Consumer protection in the digital age – Focus #4: Virtual Currencies

Informative review
Silvia Compagnucci, Vice President at I-Com and Oleksandra Maksymenko, Senior Consultant at FTI Consulting Brussels

On 1 December 2022, FTI Consulting EU, and I-Com (the Institute for Competitiveness) will host the roundtable “Protecting EU consumers in the digital age” to discuss the Commission’s “Digital fairness – fitness check on EU consumer law” initiative.

The fitness check will evaluate three fundamental pieces of EU consumer policy legislation: the Unfair Commercial Practices Directive (UCPD), the Consumer Rights Directive (CRD), and the Unfair Contract Terms Directive (UCTD) to understand whether horizontal consumer law instruments remain adequate for consumer protection online, by looking at issues including dark patterns, personalisation practices, influencer marketing, marketing of virtual items and the addictive use of digital products, among others.

Ahead of the publication of the public consultation on the fitness check and in parallel with the 2nd Annual Digital Consumer Event, this event provides an opportunity for relevant stakeholders to discuss consumer protection in the digital environment.

This review on virtual currencies is the final part of a series of publications that FTI Consulting, and I-Com are developing to inform the public debate ahead of the event.

A complex, controversial debate has unfolded over the last several years, especially in the United States, over definitions about how cryptocurrencies are classified, and if they can be classified as a commodity (a kind of digital commodity or raw material that can be stored) or as a security (a regulated security, like a stock). This is a very sensitive issue because it impacts the relationship between crypto asset service providers and users, particularly regarding provisions for protection, transparency, accountability, and compliance with specific obligations. The discussion is still open to different views. On one hand, in the US, the Digital Commodities Consumer Protection Act and the Responsible Financial Innovation Act, lean toward defining cryptocurrencies as a commodity. Whereas, the Securities and Exchange Commission (SEC), intervening in an insider trading case against a Coinbase manager, found that several digital assets on the platform could be considered as securities.

Another ongoing debate is how to define the new assets. Current definitions range from virtual assets to digital currencies. There is also no internationally consistent taxonomy currently. The European framework regulation for crypto industry, the Markets in Crypto Assets Regulation (MiCA), identifies these new forms of assets as crypto assets, which serve to be a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology. Under this umbrella, policymakers identified three types of assets: e-money tokens, asset referenced tokens and utility tokens. E-money tokens are designed to maintain a stable value by referencing the value of an official currency (e.g., USDT or USDC). Asset reference tokens are also designed to maintain a stable value, but referencing any other value or right, including several official currencies (e.g. Libra project, which had a potential to be global virtual currency whose value would be derived from a weighted basket of real world currencies). Utility tokens are intended to provide access to a good or a service (e.g. Ethereum or Bitcoin).

According to the recent data from Chainalysis, Europe has the world’s largest crypto economy. However, the industry is still in its infancy. The whole ecosystem is complex, and incorporates new players, economic concepts, and forms of assets, such as virtual currencies. The lack of an overall framework for crypto assets can lead to a lack of user confidence in these assets and a delay in the development of innovative digital services, alternative payment instruments or new funding sources for companies. To avoid such risks, the European Commission introduced MiCA, which aims to set, for the first time, a regulatory framework applicable to crypto assets, issuers of crypto assets and service providers for crypto assets. On June 30, 2022, the French Presidency and the European Parliament reached a provisional agreement on the MiCA regulation, that has already been marked as a global standard setter for crypto regulation.

Protecting consumers from risks associated with crypto assets is one of MiCA’s main objectives. MiCA will protect consumers from investment risks and help them avoid fraudulent schemes. The legislation requires all crypto asset service providers operating in the EU, to be authorised and compliant with requirements to ensure that consumers are making a conscious choice and their assets and funds are protected. It also protects holders of e-money tokens and asset referenced tokens (also known as “stablecoins”), by giving them the right to claim their funds back at any time, free of charge.

Under MiCA, all issuers of virtual currencies are required to produce and publish a crypto asset white paper, that should include all relevant information about the project, rights and obligations attached to crypto assets, and as well as information about related risks. MiCA also addresses marketing of virtual assets, ensuring that communications are fair, clear and not misleading; and that ads and marketing materials are consistent with the information provided in the crypto-asset white paper. The new European crypto assets framework also follows new trends and has requirements for social media crypto influencers. It specifies that providing opinions about crypto assets after forming opinions on them and profiting from the impact of such opinions on the price of crypto assets without appropriate disclosures, can be considered market manipulation.

MiCA also ensures that crypto asset service providers have internal risk management mechanisms in place and keep customer accounts segregated to avoid collapses like the recent FTX crash, which used to be the fifth largest exchange by volume.

The text still needs to go through formal approval procedures before it becomes effective. The framework will be fully activated in 2024.

While MiCA has been praised by the industry, it still leaves a lot of space for further clarifications from European Supervisory Authorities, such as the European Banking Authority and European Securities and Markets Authority. It also does not address risks stemming from new market developments. MiCA will start the legislative debates on NFTs and the Decentralised Finance (DeFi) – financial ecosystem, which intends to eliminate intermediaries when providing financial services. While the timelines for new legislative proposals and reports are stretched out in time, the work on developing the appropriate regulatory framework to address the risks for consumers has already begun.