After years of debate, the European Council has approved the Regulation on Markets in Crypto-Assets (MiCA), marking a significant milestone for the EU. MiCA establishes the first comprehensive legal framework for cryptocurrencies in the region. The next step is its publication in the Official Journal of the European Union, expected in the coming weeks.
MiCA aims to create a harmonized regulatory regime for crypto-assets, ensuring consistency and a level playing field across the EU. The framework prioritizes investor protection, market integrity, and innovation in the crypto industry.
Once published, MiCA's implementation timeline can be tentatively estimated. Rules for asset-referenced tokens and e-money tokens are likely to take effect in June or July 2024, allowing market participants to comply while offering these tokens. Other provisions covering custody, trading platforms, and service providers would apply from around December or January 2025.
MiCA: Europe's Game-Changing Crypto-Asset Regulation
Although the approved version of MiCA provides clarity to market players, certain technical aspects of the regulation are still subject to further development and discussion. The European Commission holds the authority to adopt regulatory technical standards in relation to these aspects.
Crypto-asset issuers and service providers operating within the European Union, including those outside the EU offering cross-border services, should begin preparing for the implementation of the new regulatory framework. It is crucial to determine whether their offerings fall under MiCA's scope and to understand the specific compliance obligations to avoid disruptions to their business operations during the transition period and beyond.
In a previous briefing, we delved into the main provisions of MiCA in detail and highlighted some key changes introduced in the compromise text compared to earlier versions of the regulation.
Scope of MiCA
MiCA regulates a wide range of crypto-assets as digital representations of value or rights transferable and stored using distributed ledger technology. However, it does not cover all types of crypto-assets and related services. Excluded from MiCA's scope are crypto-assets qualifying as financial instruments, certain non-fungible tokens (NFTs), and decentralized finance (DeFi) models like crypto-lending and mining, as well as decentralized autonomous organizations (DAOs).
Determining the classification and regulatory rules for crypto-assets poses challenges due to their versatile nature and the diverse rights they represent. Striking a balance between compliance and avoiding classification as a security token remains crucial in navigating the regulatory landscape.
Limited EU Regime: AML and Virtual Currencies
Currently, the European Union's regulatory regime for cryptocurrencies is primarily focused on anti-money laundering (AML) measures and virtual currencies. For EU member states that have not implemented their own national crypto regulations, the existing rules are limited to certain services related to virtual currencies. AML regulations cover custodian wallet providers and exchanges facilitating transactions between virtual currencies and fiat currencies. These entities are subject to a simplified registration process. However, services such as advisory, crypto-to-crypto exchanges, and other activities related to non-"virtual currency" crypto-assets do not fall under a harmonized regulatory framework at the EU level, except for those crypto-assets classified as financial instruments, which are subject to existing EU financial regulations.
Authorization for Crypto-Asset Service Providers under MiCA
MiCA introduces regulations for specific crypto-asset services like placement, custody, exchange, transfer, advisory, and portfolio management. It establishes a regulatory authorization regime similar to that for investment firms. Once authorized by a competent authority in an EU member state, crypto-service providers can operate across the EU under the "passport" regime, like other financial services.
Credit institutions, electronic money institutions, and investment firms are exempt from obtaining separate MiCA authorization. They can utilize their existing authorizations to offer crypto services within the MiCA framework. This streamlines the process for these established entities, enabling them to provide crypto-related services alongside their existing operations.
Consumer Protection Measures under MiCA
MiCA places a strong emphasis on consumer protection. Key measures include:
- Right of Withdrawal: Consumers will have a 14-day right of withdrawal from the transaction. This right can be exercised until the end of the offer period and before the crypto-asset is admitted to trading.
- Right of Redemption: MiCA provides a right of redemption for e-money tokens and asset-referenced tokens. This guarantee is similar to the existing rules for e-money and open-ended investment funds, providing consumers with an additional level of security.
- Safeguarding of Funds and Assets: Issuers are required to safeguard funds and assets by holding them with a trusted third party. This mitigates the risk of loss or misappropriation.
- Reserve of Assets: Issuers of asset-referenced tokens must maintain a "reserve of assets" to cover their liabilities to investors. This ensures that there are sufficient assets to meet investor obligations, reducing the risk of insolvency.
These consumer protection measures aim to enhance trust and confidence in the crypto market by providing individuals with clear rights and safeguards when engaging in crypto-asset transactions.
Crypto Issuance and Offering Rules under MiCA
MiCA introduces regulations for issuing and offering crypto-assets, following traditional market rules. Issuers must submit a "white paper" for registration, with approval required only for certain types of crypto-assets. Limited offerings to qualified investors and predefined thresholds have exceptions. Stricter rules apply to asset-referenced tokens (e.g., stable coins) and e-money tokens due to higher financial system risks. Additional obligations apply to significant issues. Utility tokens granting access to products/services or limited merchant networks are exempt. MiCA includes market abuse rules and transaction caps for widely used asset-referenced tokens and e-money tokens.