MiCA: The first European-level regulation of crypto-assets is on the table

The upcoming regulation of the crypto world is a topic that has been discussed frequently over the last years. However, it was not exactly clear what this regulation would look like, whom it would concern and to what extent.

These questions have now been answered, as the finalized MiCA text was approved by the European Council and the European Parliament and entered into force in June 2023. The EU has thus come a step closer to bringing crypto-assets, crypto-assets issuers and crypto-asset service providers (CASPs) under a regulatory framework for the first time.

EU Digital Finance Package

MiCA should not be considered a standalone initiative. This regulation will be accompanied by other legislative proposals from the EU Digital Finance Package, such as clarification of financial instruments under MiFID II, which will define security tokens, or an EU Pilot Regime for blockchain market infrastructures, which will allow for security tokens regulatory sandbox.

Another example is the Digital Operational Resilience Act (DORA) aiming to ensure that all participants in the financial system have the necessary safeguards in place to mitigate cyber-attacks and related risks.

Furthermore, the Transfer of Funds Regulation (TFR) aims to prevent payment systems from being used to launder money or finance terrorism and is being expanded to cover basically all transfers of crypto-assets, except for transactions below EUR 1,000 to unhosted private wallets.

Finally, the implementation of tougher requirements on shareholders and management on the basis of their localisation and further enhanced checks in accordance with the EU AML Framework will be required of crypto-asset service providers whose parent company is located in countries listed on the EU list of third countries considered to be at high risk for AML activities, as well as on the EU list of non-cooperative jurisdictions for tax purposes.

Whom does the new regulation concern?

The regulation applies to issuers of utility tokens and stablecoins, as well as to CASPs which include crypto custodians, trading venues and exchanges or crypto-advisors.

The regulation establishes:

  • uniform requirements for transparency and disclosure in relation to issuance, operation, organization and governance of crypto-asset service providers; and
  • consumer protection rules and measures to prevent market abuse.

It is estimated that the majority of MiCA provisions will become effective in late 2024.

What types of crypto-assets can we expect to be regulated?

MiCA deals with the following types of crypto-assets:

  • Asset-referenced tokens or “ARTs” are stablecoins that maintain a stable value by referring to the value of several fiat currencies, one or several commodities or one or several crypto-assets, or a combination of these.
  • E-money tokens are stablecoins referring to only one fiat currency. Such crypto-assets are electronic surrogates for coins and banknotes and are used for making payments.
  • Utility tokens are defined as a type of crypto-asset with non-financial purposes, which is intended to provide digital access to a good or service on a digital platform, and which is only accepted by the issuer.

MiCA will not cover security tokens and e-money (which are both covered by a specific regulation) and NFTs unless they fall under one of the above categories. MiCA will not be applicable to decentralized applications (dApps) since they function without intermediaries.

How would the new regulation affect crypto-assets issuers?

MiCA imposes an obligation on issuers to publish a white paper with mandatory disclosure requirements and to file a notification to a national regulatory authority, with an assessment of whether the crypto-asset at stake constitutes a financial instrument, i.e. a security token, or not. The issuer will be liable for the contents of the whitepaper.

SMEs will be exempted from the publication of a whitepaper, where the total consideration of the token offering is less than EUR 1,000,000 over a period of one year. Issuers of stablecoins will not be subject to authorisation by a national regulatory authority if the overall amount of the stablecoin issuance value is below EUR 5,000,000.

To protect retail token buyers, these will have a right to withdraw, which means a period of two weeks to withdraw their agreement to purchase tokens without giving any reasons.

Stablecoins issuers will need to have a registered office in the EU to ensure proper supervision and monitoring of offers to the public. They will also be requested to build up a sufficiently liquid reserve and meet requirements for the custody of the reserve.

What impact can we expect on crypto-assets service providers (CASPs)?

Crypto-asset service providers will need to obtain authorisation from the respective national authority in order to operate within the EU. In such a case, they can take advantage of the EU-wide passporting mechanism. Legal or natural persons outside of the EU will not be allowed to provide crypto-asset services to EU citizens on a non-occasional basis, without having legal representation in the EU.

With the new rules, crypto-asset service providers will have to respect strict requirements in order to protect clients‘ wallets and run their organization. They will be liable in case they lose investors’ crypto-assets.

MiCA will also cover any type of market abuse related to any type of transaction or service, notably market manipulation and insider dealing.

Crypto-asset market players will be required to report information on their environmental and climate footprint, i.e. make publicly available, in a prominent place on their website, information related to the environmental and climate-related impact of their crypto-assets. 

MiCA oversight

In general, the European Banking Authority (EBA) will have strong oversight powers. It will oversee all stablecoins and will be maintaining a public register of non-compliant crypto-asset service providers.

The European Securities and Markets Authority (ESMA) will be given powers to step in to ban or restrict crypto projects if they are seen to not properly protect investors, or threaten market integrity or financial stability.

Certain powers concerning authorisations will also be held by the national regulatory authorities, national central banks and the European Central Bank (ECB).