With crypto assets entering the mainstream, the need for concrete rules for asset classification, protection of users funds, and preventing criminal misuse has become an urgent need in numerous jurisdictions worldwide. Despite that, only a few countries have so far introduced formal guidelines to govern the use of virtual assets. In this respect the European Union has prove itself to be a global leader. Currently, the Markets in Crypto Assets Regulation (MiCA) is one of the most detailed and coherent pieces of legislation, covering some of the largest economies in the world.
On October 5, 2022, the European Council approved the final version of the Proposal for a Regulation on Markets in Crypto Assets. Three days later, the European Parliament Committee on Economic and Monetary Affairs (ECON) endorsed the approved text. With that entities engaging in crypto asset activities will have up to 18 months to comply with this regulation, which is expected to become applicable by the end of 2024.
"Crypto assets are defined as digital representation of value that could be transferred or stored electronically using digital ledger technologies (DLT) or similar technologies"
All provisions contained in MiCA aim to streamline digital ledger technologies while protecting users and investors. Some of the key objectives of the law which is directly applicable in European Union states without the need for transposition into national law, include:
- Providing legal clarity for crypto assets that were not previously covered by the other government and EU finance legislation.
- Increasing the chances of mass adoption and innovation of DLT technologies.
- Ensuring transparent transactions thereby reducing the chances of fraud and bankruptcy.
- Establishing clear and uniform rules for the use of stablecoins.
- Establishing clear and uniform rules for crypto assets service providers at EU level.
MiCA introduces four important legal definitions of crypto assets including:
- Asset-referenced tokens (ARTs)- crypto assets, also known as stablecoins, that reference, for stabilization purposes, other assets. ARTs maintain a stable value by being backed by more than one digital currencies, fiat currencies or commodities.
- E-money tokens (EMTS) - payments tokens and e-bank currencies used for exchange of goods and services that reference a single fiat currency to maintain stable value.
- Utility tokens - crypto assets that are intended to provide access to a good or service supplied by the issuer. Utility tokens relating to goods/services already in existence and those relating to goods/services not yet in existence are treated differently with the former subject to “lighter” requirements.
- Other crypto assets - this category may include coins and tokens that do not fall in any of the other three categories.
The main implications of the Regulation include:
- Sustainability - The legal provisions aim to address concerns stemming from the high-energy intensity of some cryptocurrencies like Bitcoin, which rely on the Proof-of-Work consensus mechanism. The energy intensity of a crypto asset will be considered for the purposes of the Regulation.
- Innovation - with so much attention by financial institutions and governments being placed on crypto assets, it is expected that new projects in the crypto space should bring solutions that will bridge the gap between user experience and security.
- Adoption - MiCA brings much needed clarity on some of the most pressing security, trust, and transparency issues associated with the use of crypto assets. By establishing an overarching framework, issuers of and investors in these assets will have the confidence to manage and operate with crytpo assets, leading to further adoption.
With MiCA, strict procedures related to the issuing of new digital assets are being put into place. These include the industry wide standard of publishing a whitepaper with detailed information about the asset being made available to the public but the requirement of key information and content to be available. Crypto Asset Issuers (CAI's) are expected to be fully prepared to give non-misleading information about the crypto assets they want to issue publicly. Customer protection is a main theme in this respect. Whitepapers following MiCA provisions must include:
- Information about the underlying technology.
- The associated risk.
- Available liquidity for the crypto assets being issued.
More detailed guidelines for offering new crypto assets, asset reference tokens, and e-money tokens will be developed and monitored cooperatively by the European Banking Authority and European Securities and Markets Authority.
Another major definition being introduced by MiCA is related to Crypto Assets Service Providers (CASPs).
- Custody and administration of crypto assets on behalf of third parties.
- Transfer of service on behalf of third parties.
- Exchange of crypto assets to fiat currencies.
- Swapping one crypto asset for another.
- Operating a trading platform for crypto assets.
According to the Regulation, CASPs will not be approved unless they are properly registered and endorsed by specific organizations that ensure financial security. Crypto Assets Service Providers consist of legal persons or undertakings whose occupation is the provision of one or more of crypto assets services to third parties mentioned above.
CASPs approved in accordance with Regulation will need to have a registered office in a member state of the Union where they carry out at least part of their crypto assets services. They shall have the place of effective management in the Union and at least one of the directors will need to be an EU resident.
MiCA will also, for the first time, tackle instances of market manipulation, insider trading and false signals to address illegal activities originating from CASPs.
Finally, a number of concepts remain outside of the scope of MiCA including:
- Decentralized Finance (DeFi)- Decentralized finance is composed of blockchain protocols based on smart contracts that operate without intermediaries.
- Non-fungible tokens (NFTs) - Generally, NFTs do not fall within the scope of MiCA, with the exception of those that could be tokenized into fungible tokes and traded in that way.
- Airdrops - Airdrops refer to digital assets (both fungible and non-fungible) that are given away for free usually to promote a project or to bootstrap community governance.
- Digital assets that can't be transferred.
- Crypto assets issued by third party countries.
- Security tokens, Bitcoin and other financial instruments covered by other EU regulations are not covered in MICA.
- Lending and borrowing of e-money tokens.
MiCA is a major step forward in the process of bringing crypto assets to the mainstream. The framework that is being established with MiCA will improve customer protection and establish clear rules to be followed by businesses within the European Union that deal with crypto assets. An additional positive effect of the Regulation will be the improved access of crypto businesses and retail participants to banking services related to crypto assets.
As mentioned above, MiCA is expected to become applicable by the end of 2024.
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