Impact of the proposed EU Regulation on Markets in Crypto-assets for IP applications

Kat friend, Dr. Julia Hugendubel, describes the most recent developments concerning the EU Commission's proposed Regulation on markets in crypto-assets and their possible impact for IP applications.

Decentralised ledger technologies (DLT) such as blockchain are the object of broad international regulation efforts. Presumably motivated by Facebook's Libra/Diem project, the Chinese e-yuan and the growing financial volume of the crypto market, governmental institutions seeking to strike a balance between protecting public interests while simultaneously fostering innovation in the crypto space ("regulate innovations in and not out of Europe" and “respecting the principle of technological neutrality”).

This goal was promoted last week by prominent participants in the workshop of the EU BLOCKCHAIN – OBSERVATORY & FORUM, a European Commission initiative to accelerate blockchain innovation and the development of the blockchain ecosystem within the EU. The workshop considered the European Commission's proposed Regulation on Markets in Crypto-assets (MiCAR). Although the event did not specifically address intellectual property applications, various use cases could fall within the scope of the Regulation, as commodities, such as art, and intangible assets, such as intellectual property, can also be tokenised.

The MiCAR and possible impacts for IP applications

The workshop participants, in discussing various salient aspects of the MiCAR and sharing information about crypto regulation, raised inevitable questions and offered insights into the EU parliament's finding of "consensus" concerning the MiCAR proposal. This was reflected by the range of characterizations offered by workshop participants, including "huge opportunities for EU industries", "defensive position", "some suggested amendments", "overly complex", and "doubtful whether MiCA will bring legal certainty".

The MiCAR aims to help regulate crypto-assets by providing a harmonised licensing regime across all EU member states by 2024. Its declared purpose is to establish responsibility for legal entities in the EU; first, for those issuing crypto-assets and, second, for any person providing crypto-asset services (Art. 3 (6), (8) MiCAR, "principle that in the end someone needs to be responsible," Jan Ceyssens).

Businesses within the scope of the MiCAR will have to meet strong capital and other requirements, such as drawing up a crypto-asset white paper in accordance with Article 5 (with Annex I). Once adopted, the MiCAR will directly apply to all Member States, without the need for implementation in national law.

According to the proposed Regulation, a 'crypto-asset' is a digital representation of value or rights that may be transferred and stored electronically, using distributed ledger or similar technology (Art. 3 (2)). This definition might also cover crypto currencies such as Bitcoin and Ether ("catch-all category" for all crypt-assets not covered elsewhere in financial services legislation and e-money tokens). However, these public blockchains do not have an issuer or service provider according to the MiCAR.

Thus, a clear answer about the intended Regulation of (the world's most popular) public blockchains is still missing ("The elephant in the room", as Dr. Nina Siedler very aptly put it). Such a regulation of Ethereum would also impact the crypto market concerning IP, as many applications with IP aspects are based on this blockchain. For instance, Nike's patented CryptoKicks are tokenised as non-fungible tokens (NFT) on Ethereum, using the ERC721 or ERC1155 standard for the physical shoe's authentication and transaction.

Concerning IP applications as such, there are different interpretations to what extent they will fall within the scope of the Regulation. A relevant issue, which was already brought up before the workshop, is the categorisation of non-financial assets. Examples discussed were the Nike's Air Jordan, which was sold (off-chain) for $560,000 last year ("concurrence of regulation of off-chain and on-chain facts") or the famous CryptoKitties ("regulation of digital collectables").

It was debated whether these examples represented by a token will be seen as utility tokens (utility tokens are considered as crypto-assets with non-financial purposes (recital 9 MiCAR)) or even have security token elements (“financial instrument”, MIFID II), as the latter will not fall within the scope of the MiCA Regulation. The determination whether a token has the specific characteristics of transferable securities is described as a challenge by EU authorities (“hybrid crypto-assets”).

The MiCAR proposal will regulate business issuing or providing services with utility tokens. A utility token is a type of crypto-asset intended to provide digital access to a good or service available on DLT. Additionally, a utility token must be a token that is only accepted by its issuer (Art. 3 (5)). Therefore, various IP-related tokens on a DLT platform, such as for music or movie streaming, could be seen as utility tokens ("providing access").

An important point raised ahead of the workshop was the possible change in a crypto-asset's purpose, especially if they represent physical goods, such as Michael Jordan's game-worn autographed Nike Air Jordan. Presumably, the shoes were first bought for personal use only without any intent to resell them, whereas today it might be seen as an investment good. Another issue is whether it is justifiable to have different regulations for "off-DLT" assets in the real world, on one hand, and tokens that represent the respective physical asset "on-DLT", on the other.

These examples show that there are still unresolved issues, beginning with the very determination of what constitutes the crypto-asset category ("every taxonomy raises new problems," Thomas Dünser).

On the whole, the MiCAR workshop participants welcomed the introduction of a broader crypto-asset Regulation. Moreover, it was emphasised that fulfilling the MiCAR's requirements comes with the benefit of market access for all EU member states. A further expectation was that the Regulation will lead to an increase in investments thanks to the certainty it could bring.

Comment

The MiCAR might have a major impact on innovations and (specific) IP applications in the crypto space. Certainly, it is a significant step on the path to regulations of crypto markets all over the world. As the MiCAR is designed to cover expressis verbis utility tokens, the Regulation will – depending upon the individual use case – also cover DLT-based IP applications. Nevertheless, the devil will be in the details.

[Merpel notes that forthcoming clarifications to questions concerning the MiCAR were already promised during the workshop.]

Picture on upper right by Davidstankiewicz and is licensed under the Creative Commons Attribution-Share Alike 4.0 International license.

Picture on lower left by MesserWoland and is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.