The Markets in Crypto-Assets (MiCA) regulation is a new EU regulation that focuses on maintaining financial stability and protecting retail investors, while promoting more widespread transformation in the crypto asset sector in European Union (EU) countries.
MiCA establishes legal certainty around crypto assets – various types of stable-coins, utility tokens and other tokens that were not regulated by the MiFID II. As a matter of fact, MiCA expands the Europe’s Markets in Financial Instruments Directive (MiFID II), which is a legal framework for securities markets (eg. security tokens), investment intermediaries and trading (including TradeFi). In early February, the UK government also announced plans to regulate crypto-assets and protect consumers.
MiCA aims to regulate any digital assets (tokens) bearing a value or a right, which can be shared or stored electronically using distributed ledger technology (DLT), blockchain or similar. It is a comprehensive set of regulations that covers critical assets of the crypto market. These critical assets include stable-coins, utility tokens, and NFTs. MiCA is intended as a framework for service providers and users of crypto.
The regulation was passed by the European Commission’s Economic and Monetary Affairs Committee in October, 2022 and the final vote in the European Union’s parliament was deferred until April 2023 . The statute consists of more than 100 articles. It deals with such issues as money laundering, KYC (Know Your Customer) and customer protection. It is intended for cryptocurrency companies, consumers and investors so that everyone is following the same rules. At the moment the MiCA law is still going through the parliaments of the various EU members. Full compliance is expected by 2024.
The legislation is aimed at the issuers of crypto assets and CASPs (crypto assets service providers). It is also intended to provide a clear protection framework to protect crypto asset holders and customers using crypto services. While some might see regulations as stifling the crypto space others welcome the consumer protections and the possibility of CASPs operating across the entire EU market block once MiCA regulations have been formally met and verified.
The controls vary in severity depending on the user base: CASPs with over 15 million users have a higher bar to reach in order to get a licence to operate in the EU. MiCA also gives the European Securities and Markets Authority (ESMA) the right to intervene to prohibit or restrict the services a CASP can offer. The ESMA are particularly concerned with maintaining market integrity, financial stability and investor protection. They want to avoid scenarios of bad actors in the crypto sphere like FTX losing their users’ deposits and destabilising other companies.
The Laws
There are four main objectives that the Markets in Crypto Assets law seeks to address they are:
- To provide legal certainty for crypto assets. Previously, the legality and functionality of crypto assets changed as various governments adopted differing stances to the legal status of crypto assets;
- To replace different national regulatory frameworks for crypto with one EU wide framework;
- To provide a uniform EU regulatory framework for crypto asset service providers and issuers;
- And, to establish specific rules for stable-coins, especially in their function as digital money.
Regarding non-fungible tokens (NFTs) they are exempt from much of the legislation unless they are minted in numbers and sold as assets. MiCA makes it compulsory for issuers of NFTs to publish a white paper that explains what the NFT is and how it will work on a blockchain.
Protections
Much of the political driving force behind the Markets in Crypto Assets law is to protect consumers. There have been notable high-profile cases of trading platforms holding the private keys of their users’ assets and using those assets to pay debts, expand the business etc. To prevent this happening MiCA regulation gives the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) powers to intervene if they detect operational practices that are endangering users and consumers of cryptocurrency services. This will do much to improve general consumer confidence in the crypto space. They must be seen as a positive development.
MiCA bestows issuers of crypto assets and providers of related services a “passport” to serve clients across the EU from a single base, while meeting capital and consumer protection rules.
What does the Regulation Cover?
MiCA distinguishes between three categories of crypto assets: (1) asset-referenced tokens (“ARTs”), (2) e-money tokens (“EMTs”), (3) other crypto assets and (4) Non-Fungible-Tokens (NFTs)
- Asset-Referenced Tokens
ARTs are defined as a type of crypto asset (aka stablecoins that reference, for stabilisation, other assets including fiat currencies) that “is not an electronic money token”. And that claims to maintain “a stable value” by “referencing to any other value or right or a combination thereof, including one or more official currencies”. MiCA highlights that ARTs could be widely adopted to transfer value or as a means of exchange. They, thus, represent a more significant threat to market integrity and the protection of retail investors.
- E-Money Tokens (EMTs)
EMTs are crypto-assets (aka stable-coins pegged to a single fiat currency) which aim to “maintain a stable value by referencing to the value of one official currency” and which should not be treated as deposits. In order to minimise regulatory arbitrage, MiCA intends to capture all crypto-assets which either classify as e-money (as defined in Article 2(2) of Directive 2009/110/EC) or which share similar features or a comparable function. Similar to e-money, EMTs can also be a digital alternative to banknotes and coins, which are also commonly used for payment purposes.
Lastly, MiCA imposes the obligation on EMT issuers to grant redemption rights to EMT holders. The right of redemption can be exercised at any point in time, at par value. It is also important to note that under MiCA, in order to ensure that EMTs are used as a medium of exchange, as opposed to a store of value, there is a general prohibition on EMT issuers from granting interest on EMTs, whether positive or negative.
- Other Crypto Assets
This is a catch-all that comprises “all other crypto assets” falling outside the two categories above mentioned (i.e. ARTs/ EMTs). This catch-all class includes utility tokens, which are defined as crypto assets that are only aimed to provide access to a good or a service supplied by the issuer of the token. Issuers or offerors of these types of crypto assets will not need to be authorised by the MFSA. However, a white paper and notification to the MFSA will be necessary prior to offering these crypto assets to the public or seeking admission on a trading platform. There are certain exemptions.
- Non-Fungible Tokens (NFTs)
Unique and non-fungible tokens (“NFTs”), including digital art and collectibles, are excluded from MiCA. However, whenever issued in a large series or split into fractional parts, these tokens may be considered to be fungible and fall within MiCA (or possibly MiFID II).
Advertising
MiCA prevents crypto companies from advertising and promoting new tokens and services until they have published a white paper on their website. The white paper has to state the purpose of the project, the rights of users and the underlying technology used. This white paper must be submitted to the authorities 20 days prior to the inception of the project. The following exemptions apply:
- To airdrops (free giveaways of crypto assets);
- To projects only open to qualified investors and having less than 150 investors in any EU member country;
- To projects that do not exceed 1 million Euros in value for 12 months;
- To projects that issue rewards for mining;
- And, to projects that issue crypto assets already available in the EU.
DeFi
DeFi or Decentralised Finance projects also fall under the auspices of the MiCA regulations. They must abide by Know Your Customer/Business (KYC/B) and anti-money laundering regulations. For DeFi projects originating outside the EU a system of regulatory arbitrage is required.
In Summary
MiCA aims to keep up with the rapid developments in crypto assets and services that EU law did not previously cover. These are primarily stable coins and utility coins. The thinking behind the law is to provide a level playing field for the crypto ecosystem that protects companies and users. The EU set out this regulatory framework to boost confidence in a growing sector of the economy. It is also to weed out bad faith actors that have hitherto been able to ‘game’ the system for profit.
Such regulations will provide confidence in the sector that will draw in institutional investment. The regulations will also help to dispel prevalent popular notions that the crypto industry is rife with conmen and scammers.
However, while the financial services sector has welcomed the new MiCA regulation, it has had a mixed reception within crypto communities. They believe that DLT-based crypto-assets should stay decentralised. Many crypto enthusiasts feel central governments should not oversee the crypto space.
