In the eye of the needle: Decentralisation under MiCA

BCAS, a global network of blockchain specialist lawyers and consultant, has recently released their handbook titled "Decentralisation under MiCA: the definitive handbook for DeFi". The handbook explores which regulatory considerations under the EU's MiCA regime may apply to certain projects and protocols that are branded as DeFi projects, cross-chain bridges, or Layer-2 (L2) solutions. The handbook also contemplates what measures can be implemented outside of the MiCA regime to balance innovation and consumer protection.

The 67-page handbook is broken up into three main analytical parts:

1. Decentralisation from Technical and Organisational Points of View;

2. Decentralisation under MiCA; and

3. Issuances and Offers to the Public.

Part 1 - Decentralisation from Technical and Organisational Points of View

The handbook offers some valuable insights for projects to navigate whether they are "fully decentralised" and therefore fall outside of the regulatory scope of MiCA. The handbook outlines five key areas of decentralisation:

1. Settlement Layer Decentralisation – projects that avoid central control over transaction processing and rely on consensus mechanisms like proof-of-work (PoW) or proof-of-stake (PoS) are closer to achieving decentralisation;

2. Architecture Decentralisation – trustless smart contracts form the backbone of DeFi, but off-chain components like oracles and L2 scaling solutions can introduce centralisation risks;

3. Governance Decentralisation – DAOs should provide true governance power to its members, though governance tokens may not always reflect genuine decision-making authority within the DAO ecosystem and governance structure;

4. User Interface Decentralisation – projects must avoid reliance on a single user interface, as it could restrict access to underlying smart contracts and limit decentralisation; and

5. Operations Decentralisation – ensuring that payment flows and contributor management are decentralised is crucial to avoiding centralisation.

Part 2 - Decentralisation under MiCA

The handbook states that under MiCA, decentralisation takes on a nuanced meaning. Sufficient decentralisation could exclude certain actors from being classified as Crypto-Asset Service Providers (CASPs), thereby falling outside MiCA's scope.

This distinction is critical for DeFi, where activities performed without intermediaries may not trigger regulatory obligations. However, despite MiCA's comprehensive framework, there remains ambiguity - recital 22 of MiCA implies decentralised activities are exempt, yet the exact parameters of "fully decentralised" remain unclear. MiCA regulates those issuing, offering, or providing services relating to crypto-aseseys, categorising them into E-Money Tokens (EMTs), Asset-Referenced Tokens (ARTs), and Other Crypto Assets (OCAs).

For the DeFi ecosystem, understanding these definitions is essential to navigating the regulatory landscape while embracing decentralisation. Even if not legally binding, BCAS warns that regulatory recitals should not be ignored as they often hint at future interpretations, requiring careful consideration as DeFi continues to evolve.

Part 3 - Issuances and Offers to the Public

Although the concept of decentralisation does not directly extend to the issuance of crypto-assets, it remains crucial when considering token minting on DeFi platforms where crypto-assets might be issued.

Under MiCA, an issuer is broadly defined as a person or entity with control over the creation of such assets, and the framework acknowledges that where no such control exists - like in the case of immutable smart contracts - the issuer may be non-identifiable, potentially exempting the asset from regulatory obligations.

However, any issuance that involves a "public offer" (defined as a communication with sufficient information enabling potential buyers to make a purchase decision) may trigger regulatory compliance under MiCA's Titles II, III, or IV:

1. Offers that fall under Title II (other crypto-assets) – the offeror must prepare and publish a whitepaper, notify the national authority, and comply with general obligations such as withdrawal rights;

2. Offers that fall under Title III (ARTs) – offerors need national authority approval, including a wihtepaper as part of the process; and

3. Offers that fall under Title IV (EMTs) – offerors must be licensed as e-money or credit institutions and comply with whitepaper and notification requirements.

Even airdrops can fall within this scope if users provide data or other benefits to the offeror. BCAS recommends that operators in DeFi tread carefully and otherwise ensure that they do not inadvertently conduct public offers or issue regulated tokens such as EMTs or ARTs.

Conclusion

In concluding the exploration of decentralisation in DeFi under MiCA, the handbook suggests that “full decentralisation” is likely more myth than reality. What matters is that decentralisation, even in degrees, is possible - an achievement in itself that challenges traditional finance.

BCAS contends that no DeFi protocol has yet achieved perfect decentralisation across the five key dimensions examined above. Importantly, decentralisation exists on a spectrum, and while the concept of "sufficient decentralisation" is flexible, it remains the goal for DeFi to live up to its own name.

Within MiCA, decentralisation plays a critical role. To be exempt from the regulation, a protocol must avoid qualifying as a CASP (Crypto-Asset Service Provider). The less decentralised the protocol, the greater the risk of falling under MiCA’s CASP framework, particularly if crypto-asset services are offered for consideration.

Care must be taken with online interfaces, which often simply provide access to smart contracts. While token issuances may not trigger regulatory obligations, public offers of crypto-assets can. DeFi operators must be vigilant, as even an airdrop may qualify as an offer to the public, invoking regulatory obligations.

Written by S Pettigrove and L Higgins