Cryptoassets – Legal Essence, Risks and Regulation

Cryptoassets – Legal Essence, Risks and Regulation
Jan. 11, 2024
By their nature, cryptocurrencies can be defined as digital financial assets intended to serve as a medium of exchange through the use of cryptography to secure transactions. In this context, crypto-assets represent a digital representation of value or rights that can bring significant benefits to market participants and consumers.
Cryptocurrencies distinguish themselves through their payment system, where transactions involving the respective cryptocurrency are recorded in a global digital ledger of transactions (shared ledger), known as "block chain".
The primary function of crypto-assets lies in their ability to serve as a substitute for traditional forms of currency or financial instruments. These digital assets are often traded on decentralized exchanges, raising questions about their legal essence and treatment.
The initial lack of a clear regulatory framework, along with the insufficient integration of crypto-markets into the traditional financial system, had been identified for an extended period as part of the reasons for the relatively low liquidity and high volatility of this type of currency.
At the present moment, regulation regarding cryptocurrencies is primarily contained in Regulation (EU) 2023/1114 of the European Parliament and of the Council dated May 31, 2023, concerning crypto-asset markets and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010, as well as Directives 2013/36/EU and (EU) 2019/1937, commonly known as the MiCa Regulation. As evident from its content, a crypto-asset may be considered an asset primarily dependent on cryptography and Distributed Ledger Technology (DLT) or similar technology, forming part of its perceived or intrinsic value. Such an asset is neither issued nor guaranteed by a central bank or a public authority and may be used as a medium of exchange or for investment purposes.
The Regulation classifies crypto-assets into three main categories based on whether they aim to stabilize their value against other assets: e-money tokens, asset-referenced tokens, and crypto-assets other than asset-referenced tokens or e-money tokens
The MiCa Regulation also establishes a regulatory framework for various services related to crypto-assets, such as facilitating the operation of crypto-asset trading platforms, exchanging crypto-assets for fiat or other crypto-assets, receiving or transmitting orders for crypto-assets on behalf of clients, and executing orders for crypto-assets on behalf of clients, among others.
It is important to note that the MiCa Regulation came into force on June 29, 2023, but the majority of its provisions will only start applying either from June 30, 2024, or from December 30, 2024.
The MiCa Regulation aims to create a comprehensive, specialized, and harmonized legal framework for crypto-asset markets not covered by Union legislation in the field of financial services.
In addition to overseeing the digital economy, the newly established European-level regulation also aims to provide legal certainty, enhance consumer awareness, counter market abuses, prevent fraud and support the stable functioning of payment systems.

It is important to highlight that, as of the present date, uncertainty persists regarding the acknowledgment of cryptocurrencies as valid collateral by banking institutions. However, the implementation of the new legal framework is anticipated to contribute to a certain level of stabilization in the global financial market
In summary, it should be noted that the technology of cryptocurrencies inevitably harbors "potentially transformative" effects on the financial system. Despite the current risks associated with cryptocurrencies and the transactions carried out with them, it should be acknowledged that the market for these assets undoubtedly provides opportunities in terms of innovative digital services, alternative payment instruments, and new sources of funding for commercial enterprises.
It should also be underscored that in some non-EU countries activities involving crypto-assets are subject to certain restrictions, the violation of which may result in the imposition of sanctions, including criminal liability. Therefore, it is necessary to conduct prior familiarization with the relevant national legislation in each specific case.