Countries are striving to identify and regulate the crypto asset industry, and the adoption of the MiCA (Markets in Crypto-Assets) regulation in the European Union is one such effort.
Comparative Analysis with the MiCA Regulation in the European Union
Today, one of the most important topics in the fintech and electronic banking industries is the emergence and creation of crypto assets, which has also led to significant transformations in the electronic payment industries. As a result, countries are attempting to identify, accept, and regulate this emerging industry.
Developed countries have opted for regulatory transparency in legislating and creating regulations for crypto assets, providing the necessary infrastructure for companies active in this field. The recently adopted MiCA (Markets in Crypto-Assets) regulation in the European Union supports this approach. The authors of this law hope it will create the required transparency to control the digital currency market, a topic we will discuss further. Conversely, drafting and making regulations for crypto assets is progressing slowly in developing countries due to comprehensive evaluations for imposing strict and prescriptive laws. Despite these challenges, studies and efforts on this matter are ongoing.
It is also worth noting that developing countries are striving not only to leverage the advantages of crypto assets but also to preserve their authority in currency issuance.
Looking briefly at the history of crypto assets in Iran, we find that, until January 2018, a gray area existed in this field—there were neither restrictions nor regulations. However, with the policies of the Supreme Council for Anti-Money Laundering, measures were introduced to regulate crypto transactions, mining, and trading, along with a series of restrictions.
The unjust sanctions and external economic pressures from certain countries have also highlighted the importance of policy-making in this area as a potential aid in financial transfers under sanctions. Despite heightened attention to crypto assets, particularly since 2018, regulatory actions in this domain remain nascent, and significant efforts are required to develop the crypto asset sector domestically.
Cryptocurrencies for imports aim to facilitate importing raw materials and essential goods the country requires. –Alireza Peymanpak, Former Head of the Trade Promotion Organization of Iran
With this background, we will examine the various legal and regulatory aspects of crypto assets. Focusing on domestic regulations in Iran, including the draft Crypto Asset Law, and comparing it with foreign regulations like MiCA, we will critically analyze this draft from both formal and substantive perspectives.
Section One: Formal Review of the Draft Crypto Asset Law
The “Draft Crypto Asset Law,” hereafter simply referred to as “the Draft” for ease of reading, is structured into four chapters and 34 articles. It includes Chapter One on General Provisions, Chapter Two on Rules for Guaranteed Crypto Assets, Chapter Three on Crypto Asset Service Providers, and Chapter Four on Information Protection and Market Abuse Prevention. This law is relatively short compared to Iran’s civil and criminal laws. The lawmakers have tried to cover all visible and hidden aspects of crypto assets in this law. However, given the vast scope of crypto assets, it is not feasible to encapsulate all issues and aspects within 34 brief articles.
In lawmaking, the legislator faces two crucial tasks, and attention to two main points is paramount before anything else: first, finding the best and fairest rule, and second, formulating the laws in precise legal language, leaving no room for ambiguity.
Several critical points in legislation require utmost precision, including the following:
A) Finding the Best Rule:
The legislator’s first duty is to find a rule that provides the fairest solutions in social relations. In this search, assistance from other fields, like economics, commerce, and banking, is essential.
Undoubtedly, learning from others’ experiences is valuable. For example, legislators can select the best outcomes based on results achieved in other countries. However, it is essential to note that blindly imitating foreign legal systems requires a clear and comprehensive perspective. History shows that law is a social science, and each society has unique customs and traditions that are typically not comparable with other societies. There is always a risk that a rule or law beneficial in one country may be harmful in another.
“MiCA brings competitive advantages for the European Union. With these regulations, the digital asset industry in Europe will benefit from legal transparency, which does not exist in countries like the United States.”
—Stefan Berger, Senior EU Representative for MiCA Regulations
It should be considered that adopting foreign legal systems is only useful when the legislator compares all external environmental factors with their society, taking into account ethics, religion, political and economic conditions, geographical location, and the nation’s history when drafting laws.
B) Techniques for Drafting and Formulating Rules:
Creating effective legislation is not achieved merely by identifying suitable rules. Legal rules should be articulated in a language comprehensible to the general public and sufficiently clear to leave no doubt for judges in applying the law. At the same time, they should allow judges room to consider the unique circumstances of each case, opening a path toward justice.
Failure to adhere to these principles diminishes the value of laws and the respect accorded to them, also complicating law enforcement.
It must be noted that achieving this balance in legislation is not easily accomplished; it requires skill, experience, and a wealth of knowledge.
Section Two: Substantive Review of the Draft Crypto Asset Law
This section examines the substance of the draft Crypto Asset Law. We start with Chapter One, which outlines general regulations in nine articles. Article One of this draft reviews specialized terms and concepts in crypto assets in 16 clauses. For instance, terms such as crypto asset, guaranteed crypto asset, cryptocurrency, whitepaper, and market participants are defined comprehensively, drawing on Iranian legal terminology and providing Persian equivalents for these terms.
In Article Two of Chapter One, the drafters address the issuance of crypto assets, explicitly restricting authorization to registered legal entities and emphasizing the importance of regulation. This is similar to the requirements for foreign exchange and currency dealers, who must operate as registered partnerships backed by numerous legal enforcement measures.
Article Two also delineates the legal procedures for initiating activities in this field, clearly outlining the steps before the public issuance of crypto assets.
Article Three requires the Ministry of Economy and Finance to draft a regulation within six months of the draft law’s enactment, which must be approved by the Council of Ministers.
At the outset, comprehensive definitions of various crypto asset-related issues are provided. However, one oversight may be a lack of emphasis on transparency, non-deceptiveness, and comprehensiveness in the regulations. When comparing this draft with the MiCA regulation, we see that it lacks the simplicity and clarity of MiCA, which is essential for legislation. Laws should be simple and understandable for the general public, as the citizens primarily interact with them. Therefore, laws should be clear and straightforward, avoiding confusion and ambiguity—an aspect well-addressed in MiCA.
“The Parliament has found a fair approach that makes it safer for individuals with good intentions to hold and trade crypto assets, while making it harder for criminals, terrorists, and sanctioned individuals to misuse these assets.”
—Assita Kanko, Reporter for the Civil Liberties Committee and Member of the European Parliament
As mentioned, Chapter One reviews general regulations, including enforcement measures outlined in Articles Three, Four, and Five, which could serve as deterrents.
These articles aim to identify and protect the rights of crypto asset stakeholders and users.
Clause Two of Article Three makes an interesting point: A crypto asset may lose its full or partial value, or it may not always be transferable; additionally, crypto assets may not always be redeemable. Article Four specifies the responsibilities of the managerial entities of issuers or trading platforms regarding the whitepaper and emphasizes the importance of proper documentation.
Chapter Two, composed of 12 articles, explores various aspects of guaranteed crypto assets. Article 10 specifies conditions for issuers of guaranteed crypto assets, stipulating that issuers must have legal status and provide documentation as detailed in 12 clauses and five notes within this article.
This article further mandates that the specific details and documents outlined in its clauses be governed by a regulation drafted by the Securities and Exchange Organization and approved by the Council of Ministers.
Article 12 details conditions and regulations for the revocation of licenses for guaranteed crypto asset issuers. One positive aspect of this draft is its comprehensiveness, aiming to examine different topics from various angles, as seen here.
As emphasized in Chapter One, transparency is critical, and Article 13 reinforces this by requiring guaranteed token issuers to promptly provide clear, accurate, and transparent information on their websites.
Articles 14, 15, and 16 address complaint handling and dispute resolution for guaranteed crypto assets, obligating issuers to facilitate a mechanism for complaints and rights redress for holders and buyers of these assets. Article 16 mandates that guaranteed crypto asset issuers adhere to specific requirements regarding minor transactions across seven clauses.
Chapter Four of the draft Crypto Assets Law addresses information protection and the prevention of market abuse, one of the most critical topics in the crypto asset field. Non-compliance with laws and regulations in this area could become a major vulnerability for operations within the crypto asset sector.
In general, this chapter carefully considers all the dos and don’ts that the legislator has emphasized to protect the rights of both parties, sometimes with a rigorous approach, and has applied these in drafting the regulations.
In Chapter Three, the legislator emphasizes granting licenses to legal entities and sets out specific regulations and conditions for obtaining necessary licenses. It also obliges providers to act honestly, fairly, and professionally in favor of customers.
This chapter clearly and specifically examines the Ministry of Economy and Finance’s duties and responsibilities regarding licensing and scheduling service provision.
Chapter Four addresses information protection and the prevention of market abuse, which is one of the most critical issues in crypto assets. Non-compliance with laws and regulations in this area could be a major vulnerability in crypto asset activities. Chapter Four, in four articles, carefully examines the scope and boundaries of information protection and potential market abuse, and with strong enforcement guarantees, it has managed to create a relatively secure environment.
Evaluating the Legislative Approach
The Iranian legislator’s approach to crypto assets prior to drafting this law could be described as ambiguous. The general stance on crypto assets was unclear, and there seemed to be some confusion about officially recognizing this phenomenon. Including enforcement measures and penalties indicates that the legislator, like other crypto-active countries, seeks to avoid hasty criminalization.
The unique characteristics of crypto assets necessitate specific terms for crimes in this field.
A review of laws in Iran reveals that the legislator has somewhat underperformed in this area, not specifically criminalizing these offenses, and offenders are prosecuted only under traditional criminal categories. For instance, Ponzi schemes and fraud involving valueless crypto assets are prosecuted under computer fraud laws. There are two distinct regulations regarding computer fraud:
1. Definition of Article 67 of the Electronic Commerce Law:
“Anyone who, in the context of electronic transactions, deceives others or misleads automated processing systems by unauthorized or fraudulent use of ‘data messages,’ software, computer systems, or telecommunication devices—such as by actions including data message entry, deletion, suspension, interference with software or computer systems, etc.—and thereby acquires funds, property, or financial benefits for themselves or others, or takes others’ property, is considered a criminal. In addition to returning the property to the owners, the offender is imprisoned for one to three years and a fine equal to the value of the taken property.”
2. Definition of Article 13 of the Computer Crimes Law:
“Anyone who illegally acquires funds, property, benefits, services, or financial privileges for themselves or others through unauthorized acts, such as data entry, modification, deletion, creation, or suspension, or system disruption on computer or telecommunication systems, will be punished. This includes returning the property to its owner and imprisonment from one to five years, or a fine ranging from 20 million to 100 million Rials, or both penalties.”
The Iranian legislature’s perspective on crypto-assets before drafting the recent legal bill could be seen as ambiguous. Generally, there wasn’t a clear stance on crypto-assets, suggesting a certain degree of confusion in recognizing the phenomenon.
Due to the legislative system and the timing of law enactment, the Computer Crimes Law postdates the Electronic Commerce Law, and some argue it has nullified the latter. This is especially because Article 56 of the Computer Crimes Law considers any conflicting law to be repealed. However, there appears to be no conflict between these two articles; Article 67 of the Electronic Commerce Law specifies Article 13 of the Computer Crimes Law and pertains only to electronic commercial transactions. Since a later general law does not repeal an earlier specific law, Article 67 remains valid.
On the other hand, there is a lack of specific, decisive regulations with targeted oversight for crypto-related money laundering. This situation means that, where applicable, offenders may be punished under the 2008 Anti-Money Laundering Law if their actions match its definitions. Articles 12 or 13 of the Computer Crimes Law may be applied to phishing, depending on the circumstances. Additionally, if malware is introduced to the victim’s computer during phishing and crypto assets are stolen, Article 1 of the same law may apply.
While there is a noticeable lack of legislative attention to crypto-asset crimes, it appears a preemptive criminalization approach is being taken. Preemptive criminalization arises when legislators disregard the principle of minimum criminal law intervention. For example, such an approach can be seen in the 2020 amendment bill to the Anti-Smuggling of Goods and Currency Law. Under Article 2, Paragraph 7, all cryptocurrencies were deemed equivalent to currency under this law, meaning all enforcement mechanisms for currency now apply to cryptocurrencies.
No legal prohibition can completely prevent or even significantly reduce users’ cryptocurrency use; policies like these ignore reality and not only fail to produce positive effects but also erode the public’s respect for the law.
Throughout this text, the emphasis has been on the need for dedicated legislation for crypto-assets. The nature of these crimes makes them much easier to commit with crypto-assets, creating a suitable platform for their proliferation. Recognizing that similar crimes are far more challenging to execute in physical spaces or traditional internet systems, deterrence is one key objective of penalties. Deterrence theory suggests that rational individuals assess costs and benefits before acting. Given the ease of committing crypto-related crimes, the cost-benefit scale tilts toward high benefits and low costs, making their occurrence predictable. To increase the costs, stricter and more specific punishments should be implemented.
It’s essential to recognize the futility of resisting new technologies. No legal prohibition can fully prevent or significantly reduce cryptocurrency usage. Policies that fail to acknowledge this reality are ineffective and diminish the public’s respect for the law. Criminalizing actions without adequate enforcement or when society does not condemn them leads to non-compliance and undermines the authority of the judiciary and legislative institutions. It would be more beneficial for legislators to focus on managing rather than outright prohibiting what they cannot change.
Meanwhile, the crypto-assets bill lacks sufficient enforcement mechanisms or provisions for criminalization under specific titles.
Comparison of the Draft Iranian Crypto-Assets Law and MiCA in the EU
If we want to understand the MiCA regulation clearly and then compare it to the draft Iranian crypto-assets law, we should first provide a precise definition of MiCA. Various questions might arise in this context that can help us understand this regulation better. The first question is: What exactly is MiCA, and what issues does it address?
“MiCA places the European Union, with its 10,000 distinct crypto assets, at the forefront of the token economy. Through this regulation, consumers are protected from fraud and deception, helping to restore public trust that was harmed by the FTX collapse.” —Stefan Berger, EU Senior Representative for MiCA Regulations
MiCA stands for Markets in Crypto Assets, a regulatory framework for crypto-asset markets within the EU.
In April 2023, the European Parliament passed MiCA regulations with 517 votes in favor and 38 against. Changpeng Zhao, CEO of Binance, has endorsed this new law, stating that MiCA offers a practical solution for the challenges faced by companies in the cryptocurrency industry. Expected to be implemented in 2024, this regulation may impose disadvantages like reduced transaction privacy and benefits such as enhanced user investment security for digital asset service providers and consumers.
The EU aims to establish the required transparency for controlling the cryptocurrency market through MiCA. Developed countries have chosen to create regulatory transparency to provide a conducive environment for industry participants. The MiCA regulation, motivated by incidents such as Terra’s collapse and FTX’s downfall, is designed to protect participants in the digital asset market.
Reviewing this newly established law reveals that MiCA intends to create a new regulatory framework to safeguard European consumers and increase accountability among digital asset developers and service providers.
The Markets in Crypto Assets (MiCA) regulation, drafted for the financial sector, seeks to harmonize cryptocurrency legislation across EU countries. MiCA provides European regulators with consistent rules to oversee cryptocurrencies stored in distributed ledgers, such as blockchain or DAG technology.
A new anti-money laundering law mandates that all crypto companies maintain records of transaction details, including sender and receiver information. However, this requirement contradicts one of blockchain technology’s fundamental principles.
Moreover, exchanges must report transactions over €1,000 occurring between exchanges and custodial wallets, unsettling traders who prioritize privacy and anonymity.
The goal of MiCA is to introduce a new regulatory framework aimed at protecting European consumers while increasing accountability for digital asset developers and associated service providers.
MiCA Law Under the Microscope
To understand the purpose of the MiCA law, it’s essential to note that its primary focus is on ensuring financial stability and providing transparency within the digital realm.
Overall, MiCA regulations can be classified into four main categories:
- Establishing a regulatory framework for digital assets that previously fell outside financial laws.
- Providing secure, clear guidelines to support emerging businesses in the cryptocurrency industry.
- Protecting investors in the crypto industry and fostering market integrity by reducing crypto market risks.
- Achieving financial stability and consistent regulations across Europe through market manipulation prevention.
To avoid market disruption, MiCA requires financial asset providers or service providers to disclose transaction details or other potential methods of market abuse.
MiCA categorizes cryptocurrencies into distinct groups. So far, three types of digital assets are recognized within this regulatory framework:
1. Asset-Referenced Tokens (ART):
As the name suggests, ART refers to digital assets whose value is determined based on a basket of multiple fiat currencies, commodities, or other digital assets. These assets differ from stablecoins pegged to a single fiat currency.
2. Electronic Money Tokens (EMT):
These assets are pegged to the value of a specific fiat currency that is a country’s legal tender. This category includes stablecoins and central bank digital currencies.
3. Miscellaneous Assets:
These are a specific category of assets, and any asset not falling within the above categories is considered a “crypto-asset” in general. These utility tokens allow holders access to particular goods or services. Unlike security tokens, they are not classified as financial instruments under the securities laws of different countries.
With this overview, we can delve into the advantages and disadvantages of MiCA and compare it with the proposed draft law for crypto-assets.
Advantages of MiCA
Among MiCA’s benefits is its ability to increase transparency in cryptocurrency market regulations within Europe. Thus, MiCA is considered the most comprehensive regulatory framework for digital assets and helps legitimize crypto-based businesses in the EU. Notably, MiCA aims to protect investors and stipulates that providers of cryptocurrencies and related services are responsible for safeguarding investor interests.
Another advantage of MiCA is the unification of regulatory frameworks across jurisdictions, allowing EU member states to implement MiCA’s consistent regulations.
Disadvantages of MiCA
However, MiCA’s shortcomings must also be examined.
One notable drawback is reduced privacy and anonymity in transactions. Transactions exceeding €1,000 to self-custodial wallets must be reported to regulators, which many see as contrary to the ethical principles of blockchain technology and its decentralized nature.
Another drawback is the challenge of enforcing MiCA. Users prioritizing privacy may find ways to circumvent new laws easily. For instance, privacy coins and decentralized applications are designed to evade such restrictions, complicating efforts to trace crypto transactions.
In summary, cryptocurrency regulations are complex. While they help legitimize the crypto industry, they can also disrupt the decentralized nature and anonymity of transactions.
Despite the criticisms, MiCA represents a significant step in drafting regulations for the digital asset industry. It’s clear that if MiCA achieves a satisfactory level of success, other countries will likely implement similar regulations.
“Currently, illegal processes within crypto-assets are rapidly spreading worldwide, possibly without detection. Revising the Transfer of Funds Regulation (TFR) mandates that providers of crypto-asset services identify and halt criminal crypto flows, ensuring that all categories of crypto companies adhere to complete anti-money laundering obligations. This means the EU will implement the most ambitious information-transfer law in full compliance with international standards,” –Ernest Urtasun, the European Parliament member and rapporteur for the Committee on Economic Affairs regarding crypto-asset transfers.
With the above insights on MiCA, we can now examine the draft law on crypto-assets. One prominent difference between the two is how legislators view crypto-assets. While MiCA seeks to establish measures allowing industry players to operate freely, albeit with some oversight, the draft law focuses more on oversight than fostering a free, open environment.
The significance of regulating this space is undeniable, considering the need to mitigate risks and leverage crypto opportunities. Digital assets can facilitate value preservation and payment transactions, offering benefits such as seamless transfers, reduced administrative costs, and anti-money laundering capabilities. However, risks such as tax evasion, illegal capital outflows, privacy violations, and cybercrime shouldn’t be overlooked.
At the same time, respecting citizens’ freedom is crucial, as excessive restrictions might lead to legal circumvention and diminished accountability.
Iranian companies facing currency and banking restrictions due to sanctions can safely receive funds by setting up a digital wallet. Hence, cryptocurrencies can be a vital support system for economies under sanctions like Iran. -Homayoun Darabi, Capital market expert
As we delve into the details of the current draft, it’s evident that establishing robust enforcement guarantees can prevent potential issues, a strength that can also be a drawback if legal restrictions dissuade industry participation.
In principle, laws should support and regulate relationships among individuals, but excessive involvement may diminish confidence in the industry.
Realistically, no legal framework can be entirely flawless, as evolving knowledge and legal research on crypto-assets will lead to more refined regulations over time. Lawmakers must account for structural differences within crypto assets, such as differentiating between cryptocurrencies and other crypto-assets, as each has unique functions and classifications. This distinction needs careful attention in the current draft.
While there’s much to discuss regarding the draft’s provisions, it’s essential to acknowledge that this nascent law has a long journey toward maturity.
A balanced approach may allow this draft to reach its potential. While constructive criticism can help refine the law, it may initially have counterproductive effects.
Future writings aim to delve deeper into this draft; however, our understanding of crypto-assets has only just begun, and there’s a long way ahead.
Sources:
Introduction to the Science of Law; Katouzian, Nasser
https://mihanblockchain.com/what-is-eu-mica-crypto-regulations
https://mihanblockchain.com/what-is-eu-mica-crypto-regulations/
