MiCAR and the Monero Ecosystem

The Monero Policy Working Group (MPWG) is a loose quorum of individuals attempting to engage in regulatory and policy conversations regarding cryptocurrency, blockchain and distributed ledger technologies.

Intro

Since the birth of Bitcoin and the emergence of the cryptocurrency and Distributed Ledger Technology (DLT) ecosystem, regulatory oversight has been viewed as a sort of estranged bed fellow; close enough for latent heat, yet distant enough to allow a wide array of delectable, sometimes precarious, sleeping positions.

In some eyes, the absence of directly applicable law was the catalyst for rapid innovation. For others it was viewed as a wide avenue of uncertainty, and an explicit reason for the lack of ‘Wall Street’ adoption and the general disregard from mainstream media.

In June 2023, “Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (Text with EEA relevance)” came into force, following a period of public consultation and trialogue through three European legislative bodies (the European Commission, European Council, and European Parliament).

The legislative framework is known as the ‘Market in Crypto-Assets Regulation’ (MiCAR).

While the legislation came into force in 2023, it provides for ‘transitional measures’ – a phased approach to compliance that allows the industry in Europe to adjust, and prepare for application of the new rules.

The final phase of this period ends on 30th December 2024, with obliged entities expected to be in full compliance on, or before, this date (MiCAR, Article 147).

One caveat exists for currently operating Crypto-Asset Service Providers (CASPs) – think exchanges, custody providers, DLT consultancy firms, etc. Already existing operators who provide crypto-asset services to European clients will have until 1st July 2026 to obtain authority (a licence) to operate in Europe, or cease trading.

What is MiCAR?

MiCAR is the first effort at a multi-jurisdictional legislative framework for ‘crypto-assets’. ‘Crypto-assets’ is the term the European Commission uses to broadly cover three types of cryptographically leveraged digital assets:

“The first type consists of crypto-assets that aim to stabilise their value by referencing only one official currency…..The second type of crypto-assets concerns ‘asset-referenced tokens’, which aim to stabilise their value by referencing another value or right, or combination thereof, including one or several official currencies….The third type consists of crypto-assets other than asset-referenced tokens and e-money tokens, and covers a wide variety of crypto-assets, including utility tokens.” (MiCAR, Recital 18).

MiCAR states explicitly that the term ‘crypto-asset’ should be widely interpreted, given the range of innovation in the DLT ecosystem.

From the perspective of MiCAR, a crypto-asset is viewed as any application of Distributed Ledger Technology (MiCAR, Recital 2), bar some notable exemptions.

Without delving too much into the details, NFTs (for the most part) are exempt, as are tokens that represent real-world assets such as real-estate, guarantees, or physical objects.

A further exemption is applied to projects or services that are ‘fully decentralised’. However, when only part of services or activities are decentralised – they are bound by the regulation (MiCAR, Recital 22).

Unfortunately, the legislative framework does not indicate how to ascertain whether a project, or service, is ‘fully decentralised’. Further guidance, in the form of an interim report, is proposed to be published by mid 2025 (MiCAR, Article 140(2)(t)).

It is also worth noting that providers of non-custodial hardware and software wallets are exempt from being classified as crypto-asset service providers, and thus exempt from the regulation (MiCAR, Recital 83).

MiCAR focus

The main focus of MiCAR is on the creation, offering, and trading of tokens to the European market – i.e., rules for token creators/issuers/offerers. This includes stablecoins (Asset Referenced Tokens in the regulation terminology), and DLT token offerings (think Initial Coin Offerings, or ICOs).

The legislation also outlines reporting obligations that CASPs have, the procedure for them gaining their ‘trading’ licence for the European market, and their consumer protection responsibilities for the services they offer to European clients.

At a very high level, MiCAR sets rules for the DLT ecosystem, providing legal obligations (MiCAR, Article 2) for aspects such as:

transparency and disclosure requirements for the issuance or offer to trading of crypto-assets;
requirements for the authorisation, supervision, operation, organisation and governance of crypto-asset service providers, and issuers of tokens;
requirements for the protection of holders of crypto-assets;
requirements for the protection of clients of crypto-asset service providers;
measures to prevent insider dealing, unlawful disclosure of inside information and market manipulation related to crypto-assets.

How does MiCAR effect Monero?

Simply put, it already has.

Monero has always sat at a sort of cryptocurrency dining side-table; widely respected by the industry for its privacy-by-design ideology, embedded privacy enhancing technologies, and pursuit of open-source principles – but not ‘adult’ enough to be incorporated into the full-blooded pursuit of ‘Wall Street’ subsumption that has dominated the mindset of industry players for the last decade.

Sitting on the edge of mainstream acceptance has never really been a problem for Monero – given alliances with cypherpunk, crypto-anarchist, and anti-capitalist (political) ideologies.

Monero has, for years, been traded on a relatively few exchanges due to its lack of mainstream adoption and purportedly, ‘high risk’ factors. It has weathered exchange delistings in Asia, Australia, and the United Kingdom.

While MiCAR is some 166 pages long, covering a wide range of topics, there is one Article that has a dramatic impact on Monero:

Article 76

Operation of a trading platform for crypto-assets

“The operating rules of the trading platform for crypto-assets shall prevent the admission to trading of crypto-assets that have an inbuilt anonymisation function unless the holders of those crypto-assets and their transaction history can be identified by the crypto-asset service providers operating a trading platform for crypto-assets.”

Monero cryptocurrency

I am sure that most readers will know that Monero uses a combination of technologies to provide strong privacy (and security) guarantees for users. The technologies ensure that information about transaction senders (ring signatures), recipients (stealth addresses), and amounts (ring confidential transactions) are not published in the public domain. These ‘privacy-by-design’ features work to provide a layer of privacy and data protection for all Monero users – and ensures that user’s financial information does not get published on a publicly accessible, permissionless ledger.

In the eyes of MiCAR, however, some (if not all) of these cryptographic components have been interpreted as “inbuilt anonymisation functions”. This has ramifications for how Monero is offered (or not) to the public through European ‘licenced’ CASPs.

Crypto-Asset Service Providers (CASPs)

In Europe a CASP is prohibited from offering a token that has an “inbuilt anonymisation function” unless, 1) the holders of crypto-assets can be identified, and 2) their transaction history can be identified.

Interpreting the first requirement is relatively straightforward. It is the Know Your Customer (KYC) process we are all familiar with. The process allows the CASP to link your real life identity with your profile on their platform.

The second requirement is a little bit more complicated, and seemingly a line in the sand for how privacy-preserving approaches are to be viewed by the European DLT ecosystem. It seems that CASPs are required to be able to access, or view, the transaction history of their platform user for any asset they offer to trading.

For the vast majority of DLT tokens this is easily done – as transactions (or outputs) can be tracked across wallet addresses by analysing the corresponding public ledger. It is quite easy to provide evidence of linkability from transaction to transaction given the technological nature of these transparent systems.

A CASP can transactions associated with the wallet they hold on behalf of their user, identifying the sending wallet address and the transaction that funded that sending wallet (the preceding transaction). If they so desire, they can also trace further back, identifying transactions since origin. With privacy-preserving DLT systems, this is not as simple.

CASPs who are engaged (or have completed) the ‘authorisation process’ with their national competent authorities (usually central banks), are essentially applying for their CASP licence to operate in Europe. They, either in conjunction with their competent authority, or by recommendation of their competent authority, have decided to take a risk averse position with regards to Article 76(3).

Simply put, they have decided to delist tokens for which there is not an easy process for accessing/viewing the transaction history of their users.

In Europe, this has meant that Monero has been delisted by both Kraken and Binance. Both of those CASPs felt they were not able to comply with Article 76(3) in a meaningful manner for Monero tokens.

It should be noted that other privacy focused projects faced similar delisting issues – most notably Firo, and Zcash. However, both of these projects worked with the compliance teams at Binance to adjust their protocol to suit the perceived requirements.

As it stands, both of these projects are still listed on Binance. Neither is listed on Kraken.

Conclusion

For Monero, ‘view keys’ could potentially be used to allow access, or view, permissions to a user’s transaction history. However, there are limitations to how much information can be derived directly through this method.

In Monero, the possessor of the wallet ‘view key’ is able to view all incoming wallet transactions, but (critically) not able to view all outgoing transactions without some additional steps. Some of these steps are explained in this talk by Justin Berman. Another limitation (in the eyes of MiCAR) is that the view key also provides view permissions for ‘one-hop’ only – not the entire transaction history of the user (as transparent chains allow).

Future Monero protocol changes, such as ‘Full Chain Membership Proofs’ (FCMP++), and ‘Carrot’ may well alter some of these limitations, with various types of view keys becoming available though the application of novel cryptographic schemes – providing tiers of information access. One such key is designated a ‘view balance key’, which is designed to allow the holder permission to view all incoming and outgoing transactions after FCMP++ activation. There is a talk about this technology here (again by Justin Berman).

Whether this new functionality will provide an avenue for appeasing CASPs in their risk mitigation and compliance objectives is, still unknown, and may well depend entirely on the appetite that CASPs have for listing privacy-preserving tokens on their platform. Given we are in the 21st century this, sadly, may not be the case.

It should also be stated that while MiCAR has impacted the Monero ecosystem, the benefits of Monero receiving regulatory approval is not entirely clear, especially given the communities ongoing commitment to decentralisation, open-source ideology, and privacy-by-design-and-default.

The Monero Policy Working Group (MPWG) is responsible for this content. This is not legal advice, and it should not be relied upon for any purpose by third parties. To learn more about the MPWG, click here.

This authorship of this blog was kindly supported by funding from Power Up Privacy.