The European Union’s New Crypto Rules (MiCA) Are Here. What’s Next?
Publish date: 2022-11-08 10:36 | Latest update: 2023-06-09 12:40
When it comes into effect, the European Union’s landmark Markets in Crypto-Assets (MiCA) Legislation will provide a unified regulatory licensing regime for crypto asset service providers (CASPs) operating in the EU. Here’s everything you need to know about the EU’s new crypto rules.
Where is MiCA in the Legislative Process?
The final text of MiCA was published in the Official Journal of the European Union (OJEU) on June 9, 2023, marking its formal passage into the EU’s statute book. It will come into force 20 days after this publication, with some provisions applying on December 30, 2024 and a few others on June 30, 2024. The full 200-page text is available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:L:2023:150:TOC.
MiCA was conceptualized in the Digital Finance Package presented by the European Commission on 24 September 2020. Despite broad support, it was not until 30 June 2022 that the Council and Parliament reached a provisional agreement on the text. Back in 2020, the European Commission committed to implementing MiCA within four years, and all signs point to them hitting this target on the nose, at some point in 2024. The European Council formally adopted the Markets in Crypto-Assets (MiCA) legislation on May 16, 2023, after the European Parliament gave its final green light on April 20, 2023. This came after several delays due to “the length and complexity of the text.”
We’ve broken down MiCA’s key points below.
Why is MiCA Necessary?
Many crypto-assets fall outside of the scope of the EU’s existing financial services legislation. Until MiCA, the EU had no laws related to:
- the operation of trading platforms for crypto-assets
- the service of exchanging crypto-assets for funds or other crypto-assets
- the custody of crypto-assets.
The lack of such rules left holders of crypto-assets exposed to risks and can also lead to substantial risks to market integrity, market manipulation, and financial crime. Companies using crypto-assets had no legal certainty on how their crypto-assets would be treated in each EU member state, which undermines digital innovation.
What is MiCA?
When it is implemented, MiCA will create a dedicated and harmonized legal framework applicable to all EU member states containing specific rules for crypto-assets and related activities and services. This should support innovation and fair competition, while ensuring a high level of protection for retail holders and market integrity. By providing legal clarity, MiCA will enable CASPs to scale up their business on a cross-border basis throughout the EU and facilitate their access to banking services.
What Will Be Regulated Under MiCA?
MiCA defines a crypto asset service as any of the following:
- the custody and administration of crypto-assets on behalf of third parties
- the operation of a trading platform for crypto-assets
- the exchange of crypto-assets for funds
- the exchange of crypto-assets for other crypto-assets
- the execution of orders for crypto-assets on behalf of third parties
- the placing of crypto-assets
- the provision of transfer services for crypto-assets on behalf of third parties
- the reception and transmission of orders for crypto-assets on behalf of third parties
- the provision of advice on crypto-assets
- the provision of portfolio management on crypto-assets.
Crypto-Asset Service Providers (CASPs)
A CASP is defined in MiCA as any legal person or undertaking whose occupation or business is the provision of one or more crypto-asset services listed above, to third parties on a professional basis. Any CASP, wherever it is based, that “solicits clients or potential clients in the Union or promotes or advertises crypto-asset services or activities in the Union” must be licensed in the EU. To do so, it needs to:
- have a registered office in an EU member state
- at least one director who is resident in the EU
- receive authorization from the national competent authority of an EU member state
- apply checks on financial operations involving customers and financial institutions from third countries listed as high-risk, for the purposes of anti-money laundering and combatting the financing of terrorism
- keep records of all transactions, orders, and services related to crypto-assets that they provide
- have sound internal control and risk assessment mechanisms, as well as adequate systems and procedures to ensure the integrity and confidentiality of information received.
Crypto-Asset White Paper
To offer crypto assets to the public, the issuer of that crypto asset must be an established legal person or entity in the EU. They must also draft, publish, and officially notify to a competent national authority an information document (“crypto-asset white paper”) containing mandatory disclosures. This document must include:
- information about the offeror or the person seeking admission to trading
- information about the issuer, if different from the offeror or person seeking admission to trading
- information about the operator of the trading platform
- the identity of the person that prepared the crypto-asset white paper and the reason why that person prepared the crypto-asset white paper
- information on the project to be carried out with the capital raised
- information on the public offer or on their admission to a trading platform for crypto-assets
- information on the rights and obligations attached to the crypto-assets
- information about the crypto-assets
- information on the underlying technology
- the related risks for that crypto-asset
- information on adverse environmental and climate related impact of the consensus mechanism used to issue the crypto-asset.
However, a white paper is not needed if the crypto-asset:
- is offered for free
- is automatically created as a reward for the maintenance of the distributed ledger technology or the validation of transactions
- is a utility token of a good or service that exists or is in operation (if it does not yet exist, then a white paper is required)
- is only exchanged in a limited network of merchants through direct contractual arrangements
CASPs based outside the EU are not excluded from this requirement if they intend to sell crypto assets within the block: “Offerors that are established in a third country should notify their crypto-asset white paper, and potentially, any marketing communication, to the competent authority of the member state where the crypto-assets are intended to be offered.”
Crypto Asset Exchanges
MiCA places much of its compliance burden on crypto exchanges. Exchanges are required to:
- make sure offerors trading on their platform have published and submitted the necessary white paper to the national competent authority.
- have detailed operating rules
- comply with pre- trade and post-trade transparency requirements.
- ensure that trades are settled in a timely manner.
- have a transparent fee structure for the services provided
- disclose conflicts of interest when communicating with clients on behalf of third parties or when providing advice.
The information contained in crypto-asset advertising messages and marketing material, including through social media platforms, should be fair, clear, and not misleading. Advertising messages and marketing material should be consistent with the information provided in the crypto-asset white paper and may be requested for submission to the national competent authority.
Once MiCA becomes law, the European Securities and Markets Authority (ESMA), in close cooperation with the European Banking Authority (EBA), will be mandated to publish guidelines covering:
- how CASPs should communicate with holders and potential holders of crypto-assets
- how CASPs should identify, prevent, manage and disclose conflicts of interest
- what administrative arrangements need to be in place to ensure that a CASP’s systems and security protocols meet EU standards.
Stricter Rules for Stablecoins
Issuers of asset-reference or e-money tokens (i.e., stablecoins) will have to comply with all of the above-referenced rules for CASPs. Additionally, if the stablecoin will be offered publicly, the issuer will need to:
- have a registered office in the EU
- receive authorization from the national competent authority, which will consult with the EBA, ESMA, and European Central Bank (ECB).
To receive authorization, an issuer will need to:
- have robust governance arrangements, including a clear organizational structure with well-defined, transparent and consistent lines of responsibility and effective processes to identify, manage, monitor and report risks, including for the purpose of anti-money laundering and combatting the financing of terrorism
- employ resources proportionate to the scale of their activities and have a business continuity policy aimed at ensuring, in the case of an interruption to their systems and procedures, the performance of their core activities
- have a strong internal control and risk assessment mechanism, as well as a system that guarantees the integrity and confidentiality of information received
- establish and maintain appropriate contractual arrangements with third-party entities ensuring a stabilization mechanism and investment of reserve assets backing the value of the tokens, the custody of such reserve assets, and, where applicable, the distribution of the asset-referenced tokens to the public
- maintain a capital reserve proportionate to the issuance size of the asset-referenced tokens, at least covering the issuers’ liability towards EU customers, making sure that the reserve assets are entirely segregated from the issuer’s own assets at all times, that the reserve assets are not encumbered or pledged as collateral, and that the issuer of asset-referenced tokens has prompt access to those reserve assets
- provide a permanent redemption right to the holders of the asset-referenced tokens, in the sense that holders are entitled to request from the issuer the redemption of the asset-referenced token at any moment.
What is Excluded from MiCA?
The EU specifically excluded non-fungible tokens (NFTs) falling under the following criteria from this legislation:
- crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles
- crypto-assets whose value is attributable to each crypto-asset’s unique characteristics and the utility it gives to the token holder
- crypto-assets representing services or physical assets that are unique and not fungible, such as product guarantees or real estate
However, there are some key distinctions that makes the MiCA’s definition of an NFT extremely narrow:
- fractional parts of a unique and non-fungible crypto-asset should not be considered unique and not fungible
- issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility.
Additionally, hardware or software providers of non-custodial wallets do not fall within MiCA’s scope.
Setting a Trend
With the EU leading the way, expect other jurisdictions to follow suit and create regulatory frameworks and standards for the crypto industry. The EU has committed to supporting international efforts to promote convergence in the treatment of crypto-assets and crypto-asset services through international organizations such as the Financial Stability Board, the Basel Committee, and the Financial Action Task Force. As more countries draft their own laws and regulations, we might see elements of MiCA make its way into foreign legislation. As was the case with GDPR, CASPs doing business in the EU, even if incorporated elsewhere, would already have to be compliant with MiCA.
All CASPs with clients or potential clients in the EU should begin assessing their existing infrastructure, so they are prepared for MiCA’s implementation. Internal policies and systems will need to be upgraded given the more rigorous compliance burden. Ospree can be your partner as you navigate a future with more crypto regulations, both in the EU and elsewhere. Book our free demo now to find out how our platform could help.
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