The Markets in Crypto-assets regulation (“MiCA” or the “Regulation”) has finally become a reality following its approval by the European Council on October 5, 2022. It is expected that MiCA will be ratified and published in the Official Journal in Q1 2023 (entry into force 20 days later) with most regulations due to apply 12-18 months from its entry into force offering a substantial grace period. Once it enters into force it will establish a harmonized crypto regulatory framework at the European Union (the “EU” or the “Union”) level and will become the first pan-national instrument worldwide that will lay down a regulatory framework for crypto assets issuers and crypto assets service providers as well as certain types of crypto assets in general.
The EU is undoubtedly proving to be ahead of the curve when it comes to crypto-assets seeking to bring crypto-assets markets within scope of financial services regulation by allowing for innovation in a way that focuses on financial stability, market integrity and investor protection.
MiCA broadly applies to centralised organisations providing crypto services to residents of the EU. Nevertheless, there are some exceptions and areas which fall outside its scope. We have highlighted the following:
MiCA does not cover crypto-assets regulated by other EU financial law instruments; therefore, crypto-assets that qualify as financial instruments, such as security tokens or electronic money (excluding e-money tokens) will fall outside the scope of MiCA.
1. Classification of crypto-assets and highlights of associated regulations
MiCA makes three clear distinctions of crypto-assets and establishes three distinct frameworks for such crypto-assets, as follows:
- Asset Reference Token (“ART”) – a token aimed to maintain a stable value via referencing/backed by one or more assets. Typically, a combination of assets (for example, a token referring to gold, or to several currencies or to other crypto-assets).
- E-Money Token (“EMT”) – electronic surrogates for coins and banknotes and are likely to be used for making payments. A key characteristic being backed by an official State currency.
- Other Crypto-Asset – a digital representation of value or rights which may be transferred and stored electronically (any other crypto-assets which is not excluded in the above-mentioned list of exemptions).
It is worth to mention that in case ART or EMT is classified as “significant”, specific provisions and additional regulatory burdens are pertinent with classification being applied on transaction volume and frequency metrics.
2. Other Crypto-Assets
Crypto-Asset Issuers (“CAI”s) are required to follow a set of requirements before they can be offered to the public, including:
- Draft Whitepaper;
- Publish and provide to local authority (with drafted marketing comms if applicable);
- Adhere to good conduct, organisation and technical requirements.
The respective trading platform where the crypto-asset is offered is required to ensure the whitepaper has been published and disseminated. Prior to the publication, no marketing communications may be disseminated.
It is worth highlighting that crypto-assets, which have been issued prior to the application of MiCA should be exempt from the obligation to publish a whitepaper and other requirements (set out in Title II).
CAIs are not required to wait for approval prior to making a crypto-asset offer to the public. However, national competent authorities have the power to request amendments to the whitepaper and any marketing communication. Furthermore, where necessary, they may also request inclusion of additional information.
3. Asset Reference Tokens
MiCA makes specific reference to Issuers of asset-referenced tokens, who are subject to more stringent requirements than other crypto-assets due to the increased risks they pose. Algorithmic ‘stablecoins’ (as well as algorithmic crypto-assets) are also covered by the Regulation.
Issuers of ARTs are required to be established in the EU and their whitepapers are required to approved by the national competent authority prior to being offered to the public. This does not; however, apply when an ART being offered solely to qualified investors or when the offer to the public is below a set threshold. It is also prohibited to offer yield/interest in order “to reduce the risks that ARTs are used as a store of value”.
4. E-Money Tokens
Issuers of EMTs are required to be authorised as either (a) a credit institution or (b) electronic money institution and publish a whitepaper notified to the national competent authority. Consequently, the Electronic Money Directive will be applicable to the Issuers of EMTs as well. However, no authorization will be required for the Issuers of small offers (less than EUR 5 million in the EU).
It will no longer be possible to offer yield/interest on stablecoins. Furthermore, any discount/reward/compensation for holding e-money tokens will be seen as offering interest.
5. Significant ARTs and EMTs
Holders of significant ARTs and/ or EMTs may face some restrictions on using these tokens as means of payment and settlement which are not referencing the Euro or other official currency of a Member State. A provision is in place for a cap of 200 million transactions per day for payment settlements. One is to note that there are exceptions for trading.
Issuers of significant ARTs and/ or EMTs are subject to higher capital requirements as well as interoperability requirements and are obliged to have in place liquidity management policy and procedure. The European Banking Authority (the “EBA”) will jointly supervise compliance with the national competent authority. The joint supervision is unusual and is in place to address the very specific risks emanating from these tokens.
6. Submission of Whitepaper and other Requirements for Crypto-Asset Issuers
In order for the CAI to make an offer to the public of crypto-assets (other than asset-referenced or e-money token) in the EU or to seek an admission of such crypto-assets to trading on a trading platform, such Issuer has to perform the following among others:
- draft a crypto-asset whitepaper, describing technical information to potential customers drawn up in at least one official language of the home Member State (or any other Member State);
- must publish such crypto-assets whitepaper on the website;
- provide registration information about the legal entity as well as its financial condition (review) for past 3 years and details of all natural or legal persons involved in the project;
- provide brief description of the project and characteristics of the token, key features/information regarding any utility together with information on ‘Tokenomics’;
- hand over information about past and future milestones (business plan) including planned use of funds;
- provide disclosures on risks and reasons for seeking admission to trading platforms (if applicable);
- specify any restrictions on transferability.
As regards to the drafting and publishing of a whitepaper, MiCA exempts CAIs from such obligation, if their offering relates to an offer to fewer than 150 natural or legal persons per Member State or the total consideration of such offer does not exceed EUR 1 million as well as offerings addressed to qualified investors only.
The above requirements mainly relate to ‘other’ crypto-assets, whereas more extensive requirements are in place for ARTs and EMTs with various policies required to be attached to the whitepaper, further disclosures, safeguarding of reserves and internal controls.
7. Crypto-Asset Service Providers
Only legal persons that have a registered office in an EU Member State and have obtained an authorization from the relevant national competent authority as Crypto-Asset Service Provide (“CASP”) in accordance with MiCA will be permitted to provide services in crypto-assets. An authorization in one Member State will be valid for the entire EU, in accordance with a “passporting” mechanism familiar from other pieces of European markets legislation.
All CASPs will be obliged to follow specific requirements for (a) custody and administration of crypto-assets and (b) trading platforms.
Moreover, CASPs will be subject to general rules, as follows:
- Act fairly and in the interest of clients;
- At least one Director to be a resident in the EU;
- Place of effective management in the EU;
- Members of management and qualifying shareholders (10%) to be fit and proper;
- Prudential & organisational requirements;
- Safekeeping of assets and funds;
- Complaint handling procedures;
- Preventing, managing conflicts of interests;
- Outsourcing requirements;
- Other policies including orderly wind-down.
Entities offering custody are required to establish a custody policy with segregated holdings, daily reporting of holdings and have liability for loss of client’s crypto-assets in the event of malfunctions or cyber-attacks. Moreover, CASPs will be obliged to place clients’ funds received with a central bank or credit institution (exemption for e-money) at the end of every business day.
MiCA introduces the following ten categories of crypto-assets services and activities, which will trigger a licensing requirement for the CASP:
- custody and administration of crypto-assets on behalf of third parties;
- operation of a trading platform for crypto-assets;
- exchange of crypto-assets for funds;
- exchange of crypto-assets for other crypto-assets;
- execution of orders for crypto-assets on behalf of third parties;
- placing of crypto-assets;
- providing transfer services for crypto-assets on behalf of third parties;
- reception and transmission of orders for crypto-assets on behalf of third parties;
- providing advice on crypto-assets;
- providing portfolio management on crypto-assets.
Furthermore, trading platforms are required to develop operating rules, technical measures and procedures to ensure resilience of the trading system with final settlement taking place within 24 hours.
In addition, MiCA lists certain minimum capital requirements depending on the Class of CASP:
MiCA in its current form is light on technical requirements, its noted that the EBA and the European Securities and Markets Authority (the “ESMA”) have been entrusted with developing the draft technical standards to be adopted throughout the Union. An updated framework of Anti-Money Laundering requirements is also expected.
MiCA will grant additional enforcement powers to national competent authorities including suspend its offering of services, make a public notice that the CASP is failing compliance, suspend advertisements, invite auditors, issue fines as well as issue bans on members of management.
CASPs providing services in accordance with the law prior to MiCA’s entry into force may continue to do so for another 18 months from the date of entry into force.
Considering that the regulatory framework for the Virtual Financial Assets (the “VFA”s) service providers in Malta is considerably similar to the regulatory framework of CASPs under MiCA, such similarity would allow VFA service providers licensed under the Maltese VFA Act to transition seamlessly from their current Malta licence to the EU MiCA compliant licence giving them a competitive advantage over other entities established in other EEA jurisdictions once MiCA comes into force. It will also allow peace of mind and legal certainty during the 18-month transition period offered by MiCA.