The European Union will, for the first time, have a regulatory framework for cryptocurrencies, cryptocurrency issuers, and cryptocurrency service providers. What will change in the European cryptocurrency market when the MiCA regulation comes into effect?
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WHAT IS THE MARKET IN CRYPTO-ASSETS (MICA) REGULATION?
MiCA (Market in Crypto-Assets) is a regulation that is part of a broader package related to digital finance. The entire package is designed to support technological development at the European level while ensuring financial stability and consumer protection.
The main purpose of the regulation is to protect consumers from certain risks associated with investing in crypto assets and help to avoid fraudulent mechanisms. You can find detailed documents on MiCA here.
Currently, consumer rights to protection or compensation are limited, especially when transactions take place outside the European Union. Currently, each EU member state regulates this matter independently. Under the new rules, cryptocurrency service providers will have to comply with strict requirements for protecting consumer wallets. They will also be responsible to investors for lost crypto assets.
WHAT DOES MICA REGULATE?
MiCA will apply to entities involved in the issuance of crypto assets or providing services related to crypto assets in the European Union. It is supposed to apply directly throughout the European Union without the need for the national implementation of legislation. The tripartite agreement between the Council Presidency, the European Commission, and the European Parliament primarily concerns:
transparency and disclosure requirements for the issuance of crypto assets, as well as accepting crypto assets for trading,
authorization of providers of crypto asset services, issuers of tokens linked to assets, and issuers of electronic money tokens,
oversight of issuers,
issuers of tokens linked to assets, issuers of tokens that are electronic money, and providers of services in the field of crypto assets, as regards their activities, the organization of their activities, and the rules of conduct they apply,
regulation on consumer protection for investing in cryptocurrencies,
measures to prevent abuse in the crypto asset market.
WHAT CRYPTOCURRENCIES WILL MICA COVER?
MiCA is intended to regulate all types of cryptocurrencies that fall within the established definition of crypto assets, which are "digital representations of value or rights that can be transferred and stored electronically using distributed ledger technology or similar technology."
What will change in the EU after MiCA comes into effect in 2024?
The regulation created three subcategories of crypto assets. This chapter is sometimes referred to as a significant milestone in understanding crypto assets at the level of EU regulations. MiCA distinguishes between:
Utility tokens - a type of crypto asset that is intended to provide digital access to a specific good or service available on a distributed ledger technology and is only accepted by the issuer of the token. These assets are not treated as money but as a right to a future product or service. Investors can buy tokens and use them as a payment method on the platform developed by the issuer.
Tokens linked to assets (stablecoins) - a type of crypto asset that is designed to maintain a stable value by being linked to the value of a range of fiat currencies that are legal tender, one or more commodities, one or more crypto assets, or a combination of these assets. Stablecoins will be under the supervision of the European Banking Authority, and only issuers from the European Union will be allowed to issue them.
Tokens in the form of electronic money - a type of crypto asset that is primarily intended to be used as a means of exchange and designed to maintain a stable value by being linked to a fiat currency as legal tender. These are cryptocurrencies whose primary purpose is to use as a means of exchange and maintain value in relation to the value of fiat currency.
INTRODUCTION OF THE PUBLIC OFFERING REQUIREMENT AND WHITEPAPER
One of the basic assumptions of the MiCA regulation is the introduction of a public offering requirement for the offering of crypto assets. Depending on the types of tokens, MiCA imposes different obligations on issuers. However, the common responsibility of issuers will be to make a document containing the basic and most important information about the project (whitepaper) accessible to the public, which is already happening, but the amount of information provided varies.
MiCA regulation aims to standardize the appearance and content of such an informational document. However, the information document will not be necessary if the total value of the offer of crypto assets does not exceed 1 million EUR within 12 months or if they are offered for free, the offer is intended for qualified investors, and also fewer than 150 natural or legal persons.
The least restrictions are to be imposed on issuers of utility tokens. They undertake to provide investors with complete, clear, accurate, and non-misleading information through marketing materials and the so-called information document. The information document requires notification to the relevant authorities.
For issuers of electronic money and tokens linked to assets, issuers will face greater restrictions and will have to:
obtain permission from the relevant authority to submit a public offering of crypto assets. It will not be required for public offers of crypto assets if the average value of tokens does not exceed 5 million EUR for a period of 12 months or if the offer is intended only for qualified investors,
prepare and publish an information document in accordance with the standards set out in the regulation on offered crypto assets,
prepare marketing materials in detail and accurately labeled, in which information will be presented in a reliable, clear, and non-misleading manner,
introduce appropriate liquidity management mechanisms,
have an internal policy, as well as rules for its regulation and appropriate organizational structure. Members of the issuer's statutory body will have to demonstrate, among other things: relevant experience and knowledge,
implement an effective mechanism for conflict of interest management, identification, and disclosure,
have sufficient own resources and reserve assets.
INTRODUCTION OF NEW DEFINITIONS
MiCA regulation also provides for the possibility of a temporary deviation from its provisions regarding entrepreneurs who intend to test some business models (in the initial phase) under the supervision of the relevant supervisory authorities.
MiCA also introduces a number of new definitions related to the cryptocurrency industry. It defines, for example, crypto assets, crypto asset services, crypto asset service providers, and the operation of a platform for trading in crypto assets.
Crypto assets, according to MiCA, are:
Digital representations of values or rights that can be transferred and stored electronically using distributed ledger technology or similar technology.
But is this definition filling a long-standing gap? It's hard to say, but of all the previous definitions, it certainly comes closest.
A crypto asset service in the MiCA regulation is defined as any service or activity related to any crypto assets, such as:
Storage and management of crypto assets on behalf of third parties,
Operation of a platform for trading in crypto assets,
Exchange of crypto assets for legal tender,
Exchange of crypto assets for other crypto assets,
Execution of orders related to crypto assets on behalf of third parties,
Subscription of crypto assets,
Receipt and transmission of orders related to crypto assets on behalf of third parties,
Provision of advice on crypto assets.
On the other hand, a crypto asset service provider is defined as:
Any person whose professional or business activity consists of professionally providing at least one crypto asset service to third parties.
And the operation of a platform for trading in crypto assets, according to the MiCA regulation, is defined as:
The operation of one or more platforms for trading in cryptographic assets, where multiple third-party interests related to the purchase and sale of crypto assets can interact to create a contract, either by exchanging one crypto asset for another or by exchanging crypto assets for legal tender.
CRYPTOCURRENCY EXCHANGES
MiCA regulation will bring significant changes to traders dealing with cryptocurrencies. Economic activity in the form of exchanging crypto assets for fiat currency is defined in Article 3 of MiCA as concluding contracts with third parties for the purchase or sale of crypto assets in fiat currency, which is legal tender, using its own capital.
Under the new regulations, operating a business as a provider of cryptocurrency services will require permission.
Only legal entities domiciled in an EU member state will be able to apply for permission to provide services in the field of crypto assets. To obtain permission to operate a cryptocurrency exchange, the relevant member authority (where it is domiciled) will need to submit an application containing the following information:
name, including the legal name and any other trade name to be used, as well as the identifier of the legal person providing the crypto asset service, the website operated by the provider, and their physical address,
the legal status of the service provider,
the company's service provider statutes,
an action program specifying the types of crypto asset services the service provider intends to provide,
a description of the service provider's governance measures,
for all individuals on the management board of the crypto asset service provider applying for permission, and for all individuals who directly or indirectly hold at least 20% of the share capital or voting rights, a certificate of good conduct for violations of domestic law rules for crypto asset business law, insolvency law, financial services law, anti-money laundering law, counter-terrorism law, and professional liability obligations,
confirmation that individuals involved in the work of the management board of the service provider have sufficient knowledge, skills, and experience to manage and are required to devote sufficient time to perform their duties together,
a description of the internal control mechanism,
a description of IT systems and security solutions,
information confirming that the service provider has prudent protection in accordance with Article 60,
a description of the procedures used by the service provider in handling customer complaints,
a description of the procedure for mining crypto assets and client funds,
a description of the procedure and system for detecting market abuse,
a description of the storage principles if the service provider intends to provide storage and management of crypto assets on behalf of third parties,
a description of the rules for operating a trading platform if the service provider intends to operate a platform for trading in crypto assets,
a description of the non-discriminatory trade policy if the service provider intends to exchange crypto assets for fiat or other crypto assets,
a description of the procedures for executing orders if the service provider intends to execute orders for crypto assets on behalf of third parties,
confirmation that individuals providing advice on behalf of the service provider have the necessary knowledge and experience to perform their duties if the service provider intends to accept and transmit orders for crypto assets on behalf of third parties.
As you can see, preparing an application for a license to operate a cryptocurrency exchange can be a significant challenge in itself. After submitting the application, the relevant authority will have 25 days to formally assess it, during which time the entity applying for permission may expect a request to rectify any formal deficiencies. The authority will then evaluate the application within three months and issue the appropriate decision based on it.
It should be noted that the license itself may be revoked in several cases. For example, if you do not use your license within 18 months or if you do not provide crypto services for 9 months.
In addition to the above general premises, the MiCA regulation also sets rules for exchanging cryptocurrencies for fiat currencies. Providers of these services will first need to introduce a non-discriminatory trade policy.
Furthermore, it will be necessary to disclose the prices of crypto assets or how prices are determined. Exchange orders will be executed at the price quoted at the time of acceptance. This means that provisions allowing for changes in the exchange rate during the transaction will be invalid. In addition, providers will be required to disclose details of their orders and transactions, including transaction volumes and prices.
ENVIRONMENTAL AND CLIMATE FOOTPRINT
The impact of blockchain technology on the environment will be included in the MiCA regulations. Entities operating in the cryptocurrency market will have to ensure that their technology is climate-friendly in line with the goals of the EU's Green Deal and provide information on their environmental and climate footprint.
The European Securities and Markets Authority (ESMA) will develop proposals for regulatory technical standards for the content, methodology, and presentation of information related to the main negative impacts on the environment and climate. Within 2 years, the European Commission will have to submit a report on the impact of cryptocurrencies on the environment and the introduction of mandatory minimum sustainability standards for consensus mechanisms. These standards will serve as guidelines for entities in the cryptocurrency market.
The environmental impact has long been a controversial issue in the cryptocurrency industry because the Proof of Work (PoW) consensus mechanism of popular blockchains such as Bitcoin (BTC) causes high energy consumption. There were rumors in the past that the European Union could ban PoW consensus mechanisms, which would effectively ban the use of BTC and completely upend the industry. However, that did not happen.
MICA AND NFTS
Non-fungible tokens (NFTs) are currently excluded from the scope of MiCA regulation, unless they fall into existing classes of crypto assets. However, the European Commission will have to further assess the situation within 18 months of the entry into force of MiCA regulation. If necessary, a supplementary legislative proposal will be prepared to establish a regulatory regime specifically for NFTs.
The regulation also designates entities to which this legal action will not apply. This document does not apply to:
The European Central Bank, the national central bank of Member States, acts as monetary or other authority in the public interest.
Insurance or reinsurance undertakings, as defined in Directive 2009/138/EC, when carrying out activities referred to in that Directive.
Liquidators or administrators acting in the context of insolvency proceedings, except for the purposes of Article 42.
Persons providing crypto asset services exclusively to their parent companies, their subsidiary undertakings, or other subsidiary undertakings of their parent companies.
The European Investment Bank.
The European Financial Stability Mechanism and the European Stability Mechanism.
Public international organizations.
Right to withdraw consent for purchasing crypto assets
MiCA regulation also includes an important provision that every consumer has the right to withdraw consent for purchasing crypto assets. The consumer has 14 days from the date of consent to their purchase, after which all payments are refundable. This is undoubtedly a gesture from the EU legislator towards consumers. However, this right does not apply to the situation where crypto assets have been accepted for trading on a crypto asset trading platform.
In addition, MiCA will regulate issues such as cooperation between supervisory authorities, such as the European Banking Authority or the European Securities and Markets Authority.
These are not all the requirements that entrepreneurs dealing with crypto assets will be subject to. Given the number of new requirements and their complexity, preparations for a smooth entry into the new regulatory reality should begin as soon as possible. The requirements contained in the MiCA regulation may pose a significant obstacle to the entry into these markets and are likely to generate high costs for such entry, including those related to legal and economic advice. Ultimately, they may contribute to the departure of crypto asset providers to more friendly legal jurisdictions.
WHEN WILL MICA COME INTO EFFECT?
The Council adopted its negotiating mandate on MiCA on November 24, 2021. Talks between co-legislators began on March 31, 2022, and concluded with a preliminary agreement on June 30, 2022.
Of course, the agreement reached on June 30 does not mean that the proposed new EU regulation for cryptocurrencies will quickly come into effect. The Council of the European Union and the European Parliament must formally approve their consensus.
MiCA will then be published in the Official Journal of the European Union. The next stage is an 18-month transitional period, after which the above proposals will become binding EU law.
WHAT IS THE DLT REGULATION?
The purpose of the DLT Regulation is to create conditions for the provision of services for the purpose of trading in financial instruments using distributed ledger technology. This is in response to market demands that existing EU and national regulations for these services do not allow for their provision based on DLT without legal risk.
Since the regulation provides for significant deviations from current requirements, which violates the principle of technological neutrality of legal norms, the scope of the regulation tools is limited.
WHAT IS DORA?
DORA is part of the digital finance package announced by the European Commission. Their purpose is to regulate the management of the broadly defined area of ICT (information and communication technology) by financial institutions.
WHICH ENTITIES WILL HAVE INTERVENTION POWERS?
Both the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) will have intervention powers to prohibit or limit the provision of services to providers of virtual asset services, as well as marketing, distribution, or sale of cryptocurrency assets, where investor protection, market integrity, or financial stability are threatened.
ESMA will determine the registration of entities based in third countries operating in the EU without permission based on information provided by relevant authorities, third-country supervisory authorities, or identified by ESMA. The relevant authorities will have far-reaching powers over entities registered in the register.
Although the final form of the regulation has not yet been decided, its final version will certainly not differ significantly from this proposal.
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