The European Union’s (EU) regulation on markets in crypto-assets (MiCA) brings crypto-assets, crypto-assets issuers and crypto-asset service providers under a harmonized legal framework covering this sector for the first time. Given the global nature of crypto-markets, it is anticipated that EU-level regulation should be a more effective governance structure than has been the case with national legislation in some member states only.
MiCA is part of a larger digital finance package, which aims to develop a European approach that fosters technological development and ensures financial stability. The new rules also contain a digital finance strategy that covers crypto-asset service providers and a distributed ledger technology (DLT) pilot regime for wholesale uses.
The package bridges a gap in existing EU legislation by ensuring that the current legal framework does not pose obstacles to the use of new digital financial instruments. It also looks to ensure that such new technologies and products fall within the scope of financial regulation and operational risk management arrangements of firms active in the EU. Thus, the package aims to support innovation and the uptake of new financial technologies while providing for an appropriate level of consumer and investor protection.
The EU approved the legislation in May 2023 and it will come into force during mid-2024 to early-2025, or basically 18 months after its publication in the bloc’s Official Journal. Notably, the rules for stablecoins will being to apply after shorter a transitional period of 12 months and take effect from the second quarter of 2024.
MiCA’s objectives and application
MiCA regulates the issuance and public offerings of crypto-assets. In addition to primary market functions it also enables secondary market activities such as listings and the supply of services to the crypto-asset sector. These services include custodial, administrative and trading platform support for third parties, among a range of other functions which fall under investment services within the 2014 Markets in Financial Instruments Directive (MiFID II).
The regulation covers issuers of utility tokens and asset referenced tokens, in addition to service providers facilitating trading venues and the wallets where crypto-assets are kept. The new rules apply to the issuance of stablecoins; enabling them to be publicly available, as well as introducing a market abuse regime for crypto-markets. Overall, the new regulatory framework seeks to preserve financial stability, while allowing innovation and fostering the attractiveness of the crypto-asset sector.
MiCA aims to protect investors by increasing transparency and putting in place a comprehensive framework for issuers and service providers including compliance with the EU’s anti-money laundering rules. However, existing EU legislation in the form of the 5th Anti-Money Laundering and Counter-Terrorism Financing Directive will remain unchanged although rules concerning crypto-assets at the national member state level and those governing non-money-laundering crypto-asset issues will be replaced by the new regulation.
MiCA does not apply to crypto-assets regulated by the EU’s existing financial services rules, such as security tokens qualifying as financial instruments under MiFID II. It is also not relevant to crypto-assets that are unique and not fungible with other crypto-assets in the form of Non-Fungible Tokens (NFTs). MiCA is not the final legislative outcome regarding the future EU approach to regulating NFTs. The European Commission is expected to issue a report about a year and a half after MiCA’s entry into force to determine various measures by which to regulate NFTs.
MiCA has broadly defined a crypto-asset as being any “digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology”. Where a financial instrument falls within this meaning, MiCA will take precedence over other EU financial services legislation. In such case, most business activities related to crypto-assets will fall under MiCA. It is important to note that non-EU crypto-asset enterprises undertaking activities on behalf of EU end-users will also be required to comply with the new regulation.
Crypto-asset categories in scope
MiCA regulates three types of crypto-assets including asset-referenced tokens (ART), electronic money tokens (EMT) and other crypto-assets not included under current EU law such as utility tokens and non-pegged tokens including Bitcoin, Solana and Ripple among others.
Both ARTs and EMTs are variants of “stablecoin” and may be categorised as ‘significant’, as opposed to ‘standard’ under MiCA based on a prescribed set of criteria. The European Banking Association (EBA) is tasked with supervising stablecoins, rather than national authorities, as such instruments are subject to stricter regulatory conditions, including capital requirements.
Regulation of crypto-asset issuers and service providers
A principal obligation for issuers of crypto-assets, other than ARTs or EMTs is the notification and publication of a white paper. This acts as a de-facto prospectus for crypto-assets prior to listing on a trading platform or being offered to the public. The white paper contains minimum standards including details of the issuer, the nature of the crypto-asset and conditions surrounding its risks and obligations along with the climate and sustainability impact of the means by which the crypto-asset is issued. No prior authorization from a competent body is necessary to make available a crypto-asset to the public or to list on a trading platform.
MiCA sets out a limited number of exemptions where the white paper does not need to be provided. Moreover, individual holders at the retail level will have up to a fortnight to withdraw an agreement to buy crypto-assets without suffering losses in accordance with consumer protection norms.
Issuers of ARTs require authorisation from national competent authority prior to their offer, including the provision of a white paper. An EMT issuer will also need to issue a white paper while this type of instrument can only be issued by an e-money or credit institution and should provide a crypto-asset white paper.
ARTs issuers are required to provide a quarterly report to their national body where the value issued exceeds €100 million. They also need to maintain a reserve of assets which must be legally separate from the asset reserves of other tokens and the issuer’s estate. The custody of such assets must be undertaken subject to appropriate policies and may be vested with credit institutions or investment management firms. Issuers of ‘significant’ ARTs and EMTs will be subject to higher capital and interoperability requirements and should employ a liquidity management policy.
Crypto-asset service providers will be required to be authorised in the EU, and thereby effectively benefiting from EU passporting rights across member states. They will need to uphold a high-level reputation and retain sufficient skills for undertaking their duties. Service providers should also maintain rigorous policies in dealing with client issues and to avoid or report on conflicts of interest that arise.
Service providers will also be expected to establish minimum levels of capital and to safeguard clients’ ownership of crypto-assets, while being obliged to report any negative environmental consequences arising from their services on crypto-assets. Service providers are considered ‘significant’ when they have a minimum 15 million users in a calendar year, in which case they will be subject to increased oversight by their relevant national body.
MiCA lays out a market abuse regime. This involves an obligation to prohibit insider trading and inside information in addition to any market manipulation. Service providers are required to adopt policies and systems that prevent and detect any market abuses.
Territorial requirements for service providers
Crypto-asset service providers, authorised by MiCA, will be required to register as legal persons. Each provider must have a registered office in a Member State where they perform some part of their crypto-asset services. They will also need to maintain their place of effective management in the EU, and at a minimum, one of their directors is an EU resident.
Non-EU crypto-asset service providers should be aware that MiCA will not have a separate regime for third-country enterprises. Instead, non-EU persons soliciting EU-based clients or promoting crypto-asset services, in the EU, will therefore have to be authorised in the same way as their EU counterparts. The European Securities and Markets Association (ESMA) will develop guidance, sometime within the first 18 months of MiCA’s coming into force, regarding the conditions under which a third-country provider is deemed to solicit EU-resident clients.
EU sets the pace for global standards in the regulation of crypto-assets
The EU has earned the title of becoming the world’s first jurisdiction to introduce a regulatory environment specifically for overseeing a market in crypto-assets. The UK government is currently drafting legislation on this sector while the US is said to be examining the EU’s new regulation with a view to developing its own set of standards.
Until that time arrives, crypto-assets will continue to be governed by existing US securities laws. These have proven less than fully capable in providing the resilient regulatory regime necessary in light of the high-profile collapse of giant crypto-asset trader, FTX, and the associated preceding demise of a USD stablecoin and cryptocurrency.
MiCA can be viewed as strategic effort by the EU to establish itself as a major and secure international trading hub for crypto-assets, as well as a key global standard-setter in the development of the crypto-asset industry and broader digital financial world.
Bob Savic is the Head of Global Policy Institute’s EU Finance, Industry and International Trade Policies