Late last week, after two years of debate and discussion, officials from the European Union announced an agreement on the landmark Markets in Crypto Assets (MiCA) regulation, arguably the world’s most comprehensive legal framework for “crypto-assets” defined as “digital representations of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.”
MiCA requires crypto-asset service providers (CASPs) — defined by MiCA as “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis” — to take action related to consumer protection, the environment, anti-money laundering (AML), stablecoins and other areas.
As we embark on our journey into the groundbreaking MiCA era, there are still a few hurdles left until ratification, meaning we have not yet seen a final version. So what do we know - even without a copy - and what might we learn down the road?
What does MiCA regulate?
The EU’s cross-continental plan defines three subcategories of crypto assets that it intends to regulate.
The first is asset-referenced tokens such as libra, the now-defunct stablecoin proposed by Facebook in 2019 that was tied to a basket of global currencies. As pointed out by Coindesk, MiCA “devotes a full 26 of its 168 pages,” to this subcategory — a possible hangover from Libra’s 2019 launch which left global regulators scrambling to address challenges associated with the release of a digital asset within the reach of billions of Facebook users and backed by some of the world’s leading companies.
The second type of crypto-assets covered is the “e-money token,” which is a stablecoin pegged to the value of a fiat currency like the U.S. dollar. Examples of these include dollar-backed USDC and USDT.
The third category of regulated crypto-asset is the “utility token,” which is intended to provide digital access to a good or service and is only accepted by the issuer of that token. This category, which MiCA calls “crypto-assets other than tokens referring to assets or electronic money tokens,” is intended to provide digital access to a good or service, available on a blockchain. These utility tokens are only accepted by the token issuer, and have a non-financial purpose related to the operation of a digital platform and digital services. As such, utility tokens should be considered a special type of crypto asset.
For each of these three categories, MiCA sets forth rules of the road that CASPs must follow in order to ensure transparency, consumer protection, and mitigate risks of market abuse. Fundamentally, MiCA prohibits a CASP from offering to the public or seeking admission to trading on a trading venue crypto assets unless the issuer is a legal entity and a white paper complying with the regulation has been prepared, notified to the relevant local regulatory authority, and published. The white paper must contain the core information on the characteristics, rights and obligations, and underlying technology and project.
What does MiCA not regulate?
While MiCA broadly encompasses cryptocurrencies like Bitcoin and Ether, along with stablecoins, it does not apply to central bank digital currencies (CBDCs) nor does it regulate security tokens that might qualify as securities or other financial instruments.
While there has been discussion of emerging technologies such as decentralized finance (DeFi) and non-fungible tokens (NFTs) being included in MiCA regulation, NFTs have been largely left up until now, potentially awaiting inclusion in the upcoming sequel, MiCA 2.
Passportable Licensing 🏎
Under MiCA, when looking to extend operations across EU countries, CASPs must obtain approval from regulatory authorities in an EU country. Once local authorities have approved a crypto business according to EU regulations, the CASP would then be able to extend operations to other EU countries without having to obtain additional licenses — so-called “passporting.”
So, what must a CASP do to get the green light?
An exchange will face a capital requirement of E150,000 (a custodian has a slightly less than E125,000 requirement), and create policies and procedures for allowing or suspending the trading of crypto-assets on its platform. The trading of privacy-enhanced cryptocurrencies such as Monero are prohibited under MiCA and the legislation focuses on the need to mitigate the risks of insider trading and market manipulation.
According to the announcement, "under the provisional agreement reached today, crypto-asset service providers (CASPs) will need an authorisation in order to operate within the EU. National authorities will be required to issue authorisations within a timeframe of three months."
"With the new rules, crypto-asset service providers will have to respect strong requirements to protect consumers' wallets and become liable in case they lose investors’ crypto-assets.” According to the announcement, MiCA “will also cover any type of market abuse related to any type of transaction or service, notably for market manipulation and insider dealing."
Actors in the crypto-assets market will be required to declare information on their environmental and climate footprint.
About 24 hours before the agreement on MiCA, EU officials reached an agreement on updated AML legislation which also covers crypto-assets. MiCA simply adopted this legislation, which requires an originator CASP to share customer information with the recipient CASP in every transaction - no thresholds or exceptions. Payments to unhosted private wallets are largely left out of the requirement, which is a significant departure from earlier drafts. EU lawmaker Ondřej Kovařík explained in a tweet, that the rule “strikes the right balance in mitigating risks for fighting money laundering in the crypto sector without preventing innovation and overburdening businesses.”
MiCA also relies heavily on guidance from the Financial Action Task Force (FATF). In MiCA’s consideration 8, drafters explain that “any legislation adopted in the field of crypto-assets should be specific, future-proof and be able to keep pace with innovation and technological developments . . . Such legislation should also contribute to the objective of combating money laundering and the financing of terrorism. Any definition of ‘crypto-assets’ should therefore correspond to the definition of ‘virtual assets’ set out in the recommendations of the Financial Action Task Force (FATF).”
According to the announcement, "MiCA will protect consumers by requesting stablecoins issuers to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits. Every so-called ‘stablecoin’ holder will be offered a claim at any time and free of charge by the issuer, and the rules governing the operation of the reserve will also provide for an adequate minimum liquidity.”
"The development of asset-referenced tokens (ARTs) based on a non-European currency, as a widely used means of payment, will be constrained to preserve our monetary sovereignty,” according to the release, “Issuers of ARTs will need to have a registered office in the EU to ensure the proper supervision and monitoring of offers to the public of asset-referenced tokens."
According to CoinDesk, “One of the most eye-catching measures would be a cap, which means stablecoins that aren’t tied to a single fiat currency would have to stop issuing if daily transactions exceed 200 million euros ($209 million) – intended to stop private companies usurping the role of the euro.”
Non-fungible tokens (NFTs), according to the release, will be excluded from the scope except if they fall under existing crypto-asset categories. Within the next 18 months, the European Commission will be tasked with preparing a comprehensive assessment and, if necessary, creating a regime for NFTs to address the emerging risks of such a new market.
However, things may not be that simple.
“In principle, the law excludes NFTs – but in practice, a French finance ministry source told CoinDesk, only as long as they do what they promise. “If a non-fungible token becomes fungible, then it will fall into” either MiCA, or other EU laws governing conventional financial instruments … In reality, another source has told CoinDesk, last-minute drafting changes may mean that the law may apply to any NFT that is part of a series and able to be divided up – or “fractionable.” The concern here for some NFT projects is that many NFTs today are fractional or are used for payments or as an investment, potentially covering more NFTs than originally understood.
How did MiCA come to be and what comes next?
According to Coindesk’s Brussels-based Jack Schickler, “The final session talks … ran on for nearly seven hours, culminating in head-to-head private discussions between lead negotiators Philippe Léglise-Costa, a French diplomat representing the Council, and Irene Tinagli, the Italian lawmaker who chairs the parliament’s Economic and Monetary Affairs Committee. Talks concluded just a few hours before France would have had to cede control to the Czech Republic, which took over chairmanship of the Council as of July 1.”
The article continued, “One of the most heated issues in those final talks appears to have been on whether national regulators, or EU agencies responsible for banking or securities markets should get to supervise crypto firms. The dispute over which agency gets supervisory authority is mirrored in the U.S. between the U.S. Securities and Exchange and Commodity Futures Trading Commissions.”
Remember, MiCA has not been passed yet - it is still “just a bill”.
As explained by Schickler for Coindesk in a follow-up piece, “while the main features of the law have been agreed to in principle by lead negotiators, they have yet to publish a full text. Once the text is available, governments – which meet in the EU’s Council – and lawmakers at the European Parliament will have to make sure their demands were met. That will happen through a series of votes.”
Even after the law is passed, CASPs will have a grace period - likely 18 months - to comply with the fund transfer requirements and other rules. And even then, the legislation looks to member state regulators to implement and enforce, meaning that local regulators and courts could take diverse approaches or interpret the law differently.
In other words, MiCA is a major step, but likely not the last, from the EU on crypto regulation.
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