Introduction

On 30 June 2022, the Council of the European Union (EU) announced1 that the Council presidency and the European Parliament reached a provisional agreement on the proposed markets in crypto-assets regulation (MiCA). More details here. The aim behind the proposed regulatory framework is to bring legal and regulatory certainty for crypto-asset operators across the EU.

Background

MiCA forms part of the Digital Finance Package proposed by the European Commission (EC) to fulfil its Digital Finance Strategy, which aims at developing a holistic approach across the EU to foster innovation, whilst ensuring financial stability and consumer protection. The Digital Finance Strategy sets out to ensure “same activity, same risks, same rules”, and hence traditional financial services market players and FinTechs and BigTechs providing payment services, savings and investment products, and insurance, amongst others, should all be subjected to the same regulations and supervision.

Through the package, the EC aims to bridge the gap prevailing in existing EU legislation by ensuring on one side that the current frameworks do not hinder the development of digital finance and on the other side that emergent technologies and new products falling within the scope of financial regulation are regulated and supervised appropriately.

Timeline of events

Highlights of the provisional agreement on the MiCA text

MiCA is expected to:

  • introduce an EU-wide requirement for the authorisation of crypto-asset service providers (CASPs) to operate within the EU; require National competent authorities (NCAs) to issue authorisations within three months;
  • require NCAs to regularly transmit relevant information regarding the largest authorised CASPs to the European Securities and Markets Authority (ESMA);
  • provide European passporting rights for authorised CASPs;
  • establish requirements in relation to the protection of consumer wallets and liability for loss of consumer’s crypto-assets;
  • introduce market abuse requirements to deter market manipulation and insider dealing in relation to crypto-assets;
  • cover disclosures relating to environmental and climate footprints. ESMA has been mandated to develop draft regulatory technical standards in this regard;
  • not to duplicate the anti-money laundering provisions as set out in the newly updated transfer of crypto-asset rules agreed on 29 June 2022, to avoid overlaps. This notwithstanding, the European Banking Authority (EBA) has been mandated to maintain a public register of non-compliant CASPs;
  • protect consumers by introducing requirements requesting stablecoin issuers to build liquid reserves, with a 1:1 ratio, partly in the form of deposits. Furthermore, such stablecoins will be supervised by the EBA, and jurisdictional presence of the issuer in the EU will be a pre-condition for any such issuance;
  • regulate the development of asset-referenced tokens (ARTs) based on a non-European currency as a widely used means of payment, with the aim to preserve the EU’s monetary sovereignty. Issuers of ARTs will similarly need to be located within the EU to enable proper supervision of public offers of ARTs; and
  • exclude from its scope non-fungible tokens (NFTs) unless they fall under existing crypto-asset categories. In the coming months the EC will be tasked to prepare an assessment and create a specific regime for the regulation of NFTs to address any emerging risks in the area, if deemed necessary.

What’s next?

The provisional agreement is subject to the approval of the Council of the EU and the European Parliament, prior to the formal adoption procedure. It is anticipated that the updated text will be released in the coming months, with implementation expected by 2024.

A Maltese perspective

Malta was one of the first jurisdictions to introduce a framework to regulate crypto-asset activity back in 2018. The Virtual Financial Assets (VFA) Act and its underlying framework sought to bring about legal and regulatory certainty for operators wishing to issue or provide services in relation to assets that are intrinsically dependent on, or utilise, Distributed Ledger Technology, in or from Malta. Having a regulatory framework governing crypto-asset activity puts the Maltese jurisdiction in an expedient position to adopt MiCA and transition pragmatically from a home-grown regime to a European one.