On September 25, 2020, the European Commission (European Commission) released a draft bill called "The Markets in Crypto-assets Regulation (MiCA)", which aims to create a comprehensive and unified regulatory framework for crypto assets in the EU. The bill is part of the EU's Digital Finance Strategy package at the macro level, and is also the first legislative initiative at the EU level to establish a comprehensive regulatory framework for crypto assets, covering issues ranging from the definition and classification of crypto assets, issuance and trading access, crypto asset market service providers, prevention of crypto asset market abuse, and protection of investor rights.
After nearly two years of legislative procedures, on October 10, 2022, the European Parliament Committee on Economic and Monetary Affairs preliminarily approved MiCA, paving the way for the subsequent adoption of the bill in the European Parliament plenary session. MiCA is expected to come into effect in early 2024.
MiCA is a landmark legislation that aims to create a unified regulatory framework for the crypto asset market in the EU and fill the gaps in the current EU financial regulatory framework. Once passed, MiCA will herald the arrival of an era of unified regulation of the crypto asset market, which will replace all regulatory provisions on crypto assets within the EU member states (MiCA is a "Regulation" in the EU legislative hierarchy, and the Regulation has direct legal effect on EU member states). This will also provide a regulatory framework and ideas for legislators in different jurisdictions around the world, accelerating the transition of the global crypto asset market from the "wild growth" stage to the "legal era".
1. Scope of application of MiCA KEY TAKEAWAYS
Once formally approved, MiCA will develop unified definitions (at EU level) of key terms for all activities related to the crypto-asset market in order to standardize supervision. In general, MiCA mainly regulates: (i) various types of crypto-assets; (2) various types of crypto-asset services and service providers.
MiCA has made a broad definition for crypto-assets, that is, a digital representation of a value or a right that may be transferred and stored electronically using DLT or similar technology. Depending on whether the crypto-assets need to be anchored to the value of other assets, MiCA classifies crypto-assets into Electronic-Money Tokens (EMTs), Asset-Reference Tokens (ARTs) and other crypto-assets.
1. EMTs, crypto assets that anchor their value by referencing a single fiat currency, are a type of “stablecoin.” Like traditional electronic money, EMTs are electronic substitutes for physical money and are mostly used for payment purposes.
2. Asset Reference Tokens (ARTs), which are crypto assets that anchor their own value by referencing other valuable assets, equities, or a combination of both (including one or more fiat currencies). ARTs include all “stablecoins” except EMTs, such as USDT, USDC, BUSD, etc.
3. Other crypto assets, i.e. all other crypto assets except ARTs and EMTs.
（from EU Markets in Crypto-Assets (MiCA) Regulation Expected to Enter into Force in Early 2023, Mayer Brown）
MiCA will fill the gaps in the current EU financial regulatory framework and establish a regulatory framework for crypto assets, applicable to all entities involved in the Issuance of Crypto-assets and the provision of crypto-asset related services in the EU. MiCA stipulates the following unified rules:
Transparency and disclosure requirements for crypto-asset issuance and trading access; Authorization and supervision of crypto-asset service providers and issuers; Operational, organizational and governance rules for asset-referenced tokens, electronic-money tokens and other crypto-asset service providers; Crypto-asset consumer protection rules; Measures to prevent market abuse and ensure the integrity of the crypto-asset market.
Similar to the federal and state regulatory levels in the United States, MiCA's regulators at the EU level are the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), while the European Central Bank (European Central Bank) will serve as one of the regulators of stablecoins. At the national level, each member state's designated regulatory agency will manage and cooperate with MiCA to implement it.
MiCA does not apply to NFTs because their value cannot be measured by the same means or the same assets in the market. Unless MiCA considers that the characteristics or uses of NFTs should be identified as crypto assets based on a substance-over-form approach. The European Commission will be authorized to submit a report 18 months after MiCA comes into effect to assess the potential for regulating NFTs.
MiCA does not apply to DeFi, as long as DeFi services are fully decentralized (in a fully decentralised manner) and without any third party involvement. MiCA did not further elaborate on the definition of "fully decentralized", which is still a bit vague for DeFi projects. In addition, according to Patrick Hansen, Circle's EU Strategy and Policy Director, the European Commission has publicly tendered for the "Embedded Supervision of DeFi on Ethereum" study, which aims to study the ability to automatically read public chain data and cooperate with supervision to control DeFi.
2. MiCA for the issuance of encrypted assets
MiCA will regulate the issuance of crypto assets to the EU public, requiring crypto asset issuers to be incorporated as a legal entity in the EU member states and publish their white papers before issuance, detailing the proposed crypto assets and communications with regulators. MiCA will also develop marketing compliance systems applicable to the issuance and trading of crypto assets, as well as codes of conduct for crypto asset issuers such as honesty, fairness, professionalism, and responsibility to regulate the activities of crypto asset issuers entering the trading stage after issuance. In addition, crypto asset issuers also need to consider the relevant laws and regulations applicable to the member states where they are located, such as the requirements of the EU Anti-Money Laundering Directive.
For stablecoins, ARTs are subject to stricter regulatory requirements than EMTs because ARTs are considered to be more likely to pose a potential threat to the monetary stability of the European Union. Before being publicly issued or traded on an exchange, the issuer needs to register in an EU member state and apply for prior approval from the local regulator. The issuance application must include: (i) detailed information of the issuer, including organizational structure, business model, governance model, internal control measures and risk control measures, own capital requirements, conflicts of interest, asset reserves, asset custody, etc.; (ii) legal opinion on ARTs; (iii) issuer organizational documents; (iv) ART white paper. After receiving the issuance application, the local regulator will seek opinions from ESMA, EBA, the EU crypto asset market regulator, and ECB, the EU monetary regulator. After obtaining issuance approval, ARTs issuers are also required to regularly fulfill their reporting obligations to the regulator regarding trading customers, transaction amounts, reserves, etc. At the same time, MiCA also requires ARTs issuers to establish sufficient liquidity reserves in the form of a certain ratio or deposits to protect consumers. The reserves need to match the full value of their claims to prevent liquidity risks such as "bank runs".
MiCA also distinguishes between significant asset-referenced tokens and significant e-money tokens, which will be directly subject to stricter supervision by the EBA because they may have a more profound impact on financial markets and sovereign currencies.
Some people believe that MiCA's regulation of stablecoins is too strict. Once MiCA comes into effect, all stablecoins on the existing market must obtain approval from regulators before they can be traded in the EU, further increasing the compliance costs of stablecoin issuers and service providers. In addition, key ARTs and key EMTs will be restricted in the number and volume of daily transactions. According to Dune data on December 5, 2022: "Currently, USDT accounts for 30.9% of the stablecoin market, USDC accounts for about 29.7%, and BUSD accounts for about 21.1%." Considering that the three major stablecoins currently account for more than 80% of the trading market volume, once MiCA restricts mainstream stablecoins anchored to the US dollar in order to maintain sovereign currencies, it may hinder the competitiveness and innovation potential of the EU crypto asset market.
3. MiCA for Crypto Asset Service Providers
MiCA may have the most extensive impact on crypto-asset service providers and market participants. MiCA requires that crypto-asset services can only be performed by legal persons and obtain a license as a crypto-asset service provider in accordance with MiCA. In addition, they need to comply with a series of codes of conduct, such as information reporting system, business restriction system, etc. Any entity that wants to engage in crypto-asset services in the EU needs to obtain service provider qualifications. The benefit is that once a crypto-asset service provider is approved, it will be able to cover 27 EU countries and 450 million people, just like the EU's "Schengen" passport visa. Similarly, MiCA also has further strict regulatory requirements for significant crypto-asset service providers.
Crypto-asset services include: asset custody services, crypto-asset trading platform operations, currency exchange services, brokerage services, investment advisory services, crypto-asset management, etc. In order to avoid conflicts with the current EU financial regulatory framework, MiCA will not apply to European financial institutions that have already been regulated, such as credit institutions, investment companies, market makers, electronic money institutions, asset management companies, etc.
IV. Impact and significance of MiCA
Before MiCA, crypto assets were defined as qualified financial instruments (QFI’s) in the EU, and EU law did not prohibit financial companies from holding, trading, and providing crypto asset-related services. Entities engaged in QFI’s transactions are regulated at the member state level and can simply rely on existing QFi licenses to provide crypto asset-related products and services in a single member state, which greatly limits the scale development of crypto companies. At the same time, crypto companies must also comply with numerous vaguely defined EU financial laws and regulations in a single member state, including AML/CTF, CRD/CRR, EMD2, MiFID II, PSD2, compensation, margin, deposit and sanctions obligations, etc.
After MiCA, there are four main purposes: to establish a dedicated legal framework for crypto assets and ensure regulatory transparency; to support innovation and fair competition; to protect the interests of small and medium-sized investors and the stability of the crypto market; and to maintain financial stability. We can see that the EU will directly form a large crypto asset market that radiates to 27 countries and 450 million EU population based on the unified crypto asset regulatory framework of MiCA!
As Martin Bruncko, Binance Europe executive, said: "Europe's previous regulation of crypto assets was fragmented, with 27 member states having their own regulations, which made it difficult for crypto companies operating in the EU to meet full compliance in many jurisdictions. The emergence of MiCA is good news because it is creating a single market. MiCA's positive significance for the development of the crypto industry far outweighs its negative significance. A large and regulated market is more conducive to the development of crypto assets, and smaller cryptocurrency exchanges and start-ups may benefit more from MiCA."
There is no doubt that the impact of MiCA is huge. From MiCA, we can see that the EU focuses more on the "comprehensive and comprehensive" top-level regulatory framework in the regulatory model. From a business perspective, MiCA makes clear basic provisions for crypto assets and crypto asset service entities based on it, and first solves the main contradictions of crypto assets (especially stablecoins). On this basis, it will gradually expand to NFT, DeFi, smart contracts, DAO and other fields, and strengthen the supervision of crypto assets step by step in a step-by-step manner. From a legislative perspective, MiCA is just the beginning. The EU's Digital Finance Strategy package (which also includes legislation to adjust the EU financial institution organization to adapt to the digital age, the Funds Transfer Regulation (TFR) on anti-money laundering, the Digital Operational Resilience Act (DORA) for cybersecurity legislation for crypto entities, pilot DLT projects, and regulatory sandboxes that will allow market participants to experiment with the use of cryptocurrencies in a regulated environment) will be gradually launched to ensure that the EU is in line with the development model of the digital age and further develop and support the potential of digital finance in innovation and competition. This series of measures will make the EU's regulatory framework in the crypto asset market clearer and more certain. On the one hand, it will avoid imposing too many restrictions on innovative activities that would lead to loss of market vitality, while maintaining the competitiveness and innovation potential of the EU crypto market. On the other hand, it will also be able to summarize regulatory experience on the basis of MiCA, regulate the market more rationally, protect the rights and interests of investors, and maintain financial market stability.
Reference：
1. As global regulation strengthens, how powerful is the EU-led MiCA bill?
https://research.huobi.com/#/ArticleDetails?id=347
2.Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020PC0593
3.How Will the EU Markets in Crypto Assets Regulation Affect Crypto and Other Financial Services Firms?
https://www.sidley.com/en/insights/newsupdates/2022/11/how-will-the-eu-markets-in-crypto-assets-regulation-affect-crypto-and-other-financial-services-firms
4.Regulating crypto-assets in Europe: Practical guide to MiCA
https://www.nortonrosefulbright.com/en/knowledge/publications/2cec201e/regulating-crypto-assets-in-europe-practical-guide-to-mica
5.CRYPTO REGULATION: THE INTRODUCTION OF MICA INTO THE EU REGULATORY LANDSCAPE
https://www.cliffordchance.com/briefings/2022/12/crypto-regulation--an-introduction-of-mica-into-the-eu-regulator.html