An Overview of MiCA: Markets in Crypto Assets Regulation
24 Aug 2021
Regulation of the blockchain and crypto space has been notoriously hard to work out, especially after cryptocurrencies like Bitcoin and Ether rose to prominence and kicked off a larger crypto boom in the latter part of the previous decade. In a recent survey conducted by our sister company LimeChain, project managers working in the crypto and blockchain sphere identified the lack of adequate regulatory frameworks as one of the main challenges the industry is currently facing. And the issue becomes even more complex due to the rapid evolution of the blockchain and crypto landscape.
In our previous piece we examined how the creation of new types of crypto tokens through the process of asset tokenization introduces new challenges and showcases the need for decisive regulatory action. We also mentioned the European Commission’s Markets in Crypto Assets Regulation proposal (MiCA), which is the EC’s attempt to bring regulatory clarity on an EU level.
Today we are taking a closer look at what is arguably the most comprehensive effort to create a framework to regulate the crypto space at supranational level. Let’s dive in:
What is MiCA and what does it aim to achieve?
Work on the proposed regulation started in 2018, after the 2017 crypto boom had brought potential crypto-related pitfalls and problem areas into sharp focus. According to an official statement, MiCA aims to “support innovation while protecting consumers and the integrity of cryptocurrency exchanges”.
As with most markets-focused regulations, one of MiCA’s priorities is to limit the potential risks to the consumer, including preventing possible scams, market manipulation and other bad practices, fraudulent activities, or unwanted side effects. But the EC’s proposal also aims to address certain issues that it sees as hindering the EU crypto-asset sector. The proposal argues that the lack of certainty regarding the legal status of crypto assets, as well as the fact that there is no coherent regulatory framework at EU level, prevent crypto asset companies from enjoying the benefits of Europe’s financial services markets. For example, crypto businesses are currently unable to benefit from the EU passporting system, which enables financial services companies registered in the European Economic Area (EEA) to operate in any other EEA state without the need for further authorization in that country.
In order to achieve all this, MiCA introduces a number of crypto-related definitions and appropriate regulatory measures for things that fall under its scope. The proposal’s main focus is on stablecoins and businesses that engage in crypto-related activities. MiCA refers to such businesses as crypto-asset service providers, or CASPs. The proposed regulation also covers the so-called utility tokens.
On the other hand, MiCA will not apply to crypto-assets like security tokens, which are defined as financial instruments or e-money under the Markets in Financial Instruments Directive (MiFID) and the Electronic Money Directive (EMD).
Crypto assets under MiCA
According to MiCA, a crypto asset is “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. The proposed regulation goes on to provide definitions for the types of crypto assets that fall under its scope.
MiCA defines utility tokes as “a type of crypto asset which is intended to provide digital access to a good or service, available on DLT, and that is only accepted by the issuer of that token”. The proposal points out utility tokens do not have financial purposes related to the operations of a digital platform and digital service, which differentiates it from other types of crypto assets, for example security tokens.
Stablecoins have arguably been the crypto asset type most scrutinized by regulators. An example of this was last year’s statement by the Financial Board of Stability, which warned that global stablecoins could pose risks to the global economy. With that in mind, it is hardly surprising that stablecoins are part of the main focus of MiCA. The proposed regulation defines two types of stablecoins:
- Asset referenced tokens (ARTs) – these are crypto-assets that seek to maintain a stable value “by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets”. Because of their stabilized value, ARTs can be used as means of payment to buy goods and services or as a store of value.
- Electronic money tokens (EMTs) – according to MiCA, an EMT is a type of asset that aims to stabilize its value by referencing a single fiat currency. Such stablecoins are primarily used as a means for payment and share similarities with the instruments defined as “e-money” under the Electronic Money Directive. However, MiCA highlights some key differences between the two, such as the fact that e-money holders are “always provided with a claim on the electronic money institution and have a contractual right to redeem their electronic money at any moment against fiat currency that is legal tender at par value with that currency”. In contrast, EMTs do not always provide the same benefits to their holders, which places them out of the scope of the EMD.
Crypto asset issuers
In addition to introducing formal definitions to the aforementioned types of assets, MiCA also proposes new rules for issuers of such assets. Under the proposed rules, issuers of all MiCA crypto assets will be required to have a white paper providing detailed information about their team, the project and its underlying technology, the type of the token and its issuance, and the potential risks that could arise for the consumer.
The white paper is not subject to approval from watchdogs, but it must be shared with the relevant authorities at least 20 days before publication. The issuer is required to publish the white paper on their website no later than the date of the offering.
The regulation proposes exemptions from the white paper requirement for issuers that meet certain criteria. For example, issuers of crypto assets, “other than other than asset-referenced tokens or e-money tokens”, are not required to publish a white paper if: their crypto-asset offerings do not exceed EUR 1,000,000 over 12 months; the crypto assets are offered for free, with the caveat that MiCA does not consider this to be the case if investors are asked to provide personal data in exchange for those assets; the crypto assets are offered only to qualified investors and can only be held by such qualified investors; the crypto assets are offered to fewer than 150 investors per member state; the crypto assets are issued as rewards for the maintenance of a DLT network or validation of transactions; the crypto assets are not fungible with other assets.
Meanwhile, stablecoins are subject to stricter rules than utility tokens. Under MiCA, not only are stablecoin issuers required to provide more detailed information but also there is no exemption from white papers for either ART or EMT issuers.
In addition, both ART issuers and their EMT counterparts can face more stringent requirements if their tokens are deemed “significant” by the European Banking Authority (EBA). Stablecoins will be assessed based on a set of criteria that takes into account factors such as user base size, token value or market capitalization and interconnectedness with the financial system, among others. Stablecoins that meet three or more of the specified criteria are deemed significant and their respective issuers become subject to a bespoke framework proposed by MiCA. The framework proposes additional obligations related to governance, capital and liquidity levels, risk management, and capacity to handle token redemption requests, among others.
Crypto asset service providers
In addition to the new requirements regarding crypto-asset issuers, MiCA also proposes new rules for the broader category of ‘crypto-asset service providers’, or ‘CASPs’. Under MiCA, CASPs are defined as “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis”. The following activities are deemed to be crypto-asset services under MiCA:
- Custody and administration of crypto-assets on behalf of third parties;
- Operation of a trading platform for crypto-assets;
- Exchange of crypto-assets against fiat currency or exchange of crypto-assets against other crypto-assets;
- Execution of orders for crypto-assets on behalf of third parties;
- Placing of crypto-assets;
- Reception and transmission of orders on behalf of third parties;
- Advice on crypto-assets;
According to the regulation, a crypto asset service provider has to be authorized by competent authorities in an EU member state to be able to operate within the Union. MiCA specifies that only legal persons that have a registered office in a member state can provide crypto asset services.
Notably, an authorization as a crypto asset service provider will be valid for the entire EU and an authorized CASP that provides cross-border services will not be required to have a physical presence in a host member state. This reflects MiCA’s aim to provide CASPs with similar benefits to those available to traditional financial firms that have EU passports.
Meanwhile, companies based outside the EU, but providing crypto-asset services to EU residents will be subject to the same obligations as the EU-based CASPs. Those include, among other things, obligation to act honestly and in the best interest of clients, prudential requirements, obligation to provide information to competent authorities, to safekeep clients’ funds, and to identify, manage, prevent and disclose conflicts of interests. The obligations also include specific requirements based on what types of crypto-asset services are provided.
Another of MiCA’s provisions on crypto asset providers states that the European Securities and Markets Authority (ESMA) shall establish a register of all CASPs. That register will be publicly available on ESMA’s website.
It remains to be seen whether MiCA would be a successful attempt to address the need for crypto regulation in the EU, but it definitely seems like a decisive step in the right direction. The framework seeks to introduce rules for the relationship between token issuers and token holders, minimum capital requirements for the various types of CASPs, measures aimed at preventing market abuse and ensuring investor protection. Perhaps most importantly, MiCA aims to harmonize crypto-related regulatory regimes across the EU, which will spare CASPs from having to deal with a fragmented regulatory landscape. In particular, extending EU passport privileges to CASPs can make it much easier for these types of businesses to operate in the region.
The regulation is expected to be fully implemented by 2024, although no definitive date has been set.
Security tokens are a crypto asset type that represents an ownership stake in an asset or a business. A security token essentially serves a similar role to traditional securities such as shares so it warrants the same regulatory scrutiny as those types of financial instruments. At the same time, they can bring the benefits of the blockchain revolution to traditional financial markets and help create liquidity in typically illiquid sectors. This makes security tokens a very powerful tool for bridging traditional finance and DLT-powered fintech. It also makes them an interesting case from a legal standpoint.
The majority of legal hurdles come as a result of the inability of current financial rules and regulations to cover the various aspects of the blockchain sector, as well as from the lack of a unified approach when it comes to blockchain and crypto regulation.
One factor that brought into focus the need for regulatory response was the asset tokenization boom that contributed, directly and indirectly, to that rapid growth of the crypto market.