MiCA – Markets in Crypto-Assets regulation – What, why and when?

The European Commission adopted a legislative proposal on the regulation of crypto-assets as a part of the digital finance package in September 2020. This legislative proposal, Markets in Crypto-Assets (the “MiCA”) regulation, was approved by the European Council on 5 October 2022 and is currently pending the European Parliament’s approval. MiCA will address crypto-assets that are not currently governed by existing regulations, including utility tokens, asset-referenced tokens and e-money tokens, and establish a legal framework for crypto-asset services providers as well as consumer protection.

Crypto-assets, the asset class earlier promising to revolutionise finance, are currently struggling to maintain relevance as FTX, the Bahamas-based cryptocurrency exchange unable to meet the demand for customer withdrawals, filed for bankruptcy in early November setting back the growing interest around crypto-assets. During the aftermath, Ulrich Bindseil and Jürgen Schaaf from the European Central Bank went as far as stating that Bitcoin’s recent slump is an “artificially induced last gasp before the road to irrelevance”.1

From a regulatory standpoint, the European Union become the first regulator to publish arguably the most comprehensive all-in-one crypto regulation of any legal jurisdiction. MiCA will create a regulatory framework that lays down uniform requirements for the offering and placing on the market of crypto-assets, and requirements for crypto-asset service providers.

Scope and applicability

As a rule of thumb, MiCA will regulate (i) crypto-assets that are not considered financial instruments as defined in Markets in Financial Instruments Directive 2 (Directive 2014/65/EU) (“MiFID II“) and (ii) anyone offering crypto-asset services in the European Union.

MiCA will define a crypto-asset as “a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology”. MiCA will introduce three subcategories for crypto-assets including (i) utility tokens which are crypto-assets intended to provide access to a good or a service, and two different types of stablecoins called (ii) e-money tokens meaning a token purporting to reference the value of a fiat currency, and (iii) asset-referenced tokens meaning a token purporting to reference the value of several fiat currencies, one or more commodities or crypto-assets or a combination of these.

MiCA will not define the circumstances under which a crypto-asset is considered a financial instrument. Therefore, it will be up to the crypto issuer or service provider to identify whether MiCA is applicable to its operations. In addition to financial instruments, certain digital assets such as central bank digital currency and decentralized finance (due to its characteristic as a fully decentralised service without any intermediary) will be excluded from the scope of MiCA.

Issuing and offering crypto-assets to the public in the European Union will be regulated under MiCA. Issuers will be required to be legal entities that publish a white paper that describes the planned crypto-asset offering in detail. The white paper will need to be notified but not pre-approved by the supervisory authority of the relevant Member State. The European Commission will adopt regulatory technical standards to standardize the content and form of the crypto-asset white paper.

Required authorisations

A significant proportion of MiCA will focus on regulating stablecoin issuers (digital assets that attempt to stabilise volatility by pegging to a fiat currency). Stablecoin issuers will be required to obtain prior authorisation from the relevant Member State’s supervisory authority which will be refused if the applicant does not demonstrate compliance in areas such as governance arrangements, disclosure requirements, conflict of interest and obligation to hold reserves of assets. Significant stablecoins, as defined under MiCA, are proposed to be supervised directly under the European Banking Authority.

Any person whose business is the provision of one or more crypto-asset services to third parties on a professional basis will be considered a crypto-asset service provider under MiCA. Crypto-asset services will include i.a. exchange, trading, broker and custodian services. Crypto-asset service providers will be required to seek authorisation from the supervisory authority of the Member State where they have their registered office. A legal person wishing to obtain authorisation under MiCA must, in addition to having a registered office or place of effective management in the European Union, also have at least one director based in the European Union. Other conditions to authorisation include, for example, capital requirements and governance requirements.

Authorised crypto-asset service providers may passport their authorisation and provide services in other Member States. The MiCA does not include a separate third-country regime and therefore, third-country service providers with no registered office in the European Union will be able to provide crypto-asset services in the European Union only based on reverse solicitation, i.e. if initiated by the client.

Credit institutions, MiFID II investment firms, and e-money institutions that are already authorised in the European Union can provide certain crypto-asset services without separate authorisation under MiCA. However, these firms must comply with MiCA when offering crypto-asset services including the limitations and obligations to notify relevant supervisory authority prior to providing crypto-asset services.

Entry into force

While MiCA is reaching the finish line, the European Parliament still needs to approve the regulation. This is expected to happen in early 2023. Assuming this happens, MiCA will enter into force during Q1 of 2023 and, as a result, MiCA will become applicable in 2024 (rules for stablecoins 12 months and all other rules 18 months after MiCA enters into force). As a regulation, MiCA will apply directly across the European Union without any national implementation and will require Finnish legislators to partly amend and revoke the Finnish Act on Virtual Currency Providers (572/2019).2

Checklist for companies operating in the crypto space:

  1. Recognize the categorization under MiCA between crypto-assets as rules differ between different crypto-assets.
  2. Evaluate the need for authorisation under MiCA and seek for legal advice if needed.
  3. Remember that MiCA is level 1 regulation that sets out regulatory principles that will be supplemented by detailed regulatory technical standards.
  4. Follow legal developments. In addition to MiCA, more upcoming EU legislation regarding the crypto-asset space can be expected in particular relating to anti-money laundering.3

 

The regulatory objectives:

  1. Legal certainty – clearly defining the regulatory treatment of crypto-assets falling under the scope of MiCA
  2. Support innovation – the development of crypto-assets requires a framework that supports innovation and competition
  3. Consumer and investor protection – ensuring the appropriate safeguards are in place
  4. Financial stability – addressing the possibility of certain crypto-assets reaching their potential
  5. Combating money laundering and the financing of terrorism – identify and react to AML risks

1Bitcoin’s last stand, Ulrich Bindseil and Jürgen Schaaf, 30 November 2022, THE ECB BLOG (Bitcoin’s last stand (europa.eu))
2Finnish Government’s Union communication to the Parliament on the MiCA proposal (TaVL 25/2020 vp U 56/2020 vp, page 13)
3The European Council and Parliament have reached a provisional agreement on updating transfer of funds rules (Anti-money laundering: Provisional agreement reached on transparency of crypto asset transfers – Consilium (europa.eu)) and
the European Commission published a study on regulating decentralized finance (Decentralized finance – Publications Office of the EU (europa.eu)).

 

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