Markets in Crypto-Assets Regulation: A Short Guide

Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets and amending Directive (EU) 2019/1937 (‘MiCA’, ‘Regulation’), is part of the European Commission’s Digital Finance Package, which was announced in September 2020. The major goals of the package were to make the financial industry in the European Union (EU) more innovative and competitive, to make Europe a worldwide standard-setter, and provide consumer protection for digital finance and modern payments. It covers a wide range of topics, including supervision, consumer protection, the regulation of Cryptoasset Service Providers (CASPs), Asset-referenced tokens (ARTs), Electronic money tokens (EMTs), safeguards against market manipulation and financial crime.

The Regulation was first proposed by the European Commission in 2020. In June 2022, a first provisional draft of the Regulation was put forward. In the weeks that followed, several revisions and amendments were made. Following the preliminary talks between the representatives of the three institutions on October 5, the Permanent Representatives Committee approved a draft compromise package and forwarded it to the European Parliament for approval before its formal entry into force.

On Thursday 20 April 2023, the Parliament gave its final green light with 517 votes in favour to 38 against and 18 abstentions.

Regulation Scope

The articles of the Regulation cover amongst others:

• the scope and definitions,
• offering of Asset-referenced tokens and Electronic money tokens,
• the authorisation and operating conditions for CASPs,
• provisions for prevention of market abuse,
• the role of the competent authorities.

The goal of policymakers with the Regulation is to set standards for the EU’s crypto market and their related providers. The Regulation has four main goals:

• designing a legal framework for cryptoassets,
• fostering competition and innovation
• protect consumers and investors, and
• achieve financial stability and market integrity

The overarching goal of the Regulation is to ensure that the regulatory framework effectively addresses the risks associated with cryptoassets as well as to offer clarification regarding the applicability of the EU financial services law to cryptoasses. It should be emphasised that although officials are expected to address regulating these industries in the future, the Regulation currently does not specifically address Decentralised Finance (DeFi) or Non-Fungible Tokens (NFTs).

Assets Taxonomy

Under MiCA, cryptoassets have been categorised into different categories. As per Article 3 of the Regulation:

• “‘cryptoasset’ means a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology”,
• “‘asset-referenced token’ means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing to any other value or right or a combination thereof, including one or more official currencies”,
• “‘electronic money token’ or ‘e-money token’ means a type of crypto-asset that purports to maintain a stable value by referencing to the value of one official currency”,
• “‘utility token’ means a type of crypto-asset which is only intended to provide access to a good or a service supplied by the issuer of that token”.

Asset Referenced Tokens

Because of their quick growth and possible importance in international payments, stablecoins (crypto assets tied to underlying assets) are drawing particular attention from governments and authorities around the world. As a result, MiCA is establishing strict requirements for their issuers.

ARTs must be authorised by the National Competent Authority in their home Member State before offering tokens to the public or seeking admission of these tokens to trading and will also need to establish and maintain a registered office in the Union, own funds higher than 350k or 2% of the reserve assets amount and the reserve should be segregated from the issuers own assets.

ARTs are a particularly important part of the regulation, and the European Banking Authority (EBA) will be overseeing this aspect. MiCA also mandates that ART issuers should maintain minimum liquidity to prevent depegging events such as the one observed with the downfall of the Terra ecosystem, as well as preventing other major liquidity issues. Moreover, ART issuers will need to offer to the holders of such assets a claim at any time, free of charge.

Electronic money tokens

While ARTs refer to several fiat currencies, one or several commodities or one or several cryptoassets, or a combination of such assets (the so called “reserve assets”), EMTs refer to one single fiat currency only. The Regulation notes that the definition of EMTs is purposefully broad in order to include all categories of cryptoassets that make reference to a single legal tender fiat currency.

Title IV of the regulation provides for the requirements to be fulfilled by issuers of EMTs, which amongst others are the following:

• preparation of a whitepaper,
• authorisation as e-money institution,
• EMTs to be issued and redeemed at par value,
• prohibited granting of interests to holders of EMTs,
• requirements on marketing communications.

The decision on whether to authorise EMTs should fall under the Competent authorities, with the possibility to refuse such authorisation if there is a risk to financial stability or monetary sovereignty.

Role of the competent authorities

CASPs will require authorisation to operate within the EU. As per article 93(1) of the regulation: “Member States shall designate the competent authorities responsible for carrying out the functions and duties provided for in this Regulation and shall inform the EBA and ESMA thereof.” It is further mentioned in article 96(1) that: “For the purpose of this Regulation, the competent authorities shall cooperate closely with ESMA in accordance with Regulation (EU) No 1095/2010 and with the EBA in accordance with Regulation (EU) No 1093/2010.”

Authorizations must be issued by National competent authorities (NCAs) within 40 days. NCAs will report data regarding CASPs to the European Securities and Markets Authority (ESMA).

ESMA, in cooperation with the EBA will have powers to draft regulatory technical standards even on climate and other environment related adverse impacts and to outline key energy indicators. ESMA will be further tasked with maintaining a register of all non-compliant CASPs.

The Regulation also mentions that the ECB and the national central banks should provide the NCAs, with an opinion on the risks for the smooth operation of payment systems, monetary policy transmission or monetary sovereignty.

Cryptoasset service providers

CASPs shall be authorised to provide their services in the Union and this authorisation can be withdrawn pursuant to Article 64 of the Regulation. CASPs with more than 15 million active users are classified as ‘Significant CASPs’ and will be supervised by NCAs. However, ESMA can intervene to proscribe or limit the provision of cryptoasset services by a CASP. CASPs that offer cryptoassets to third parties will be obliged to publish a whitepaper. They will also be obliged to be authorised to issue cryptoassets and comply with particular rules when they market cryptoassets. Additionally, they will be obliged to conduct themselves “honestly, fairly and professionally” with potential cryptoasset holders, with policies for conflict management and security access protocol maintenance. Cryproasset services should only be provided by legal entities/persons that have a registered office in a Member State and that have been authorised.

Title V’s articles set out the provisions on authorization and operating conditions of CASPs which amongst other are the following:

• Applications must be submitted to the competent authority of the applicant's home Member State.
• The application must include information such as the applicant's legal name, legal form, contact information, and physical address.
• A programme of operations must be included, detailing the types of crypto-asset services the applicant intends to provide and how they will be marketed.
• Proof must be provided that the applicant meets the requirements for prudential safeguards set out in the Regulation.
• The governance arrangements and management body of the applicant must be described, along with proof of their good repute and appropriate knowledge, skills, and experience.
• The identity and holdings of shareholders and members must be disclosed, along with proof of their good repute.
• Internal control mechanisms, policies, and procedures must be described, including those related to risk management, money laundering and terrorist financing risks, and business continuity.
• Technical documentation of ICT systems and security arrangements must be provided, along with a non-technical description.
• Procedures for the segregation of clients' crypto-assets and funds and complaints-handling procedures must be described.
• Policies for custody and administration of crypto-assets, operation of a trading platform for crypto-assets, exchange of crypto-assets for funds or other crypto-assets, execution of orders for crypto-assets on behalf of clients, provision of advice on crypto-assets or portfolio management of crypto-assets, and transfer services for crypto-assets must all be described.
• The type of crypto-asset to which the crypto-asset service relates must be identified.

DAOs

The Regulation applies to natural and legal persons, as well as certain other undertakings, and covers crypto-asset services and activities that are performed, provided or controlled by them, including those carried out in a decentralized manner. However, if crypto-asset services are provided in a fully decentralized manner without an intermediary, they are not covered by the regulation. However, if crypto-assets have no identifiable issuer, they will not fall under certain parts of the regulation. Nonetheless, crypto-asset service providers providing services related to such crypto-assets will be covered by this regulation.

Final Thoughts

MiCA will greatly impact market players’ ability to diversify their business through cryptoasset strategies. It will provide robust safeguards for non-regulated cryptoassets, related service providers and, of course, the consumers.

MiCa will now have to be formally endorsed by the council in May, before publication in the EU Official Journal 20 days later. Most of the provisions will become applicable 18 months later, in mid-2024. An exception to this are the requirements related to ARTs and EMTs which are expected to become applicable within 12 months of the entry into force of the Regulation.

The Regulation aims to bring greater transparency and investor protection to the rapidly evolving world of cryptocurrencies. The Regulation will provide a legal framework for issuers, offerors, persons seeking admission to trading of crypto-assets, and crypto-asset service providers, while also taking into account the unique characteristics of decentralized systems.

While some may argue that such regulations may hinder innovation and growth, it is important to strike a balance between the benefits of innovation and the need for investor protection. It remains to be seen how effective the regulation will be in achieving these goals, but it is clear that the EU is taking a proactive approach to address the challenges and opportunities presented by crypto-assets.

Vasilis Charalambous, Head of GZG Tech, George Z. Georgiou & Associates LLC