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Magazine Issues » September 2022

MiCA: What Europe’s cryptoassets regulation means for the continent

MiCAMiCA aims to set standards for the EU’s crypto market. Benjamin David outlines the proposals.

The European Commission (EC) aims to end the crypto ‘Wild West’ by setting standards for digital assets and their related providers through MiCA, a regulation set to come into force in 2023.

MiCA – the proposed Markets in Crypto-Assets legislation – is part of the EC’s Digital Finance Package, published in September 2020.

Drawn up by the Directorate-General for Financial Stability, Financial Services and Capital Markets Union, MiCA’s application in the EU has four primary objectives: building a legal framework for cryptoassets; aiding innovation and competition; protection for consumers and investors; and financial stability.

Over the course of 168 pages, MiCA focuses on rules for cryptoassets that are currently out of scope of regulation – including stablecoins – and rules for cryptoasset service providers, known as CASPs in the legal jargon. 

Provisional agreements for MiCA were reached in June and the application of MiCA was expected to be mid-2023. However, it is now predicted to be delayed to 2024 to allow the adoption of level 2 measures. Despite the timeline, MiCA is expected to have a large and indelible impact on the digital asset landscape in Europe. In a press release by the EC on June 30, 2022, Bruno Le Maire, France’s minister for the economy, finance and industrial and digital sovereignty, stated: “This landmark regulation will put an end to the crypto Wild West and confirms the EU’s role as a standard-setter for digital topics.”

Why was MiCA developed? 
The regulatory framework emerged from a gap in European financial services regulation. Most cryptoassets were found to be out of scope of EU financial services legislation. The EC developed MiCA to ensure that EU consumers could access safe cryptoassets, without obstacles, and without compromising market stability. It also addresses cryptoasset risks and provides a single licensing regime across all member states by 2024.  

Which cryptoassets are involved? 
MiCA defines a cryptoasset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. 

The three cryptoasset types that apply to MiCA include:

• Utility tokens. These are a type of cryptoasset intended to provide digital access to goods or services available on DLT and which are only accepted by the issuer of that token.

• Asset-referenced tokens. These reference currencies, commodities, other cryptoassets, or baskets of these, and aim to maintain a stable value.

• E-money tokens. Referencing only one fiat currency, these aim for a stable value and to function similar to electronic money.

Which cryptoasset services and providers are involved? 
Many, including custodians and administrators, trading platforms and advisers. These are all considered as cryptoasset service providers – CASPs - and captured by MiCA.

By contrast, a cryptoasset provider (CAP) pertains to any person whose occupation or business provides cryptoasset services to third parties on a professional basis. 

What does it mean for cryptoasset service providers?
CASPs will require authorisation to operate within the EU. National authorities will be obliged to issue authorisations within 40 days. 

The biggest CASPs will have information about them transmitted by national regulators to the European Securities and Markets Authority (Esma). CASPs with more than 15 million active users are classified as ‘Significant CASPs’ and will be supervised by competent authorities. However, Esma can intervene to proscribe or limit the provision of cryptoasset services by a CASP. 

CASPs that offer cryptoassets to third parties will be obliged to publish a whitepaper similar to prospectuses published under the prospectus regulation. They will also be obliged to be authorised to issue cryptoassets and comply with particular rules when they market cryptoassets. 

Additionally, they will be obliged to conduct themselves “sincerely, justly and professionally” with cryptoasset holders, with policies for conflict management and security access protocol maintenance.

Which cryptoassets aren’t involved? 
Although MiCA broadly includes cryptocurrencies such as bitcoin, ether and stablecoins, central bank digital currencies (CBDC) are not included. Moreover, it does not regulate security tokens that qualify as securities or other financial instruments. 

MiCA will not apply to cryptoassets that qualify as deposits, electronic money (except where they qualify as electronic tokens under MiCA), financial instruments, securitisation and structured deposits. 

Additionally, MiCA will not apply to, among others, European investment banks, liquidators or administrators acting in solvency procedures, member state national banks acting as monetary or other public authorities, or persons providing cryptoasset services for their parent companies.

What else is involved? 
• Environmental impacts: Those in the cryptoasset market will have to ensure relevant technology is climate-friendly, in agreement with the EU’s Green Deal, and will be obliged to disclose their environmental and climate footprint. Esma will offer further provisions specifying what such disclosures will entail. In addition, at a later date, the EC will publish a document comparing different types of blockchain technologies and offer policy options.

• Custody liability: Providers of custodian wallets will be liable for damages or losses caused by hacks or preventable failures. New liability rules are also specified for custodians holding asset-referenced tokens. 

• DeFi: Cryptoassets issued by a decentralised finance protocol qualify as cryptoassets, according to MiCA. Therefore, CASPs conducting activities concerning these assets must comply with MiCA requirements. 

• Stablecoins: Stablecoin issuers are obliged to back the amount of outstanding stablecoin circulation with a liquid reserve composed of a 1/1 ratio and consisting partly of deposits. Moreover, stablecoin issuers will offer holders a claim at any time, free of charge.

Looking forward
MiCA will greatly impact market players’ ability to diversify their business through cryptoasset strategies. It will provide robust safeguards for non-regulated cryptoassets, related service providers and, of course, the consumer. 

However, as BNP Paribas notes in its ‘MiCA – Markets in Crypto-Assets regulation memo´, MiCA should not be thought of as an independent initiative since “the European Commission’s digital finance strategy not only relies on MiCA, but also on the DLT Pilot Regime and the Digital Operational Resilience Act (DORA), thus demonstrating transversal reach”. 

While it will take until 2024 to see MiCA rolled out, the question of how Europe’s EU-wide crypto regulatory landscape will shape out can only be answered in time. 

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