EU reaches agreement on crypto-asset regulation (MiCA)

Nearly two years after the European Commission’s initial proposal in September 2020, the Council of the European Union and the European Parliament have reached provisional agreement on the Markets in Crypto-Assets (MiCA) Regulation.

Once adopted, MiCA will create an EU wide regulatory framework for the issuance of crypto-assets and provision of related services.  MiCA forms part of the EU’s wider Digital Finance Strategy package reflecting its desire to establish itself as a key part of the global digital market. 

Summary 

MiCA will be a directly applicable EU Regulation expected to apply from 2024. As well as providing legal certainty for crypto firms and users across the EU, MiCA’s core aims are to protect investors and consumers, support innovation and promote financial stability. Following recent events in the stablecoin market and the resulting losses, stablecoins are unsurprisingly a key focus of the new rules. 

Scope

All crypto-assets that are not already regulated by an existing EU regulatory regime are within scope. This will include stablecoins (whose value is pegged to one or more commodities or fiat currencies), utility tokens and services related to unbacked crypto-assets (such as bitcoin). Financial instruments or e-money that are within the scope of existing EU financial legislation (such as the Markets in Financial Instruments Directive or the Securitisation Regulation) will not be captured by MiCA. Separate legislation is also in train to clarify the legal treatment of crypto-assets that fall outside MiCA’s remit.

The rules will apply to firms issuing crypto-assets and other crypto-asset service providers (CASPs) that wish to operate in the EU, including exchanges, custodian wallet providers and trading platforms.  

Key points

MiCA introduces a single licensing regime across the EU to regulate issuers of crypto-assets and CASPs. This will enable firms to passport their licensing and provide services throughout the EU in the same way as ‘traditional’ financial service providers do today. National competent authorities will have a three-month timeline to issue or refuse an application for authorisation.

MiCA imposes specific regulatory and prudential requirements on firms, depending on the type of crypto-asset issued, the types of service(s) provided and whether the firm exceeds certain thresholds that would make it ‘significant’. EU bodies are to have supervisory control over the largest crypto-asset firms.  

Safeguarding requirements will apply to CASPs acting as custodians of consumer or investor assets (e.g. wallet providers and exchanges) and they will be liable to customers if they lose those assets. More stringent rules are to be established in relation to stablecoins. Issuers of stablecoins will be required to maintain sufficient liquidity reserves to cover all claims and enable holders to redeem their stablecoins at any time. A daily cap of Euro 200 million will apply on the trading of a particular stablecoin.

Issuers and offerors of crypto-assets will be required to publish a white paper in relation to the crypto-assets they offer. The transparency and disclosure requirements are similar to those of a prospectus in the offering of ‘traditional’ securities to the public, enabling consumers and investors to understand the key risks associated with their investment.  

Given crypto-asset issuers and CASPs are often SMEs, MiCA does not apply the full obligations of the EU market abuse regime to crypto-assets. Instead, it introduces bespoke market abuse measures specifically including market manipulation and insider dealing obligations where crypto-assets are admitted to trading on a platform. Trading platforms will need to have adequate systems, procedures and arrangements to monitor and detect market abuse.

The European Security and Markets Authority (ESMA) will be required to maintain a public register of CASPs that do not comply with MiCA, effectively a rogue’s gallery. 

Non-fungible tokens (NFTs) which are digital assets representing objects (e.g. artworks) are out of scope for now, although the risks associated with this emerging market are being assessed over the next 18 months and the door has been left open within the Regulation to capture NFTs at a later date, if desired.

A ban on those currencies that rely on ‘proof of work’ computer processing (which require significant energy use) is off the table for now, but CASPs will be required to disclose their energy use and publish information about their impact on the environment. The European Commission has been tasked with providing a report within two years on the environmental impact of crypto-assets and the introduction of mandatory sustainability standards, including ‘proof-of-work’. 

Anti-Money Laundering (AML)

In parallel track with MiCA, the EU will extend the scope of AML information rules to include crypto-asset providers. These rules will introduce an obligation on CASPs to make available certain information about the beneficiary and originator of crypto-asset transfers, bringing the transparency obligations in relation to such crypto-asset transactions into line with ‘traditional’ wire transfer transactions.

Conclusions and next steps

Centralised EU regulation is being imposed on the crypto-sphere, which has (to date) existed as a decentralised market. MiCA has sought to introduce a sliding scale of regulation and supervision, proportionate to the degree of perceived risk a crypto firm or asset poses to consumers and financial markets. Although many will welcome this regulation, it will require some players to alter their business models in order to comply, which will inevitably prove costly and potentially difficult to navigate. 

The final text of the new Regulation is yet to be published and so we will not know its full scope and reach until then.  Whether you regard MiCA as a crackdown on crypto, or a catalyst to strengthening its position in mainstream finance, it will permanently alter the crypto landscape across the EU and there can be no doubt that European lawmakers are positioning themselves to be front and centre in the regulation of this dynamic market.  Time will also tell how the UK reacts to MiCA and we will continue tracking this over the coming months.

Authors: Alex Williamson, Jo Croston

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2022. Specific advice should be sought for specific cases. For more information see our terms & conditions.