A year has passed since the Markets in Crypto-Assets (MiCA) regulation was approved by the European Parliament. The implementation of the first two titles is imminent at the end of June 2024, with the remaining parts to be enforceable by the end of the year.
What is the Markets in Crypto-Assets Regulation?
In brief, the Markets in Crypto-Assets Regulation (MiCA) (Regulation (EU) 2023/1114) is a law issued by the European Commission that provides a legal framework for crypto-assets and related services in the European Union (EU), and sets rules for their issuance, trading, and supervision. The objective is to provide investor protection and foster extensive innovation in the crypto asset sector in EU member states.
Some Terminology used in MiCA
All EU Directives and Regulations are peppered with specific terminology and abbreviations, and MiCA is no exception. While the full list is found in Article 3 of Title I in MiCA, some key abbreviations are set out below:
ART – Asset-Referenced Token
CASP – Crypto-Asset Service Provider
DLT – Distributed Ledger Technology
EBA – European Banking Authority
EMT – Electronic Money Token
EMI – Electronic Money Institution
EP – European Parliament
ESA – European Supervisory Authority
ESMA – European Securities and Markets Authority
ESRB – European Systemic Risk Board
MiCA – Markets in Crypto-Asset Regulation
MiFID II – the Second Markets in Financial Instruments Directive
NCA – National Competent Authority
RTS – Regulatory Technical Standards
SME – Small and Medium Enterprise
Key Benefits of MiCA
MiCA has been positively welcomed by serious industry players as it provides legal clarity and certainty for crypto-asset issuers and service providers, as well as for investors and consumers. It promotes innovation and competition in the crypto-asset market by creating a harmonized and comprehensive set of rules across the EU. This permits a provider regulated in one EU member state to “passport” its services across the entire EU bloc.
MiCA enhances consumer and investor protection by imposing disclosure requirements, governance standards, and risk mitigation measures for crypto-asset issuers and CASPs. The regulation fosters financial stability and market integrity by subjecting CASPs to prudential, organizational, and conduct of business rules, as well as to supervision and enforcement by competent authorities.
Most importantly, it supports the digital transformation of the EU economy and society by enabling the development and adoption of new technologies and business models based on crypto-assets.
A History of Markets in Crypto-Assets (MiCA)
The EC’s Economic and Monetary Affairs Committee voted on 10th October 2022 to approve the first EU-wide regulation addressing blockchain-related assets. The Markets in Crypto-Assets Regulation took force of law after approval by the European Parliament in June 2023, with three consultation packages released for public feedback after that date. EU national governments had a grace period of 12 and 18 months until different parts of MiCA would be enforced.
By the 30th June 2024, EU member states will be required to enforce Title III and Title IV, with the remaining five Titles (I, II, V, VI, VII) applicable by the end of December 2024. Titles VIII and IX deal with matters where there is no need for public feedback or Member State adjustment periods, including delegated acts and transitional and final provisions.
A quick timeline of the MiCA is set out below:
April 2023 – EP votes in MiCA
June 2023 – MiCA published in the Official Journal of the European Union (OJEU)
July 2023 – Publication of Consultation Package 1
October 2023 – Publication of Consultation Package 2
March 2024 – Publication of Consultation Package 3
June 2024 – Titles III & IV may be enforced
December 2024 – Titles I, II, V, VI & VII may be enforced
Titles within Markets in Crypto-Assets
MiCA is divided into nine “Titles” or parts. The first seven Titles address crypto-asset regulation, authorisation, minimum requirements for CASPs, and responsibilities of jurisdiction.
Titles VIII and IX cover powers of adoption and the responsibility of the Commission to submit reports to the European Parliament and the European Council on the impact of the legislation as well as any developments. While the final report is due by the 30th June 2027, an interim report is due two years earlier on 30th June 2025.
Crypto-Asset Definitions & Key Requirements
The legislation defines three types of crypto-assets that fall within scope of legislation: asset-referenced tokens, e-money tokens, and crypto-assets that are neither of the other two types. Some other types of crypto assets are mentioned that are exempt from MiCA.
MiCA as published requires ESMA to submit a number of draft regulatory technical standards to provide further guidance to market operators by 30th June 2024.
Asset-referenced tokens
Asset-referenced tokens are crypto-assets designed to maintain a stable value by reference to another value or right, including one or more official currencies. These are more commonly known as stablecoins.
Title III of MiCA is dedicated to the conditions attaching to issuers of asset-referenced tokens. Credit institutions and other legals entities established in the EU and duly authorised by a national regulator may issue such tokens. There are strict requirements on liquidity reserves, reporting and investor protection.
The regulation on these types of tokens will be enforceable as from the 30th of June 2024.
e-money tokens
Electronic money tokens or e-money tokens are crypto-assets that strive to maintain a stable value by referencing the value of one official currency. Dealt with in Title IV, only credit institutions or electronic money institutions (EMI) may issue e-money tokens to the public, upon submission of a white paper to the competent authority and publication of same to the general public. Article 51 details the content and form required of the white paper.
Several rules follow on areas including accuracy of information presented to the public, liability of the issuer and on the investment of funds received in exchange for e-money tokens.
The regulation on these types of tokens will also be imposed as from the 30th of June 2024.
Crypto-asset tokens
Crypto-asset tokens are crypto-assets other than an asset-referenced token or e-money token. Anyone wishing to issue crypto-asset tokens must do so through a legal entity and is required to submit a white paper, with prescribed content and form to their competent authority.
Other than limited exemptions listed in Article 4, MiCA imposes obligations on the issuer in relation to marketing communications, investor information and protection.
Crypto-Assets exempt from MiCA
A number of DLT assets are not regulated by MiCA, for different reasons.
Utility tokens are crypto-assets only intended to provide access to a good or a service supplied by its issuer. A key requirement is that ownership rights may not be transferred to another person, other than through redemption against the issuer.
Digital assets that represent financial instruments as defined by MiFID II are to be regulated under MiFID II, MiFIR and any ancillary regulation but not by MiCA. This is confusingly different from the line taken vis-a-vis e-money.
Also exempt are those tokens that qualify as deposits or structured deposits, as securitisation positions, insurance policies, pension and social security schemes as these are deemed to be sufficiently regulated by other legislation.
Transactions between certain public entities and groups are exempt from MiCA, as well as non-fractionalized non-fungible tokens (NFT).
Crypto-Asset Service Providers
Title V of MiCA identifies those authorized to act as crypto-asset service providers (CASPs). Key requirements include being a legal entity with a registered office and place of effective management within the EU, and at least one EU-resident director.
MiCA permits the following financial institutions to offer crypto-asset services, with a requirement to notify or request due authorisation from their national competent authority.
- Credit institutions
- Central securities depositories
- Investment firms
- Market operators
- Electronic money institutions (EMI)
- Undertakings for Collective Investment in Transferrable Securities (UCITS) management companies
- Approved alternative investment fund managers (AIFM)
This Title also provides one of the key benefits of the regulation, that is permitting service providers to “passport” or offer cross-border services once they have informed the regulator in their Member State. Obligations to clients are defined, also security, governance, and operational requirements.
Prevention of Market Abuse in MiCA
Title VI establishes a common framework for the supervision and enforcement of the rules applicable to crypto-asset issuers and service providers in the European Union. It defines the roles and responsibilities of the NCAs, EBA, ESMA, and ESRB in relation to the oversight of the crypto-asset market.
It also sets out the procedures for cooperation, information exchange, and consultation among these authorities, as well as the mechanisms for dispute resolution, peer review, and convergence of supervisory practices.
ESMA Consultation Packages
The European Securities and Markets Authority (ESMA) was empowered to develop technical standards and guidelines specifying certain provisions within MiCA. ESMA has published three consultation packages to collect feedback from stakeholders and market operators on the appropriate implementation of MiCA.
ESMA MiCA Consultation Package 1
The first package related to the content, forms and templates for notification by certain financial entities, forms for authorisation application of CASPs, complaint-handling procedure, mitigation and management of conflicts of interest by CASPs and the assessment of the requirements of planned acquisition of qualifying holdings.
ESMA MiCA Consultation Package 2
The second consultation paper “Package 2” tackled sustainability indicators and adverse impacts on climate, continuity and regularity of CASP services, offering pre- and post- trade data to the public, CASP record keeping, machine readability of white papers and their register, and appropriate public disclosure of inside information.
ESMA MiCA Consultation Package 3
ESMA’s final consultation paper sought feedback on the prevention and detection of crypto-asset market abuse, aspects of the provision of advice and portfolio management services in crypto-assets and periodic reporting thereof, transfer services for crypto-assets, and maintenance of systems and security protocols.
ESMA is required to provide its draft proposals on all the above by the end of June 2024.
Conclusion
MiCA is a significant milestone in the cryptocurrency market as it is the first EU-wide comprehensive regulation for a technology that is still very much in its infancy. The fact that issuers and service providers are subject to considerable scrutiny and bear liability should encourage investors to embrace the opportunities in greater numbers and drive forward digital-asset acceptance and usage within the EU.
The first provisions of MiCA will be applicable by the end of June 2024, with the rest to follow by the end of December 2024.