Highlights from The MiCAR Workshop
November 18 2024
by Behice Uzun
Highlights from the MiCAR Workshop with Sandra Kumhofer, General Counsel at Mento Labs, hosted by Celo Europe DAO
Sandra: Hi, everybody. I'm Sandra, the General Counsel at Mento Labs. So, a bit about my background. I’m Austrian, born and raised in Vienna, where I also studied law. I started working at an international law firm in the litigation and regulatory department in 2009, right after the 2008 financial crisis. My job was to implement the flood of new regulations and directives coming from the European legislator into our clients’ processes, which were mainly big banks. It was then that my passion for regulation began. I really liked having a clear framework, where everyone knows what’s allowed and what isn’t—a level playing field. After six years, I left that law firm and moved to Berlin in 2013. There, I became part of the fintech scene, working with friends who would later founded companies like N26. I got involved in helping them build what is now a well-known, fully licensed bank with millions of users across Europe. Then, in 2015, I joined Finleap, a fintech company builder. Over the next six years, I helped build over 20 fintech companies, including some that required supervisory licences, like a bank, an insurance company, financial service provider, broker services, etc. It was a crazy but exciting time.
During that period, I also did a lot of lobbying work, engaging with the European legislator in Brussels. I was part of the European Commission's Expert Group on Regulatory Obstacles to Financial Innovation, which was quite influential. We advised the commission and helped set the groundwork for what would later become MiCAR (Markets in Crypto-Assets Regulation). We wanted Europe to be the first place in the world with a comprehensive crypto regulation, and our group published 30 recommendations, including the need for a legal framework for digital assets.
Let’s dive into MiCAR. MiCAR regulates three types of tokens: e-money tokens, asset-reference tokens, and other crypto assets, like governance tokens. It also regulates crypto asset service providers, or CASPs. E-money tokens, or EMTs, are what most people think of when they hear “stablecoins.” They are defined in Article 3 as “a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.” The key point is that it must be a single currency. If it references a basket of currencies, it becomes an asset-reference token instead.
MiCAR specifies that only credit institutions or electronic money institutions can issue e-money tokens. But here’s where things get complicated: Article 48 2. says “E-Money Tokens shall be deemed to be electronic money,” which means they actually fall under the E-Money Directive and were wiped out of MiCAR. This means that if a stablecoin references, for example, the Euro, it must comply with the E-Money Directive, and if payment services are involved, the Payment Service Directive 2 (PSD2) is also applicable. In addition to the applicability of the E-Money Directive and PSD2, MiCAR is also applicable if the crypto-assets services regulated under Title v of MiCAR involve EMTs. This creates a lot of complexity.
We call this “regulatory dualism.” You’re not just dealing with MiCAR; you have to navigate the E-Money Directive and PSD2, which leads to higher costs and complicated products for consumers and less clarity. The result is a framework that tries to regulate new technologies with traditional legal instruments and that's not working out as EMTs and e-money are different legal instruments and therefore need to be treated in different ways.
Now, I want to share a bit about Mento Labs and our approach to stablecoins. Mento Labs operates the Mento protocol offering different decentralized stablecoins like cUSD, cEUR, and cREAL. But, and this is important, these stablecoins are created in a fully decentralized manner. The community makes proposals and votes, and if the proposal is approved, the minting of the stablecoin is executed automatically via a smart contract. There is no central entity, no issuer pressing a button. It’s all community-driven. So although the Mento stablecoins are qualified as EMTs under MiCAR, MiCAR is not applicable because there is no issuing entity and therefore the issuer or offeror qualification is not given.
Recital 22 of MiCAR is key here. It states that “where crypto-assets have no identifiable issuer, they should not fall within the scope of […] this Regulation.” Because the Mento stablecoins are issued based on community governance, with no central and identifiable entity l, they don’t qualify under MiCAR.
Another key message is stipulated in Recital 20, which says “Issuers of crypto-assets are entities that have control over the creation of crypto-assets.” In lack of a definition of “control over creation” it can be assumed that the passus describes the coming into existence process, so the issuance as a crypto-asset is brought to the public with this step. The deployer of a crypto-asset like Mento Labs isn't necessarily also its issuer. Between deployment and issuance lies the will of its issuance and this lies with the community in the case of Mento’s stablecoins. If the community votes against it, the stablecoins don't come into existence.
Additionally, Mento Labs cannot upgrade, stop, modify, change, seize or freeze these stablecoins. Even if a regulatory authority demanded that we stop or freeze them, we couldn’t. The protocol is immutable. This is crucial for our DeFi (decentralized finance) approach.
Now, let’s talk about the Mento Reserve. It’s fully backed by crypto assets. You can check it all online. Our reserve includes Bitcoin, USDC, CELO, and other crypto holdings. There’s no fiat currency involved. The reserve backing ratio is nearly four times the circulating supply, ensuring robust collateralization.
Our approach to emerging markets is also worth mentioning. We provide the technical infrastructure for local partners to issue their own stablecoins. Mento Labs acts as a technical infrastructure provider, a support system, offering regulatory guidance, legal expertise, and help with user integration. But we don’t issue these stablecoins ourselves. We empower local entities to create financial tools that suit their needs either as issuer or fully decentralized.
This is why I’m so passionate about blockchain. It’s not the future; it’s already the present. It has the potential to bridge the gap between emerging markets and developed economies. But adoption requires thoughtful adaptation. It’s not just about technology; it’s about meeting the unique needs of different regions.
To watch the full recording, visit this link.
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