all permissionless tokens other than ARTs and EMs may risk
not being admitted to trading on an exchange platform because it will be entirely impossible
for CASP to ascertain the presence of all the requirements set out in the operating rules under
article 68. And it is all too easy to imagine what the effects will be if access to trading platforms
for digital tokens supported by permissionless solutions is effectively made restricted, given that
the entire economy based on them is the valuation has been mostly driven by trading following
market trends.

Furthermore, the exemption in the article 4(2)(b) for tokens other than ARTs and EMTs based
on permissionless technology does not, in our view, transform such crypto-assets into free and
unregulated tokens. In fact, several elements in the MICAR text lead to the conclusion that
instead of all permissionless tokens a large grey area of ambiguity has been provided, which is
detrimental to the development and enhancement of the related economy.

It should be noted that the exemption in the article 4(2)(b) is restricted to permissionless
cryptocurrencies only and cannot be extended to crypto-assets with functions other than
those of coins, and that the exemption is, in any case, partial and does not concern the
requirement set out in article 4 (1)(a). As a result, the incorporation requirement for all providers
wishing to issue crypto-assets can be applied indiscriminately.

Therefore, for those who know how the critical and strategic crypto-economy has
developed over the last twelve years, due to the support and growth of entirely open source
projects based on public and permissionless Blockchain, it will not be complicated to
understand how, on the other hand, the whole DLT permissionless sector with MICAR enters a
dangerous grey area from which adverse effects can only arise. First and foremost, there will
probably be a halt to the continuous development and technological and innovation
progress that can only come from projects based on public, decentralised, open and
permissionless Blockchain.
 25

Only a public Blockchain is supported by an unlimited community of users scattered around

the globe. It is devised in a way that cannot be controlled by any one individual or a firm. The
network of a public Blockchain ensures unbiased transparency and accountability of every
operation executed on that Blockchain. Once the network approves a transaction, it cannot
be undone, as the cost of a backdoor manipulation is too high to do. Not to mention that all
the above in any case leads to an implicit preference of the European legislator for crypto-
asset solutions and related services based on DLT permissions in apparent breach of
technological neutrality’s principle and the objectives outlined by the MICAR itself.

Ultimately, the derogation under article 123 of the ordinary regime laid down by articles 4
to 14 set in favour of crypto-assets which were already negotiated in the EU, together with the
opt-in regime outlined for CASP15, points the issue that will arise once that the transitory
measures elapse; in our opinion, it will only make MICAR's regulatory discrimination against
crypto-assets issued based on permissionless solutions even worse.

Therefore, it is our opinion that rather than banish them, MICA regulation could then begin
to take into more account all the permissionless and fully distributed Blockchain's characters,
which may assume relevance for its effective enforcement. Reaching greater consistency with
the core of the crypto-industry, as well as to identify, experiment and, optimistically, validate
practices which may later lead to a regime fit for and capable of being realistically observed
by Distributed Autonomous Organizations (so-called DAO) through which almost the entire
area of permissionless Blockchain operates. Otherwise, crypto-assets and their European
holders may lay in a legal grey area, capable of foreclosing even the liquidations activities, as
several other deals with banks and physical economies; while the competitiveness of the
whole European financial service markets would be limited.

CONCLUSION
Crypto-assets and the network that generates them introduce new solutions to old finance
problems. The crypto-sector opens an opportunity to develop a parallel system that would
enhance the financial system's digital operational resilience and provide insurance against
failures. Crypto-assets enable deepening the Single Market for digital financial services and
promoting a data-driven financial sector. Because of the various treatments of the crypto-
assets between the Member States, there is very high uncertainty in the industry on how to
progress and develop business following the laws in EU broad terms.

15
Respectively set within article 123 (1)(2).
 26

Therefore one of the most critical activities that the European Commission should focus on
is to actively support cross-national sharing of the best practices amongst the regulators, from
the member countries, when it comes to the issue of crypto-asset.
We broadly endorse the enormous effort made with the MICAR proposal to achieve a
regulatory certainty for all crypto-assets other than financial instruments. Without the MICAR,
we would remain unregulated crypto-assets, blocking the enormous benefits of developing
this sector within the Single Market. We appreciate not only the effort to formalise this
complicated matter but also the intention to harmonise and eliminate the asymmetries that
have been created in recent years between the Member States, some of which, as we know,
already since the 4th AMLD and especially with the implementation of the 5th AMLD, have
equipped themselves with their own legal frameworks that are too dependent on the
consistency of their respective national systems (e.g. Germany, France, Malta, Italy, etc.).
Nevertheless, we urge the Commission to bring the proposed text into line with the recitals'
objectives and underlying its enormous effort.
About the first set of inputs mainly related to the definitions offered of regulated crypto-
assets, we call the Commission to reflect on the prior formulation of a clear token taxonomy
that is consistent with those coming from the industry and then emends the definitions of the
crypto assets included in the scope of application of MICAR accordingly. The industry requires
a simple and straightforward set of definitions regarding when crypto-assets are used for
payments, and this needs to be consistently applied across ENCAs. Only with clear definitions
can the correct regulatory framework be identified, applied and then regulated appropriately
in the same way. It is crucial for the industry that the same activity is held in the same way to
maintain a level playing field and maintain financial stability and safeguard investors and
consumers.
Similarly, for the second set of inputs related to the pro-competitive weakness resulting from
the subjective exemptions granted by the MICAR, especially for certain types of crypto-assets
(ARTs and EMTs in particular) to credit institutions or EMIs already operating, the principle “same
activity, same regulation" deserves to be taken into more significant consideration to maintain
a level playing field. In detail, if the subjective exemptions for financial incumbents were to be
kept - and which in the case of EMTs would even seem to lead to a veritable reservation of the
law in favour of a particular type of regulated entity - it would be necessary, in our opinion,
also to save the technological and innovative advancement of the sector brought so far by
Blockchain start-ups and small companies operating in the industry. Therefore, we suggest
lowering the overall level of entry barriers resulting from the proposed regulation in various
ways, such as: (i) refraining from imposing MIfid II-inspired authorisation models, especially for
 27

the ordinary regime relating to crypto-assets other than ARTs and EMTs, (ii) provide for
quantitative thresholds for exemption from obligations not modelled on the Prospectus rules,
but more consistent with the reality, (iii) place the same obligations on the financial incumbents
involved in the issuance of stable coins as on the newcomers especially as regards the
technical elements of their projects.

Regarding the third and final set of inputs related to the observed marginalisation of DLT
permissionless crypto-assets and related services, we suggest as a preliminary step to clarify
definitively whether or not they should be part of the regulatory perimeter of the MICAR or
another regulatory instrument, or stay permanently outside any regulatory framework. It is
entirely not advisable to maintain such a grey area neither for native cryptocurrencies covered
by the exemption under article 4(2)(b) nor for the other permissionless crypto-assets that cannot
be technically equated with coins and do not benefit from the same exemption. First of all,
because the exemption of cryptocurrencies is not total but only partial. They too, as stated in
conjunction with article 4 (1)(a), are subject to the requirement of obligation to request the
incorporation of a legal entity or person and all those obligations set out in article 13 16. And the
same, if not worse, an argument can be made mostly for those permissionless crypto-assets that
are not coins, since the partial exemption under article 4 (2)(b) does not apply to them.
This regulatory uncertainty, which could affect both newly issued cryptocurrencies and digital
tokens underlying a public and permissionless Blockchain, and making them risk not being
admitted to trading platforms due to unworkable operating rules arising from article 68,
becomes, moreover, a real inequality of treatment if we consider that article 123 (1) is capable
of introducing a different treatment between crypto-assets subject to the ordinary regime
depending on whether they were offered to the public or admitted to trading before or after
the entry into force of MICAR.

16
Article 13 states that: “Obligations of issuers of crypto-assets, other than asset-referenced tokens or e-money tokens. 1.
Issuers of crypto-assets, other than asset-referenced tokens or e-money tokens, shall: (a) act honestly, fairly and professionally;
(b) communicate with the holders of crypto-assets in a fair, clear and not misleading manner; (c) prevent, identify, manage
and disclose any conflicts of interest that may arise; (d) maintain all of their systems and security access protocols to
appropriate Union standards. For point (d), ESMA, in cooperation with the EBA, shall develop guidelines under Article 16 of
Regulation (EU) No 1095/2010 to specify the Union standards. 2. Issuers of crypto-assets, other than asset-referenced tokens
or e-money tokens, shall act in the best interests of the holders of such crypto-assets and shall treat them equally unless any
preferential treatment is disclosed in the crypto-asset white paper, and, where applicable, the marketing communications.
Where an offer to the public of crypto-assets, other than asset-referenced tokens or e-money tokens, is cancelled for any
reason, issuers of such crypto-assets shall ensure that any funds collected from purchasers or potential purchasers are duly
returned to them as soon as possible”.
 28

The derogation of articles 4 to 14 set in favour of crypto-assets which were already negotiated
in the EU, along with the opt-in regime outlined for CASP, points the issue that will arise once that
the transitory measures elapse; and that, in our opinion, it could be addressed amending an
extension to the range of "simplified measures of authorizations” outlined in article 123 (3), by
including in it certain “authorization measures specifically set for crypto-asset related to
permissionless blockchains"; in which particular regulatory unfitness could be, case by case,
evaluated together with strengths, whether deserved.