The European Commission’s plans to regulate digital assets have been leaked. Syed Rahman of financial crime specialists Rahman Ravelli has spotted an omission.

A leak has revealed the European Commission’s plans for a comprehensive set of regulations to cover trading or issuing of digital assets.

The draft legislation on Markets in Crypto-Assets (MiCA) offers cryptoassets the same sort of security and legal framework that Europe’s Markets in Financial Instruments Directive (MiFID) provided for securities markets, investment intermediaries and trading venues. If it comes into effect, it will mean cryptocurrencies, security tokens and stablecoins being treated as any other regulated financial instrument.

The MiCA proposals define cryptoassets and the rules that apply to the issuers of them and service providers. The proposals’ definition of a virtual asset service provider (VASP) is similar to that produced by the Financial Action Task Force (FATF). There is also a focus on stablecoins.

A quick observation of the proposed legislation shows that some of these draft MiCA rules have, however, not considered Decentralised Finance (DeFi), which is a fast-growing sector in the cryptocurrency industry. While cryptocurrency coins create a decentralised store of value separate from any government-backed fiat currency, DeFi creates decentralised financial instruments separate from traditional centralised institutions.

The 168-page document that has been leaked makes no reference to decentralised issues – tokens that are issued free seem to be largely exempted. Yet since June, four ‘free’ DeFi tokens have been issued with a combined current market capitalisation of more than $2.5 billion. There is some risk for their secondary market investors. And as it is suspected that the regulations will not cover most of the decentralised exchanges - which are essentially automated smart contracts – this could prove significant.