Additional Author: Svenja Schenk
The much-debated Markets in Crypto-Assets (MiCA) Regulation is expected to enter into force in early 2023. MiCA is intended to close gaps in existing EU financial services legislation by establishing a harmonized set of rules for crypto-assets and related activities and services. Among other things, MiCA imposes restrictions on the issuance and use of stablecoins. It’s part of a broader digital finance package, which, inter alia, also includes the Digital Operational Resilience Act (DORA) and the DLT Pilot Regime Regulation (which itself will start applying on March 23, 2023).
The European Parliament is expected to vote on the bill in February 2023. After formal approval by the Council of the EU, MiCA will be published in the EU's Official Journal and enter into force 20 days later. MiCA will generally start applying after a transitional period of 18 months, meaning that MiCA will likely take effect no earlier than Q3 2024. However, the rules for stablecoins will start applying after a transitional period of 12 months and could hence take effect from spring 2024.
Scope of Application: "Crypto-Assets"
MiCA regulates primary market activities (issuance/public offerings) and access to the secondary market (listings) as well as the provision of certain crypto-related services. With regard to the latter, MiCA provides a catalogue of a total of 10 services defined as "crypto-asset services" (Art. 3 (1) No. (9) MiCA), which is inspired by the list of investment services under the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). The list includes services such as the custody and administration of crypto-assets on behalf of third parties and the operation of a trading platform.
MiCA regulates activities involving "crypto-assets." The term crypto-asset is broadly defined as any "digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology" (Art. 3 (1) No. (2) MiCA). MiCA introduces three sub-categories of crypto-assets that are subject to different requirements adjusted to the risks they entail:
- "Electronic money tokens" or "e-money tokens" (EMTs) are crypto-assets that purport "to maintain a stable value by referencing to the value of one official currency" (Art. 3 (1) No. (4) MiCA). Like traditional e-money, EMTs are electronic surrogates for coins and banknotes and are likely to be used for payment purposes.
- "Asset-referenced tokens" (ARTs) aim "to maintain a stable value by referencing to any other value or right or a combination thereof, including one or more official currencies" (Art. 3 (1) No. (3) MiCA). For example, ARTs could be backed by a basket of different fiat currencies, commodities or crypto assets.
- The third sub-group is a catch-all category for all other crypto-assets that are not EMTs or ARTs, which thus covers a wide variety of crypto-assets, including non-pegged payment tokens (i.a., cryptocurrencies like Bitcoin or Ether) and utility tokens. MiCA lays down a few specific rules for utility tokens, defined as “a type of crypto-asset which is only intended to provide access to a good or a service supplied by the issuer of that token” (Art. 3 (1) No. (5) MiCA).
Both ARTs and EMTs are variants of "stablecoins." Under MiCA, ARTs and EMTs may be designated as significant by the European Banking Authority (EBA) based on a prescribed set of criteria such as the number of holders, market capitalization, gatekeeper status of their issuer or interconnectedness with the financial system. Issuers of significant ARTs (sARTs) and EMTs (sEMTs) are subject to more rigid rules—for example, regarding capital requirements—and will generally be supervised by EBA instead of national authorities. This system resembles the classification of banks as systemically important to address financial stability concerns of regulators.
MiCA does not apply to crypto-assets captured by existing financial services legislation (e.g., security tokens qualifying as financial instruments under MiFID II). Further, it does not apply to crypto-assets that are unique and not fungible with other crypto-assets (Art. 2 (2a) MiCA; so-called Non-Fungible Tokens (NFTs)). However, NFTs that are issued "in a large series or collection" may be considered fungible and thereby covered by MiCA. Fractional parts of NFTs also do not fall under the exclusion.
Since crypto-asset services that "are provided in a fully decentralized manner without any intermediary" and crypto-assets without an identifiable issuer also do not fall within the scope of MiCA (recital 12a), the regulation does not capture Decentralized Finance (DeFi) and operations of Decentralized Autonomous Organizations (DAO)—so long as control of the operations is truly decentralized.
Obligations for Issuers and Service Providers
Issuers of Crypto-Assets
One core obligation under MiCA is that issuers of all three types of crypto-assets must issue white papers—a sort of prospectus for crypto-assets, informing potential holders of the characteristics of the issued crypto-asset—before they may offer a token to the public or list it on a trading platform. MiCA introduces minimum standards for these white papers in order to achieve a (so far lacking) standardization and reliability. Under MiCA, white papers must include information on not only, i.a., the issuer, the crypto-asset project or token, risks and the rights and obligations attached to the crypto-asset but notably also the adverse environmental and climate-related impacts of the consensus mechanism used to issue the crypto-asset.
Unlike with a prospectus, there is no general requirement for a competent authority to approve the whitepaper. Further, the Prospectus Regulation 2017/1129/EU contains more detailed rules on the required content, such as the material risk factors, including their weighting.
For crypto-assets other than ARTs or EMTs, MiCA mainly stipulates disclosure, transparency and governance rules. Offering such crypto-assets to the public or listing them on a trading platform does not require prior authorization. Rather, issuers only need to notify and publish the white paper up front. Notably, MiCA grants retail holders a right to withdraw from the purchase of such a token on the primary market within 14 days if the respective crypto-asset was not yet traded on a trading platform at the time of purchase.
Issuers of EMT and ART
For issuers of the stablecoin variants EMTs and ARTs, on the other hand, MiCA lays forth stricter rules due to related concerns with regard to financial stability and monetary sovereignty. Publicly offering or listing ARTs or EMTs within the EU generally requires prior authorization and may only be done by the issuer itself unless the issuer gives another person written permission to do so.
EMTs may only be offered/listed by authorized credit institutions or e-money institutions upon prior notification of their supervisory authority as well as notification and publication of the required white paper. Interestingly, an EMT will automatically be deemed to be offered in the EU and therefore be subject to the strict MiCA rules when it references a union currency. Due to the similarity between EMTs and e-money, lawmakers chose to work with broad references to the e-money Directive 2009/110/EC to regulate the rights and obligations of EMT issuers, including references to capital requirements and rules on the safeguarding of received funds. MiCA itself mostly stipulates certain exceptions from the e-money regime as well as some additional rules, e.g., for the investment of received funds.
Further, issuers of ARTs must be established in the EU to receive authorization and—in contrast to the rules for the other MiCA-token-types—not only notify but also submit the required white paper for prior approval to the competent authority before publishing it. In this respect, ARTs are more similar to the approval process under the Prospectus Regulation than the other crypto-assets. Hence, issuers of ART are subject to a detailed catalogue of duties and rules stipulated in MiCA itself, which includes transparency and extensive governance rules as well as capital requirements. While issuers of EMTs must safeguard received funds, the rules for ARTs include an obligation to maintain a reserve of assets. As MiCA stipulates a right of EMT and ART investors to redeem their tokens at any time, the reserve requirements will ensure issuers won’t run into any liquidity risks when faced with a large number of simultaneous redemption requests. Therefore, the reserve always needs to match the full value of the total outstanding holders’ claims.
Furthermore, and subject to much debate, MiCA effectively limits the daily average number of transactions and trading volume associated to uses of EMTs and ARTs as means of exchange to 1 million and EUR 200 million, respectively. For an EMT, this only applies where the token is denominated in a currency which is not an official currency of an EU member state. It has been feared that these rules may put popular USD-pegged stablecoins like Tether's USDT, Circle's USD coin and Binance's Binance USD at risk of being stifled in the EU due to their high trading volumes. However, the regulation clarifies that not all kinds of transactions will be considered to be associated to uses as a means of exchange.
Crypto-Asset Service Providers
The provision of crypto-asset services in the EU will generally require prior authorization as a "crypto-asset service provider" (CASP, Art. 53 et seq. MiCA) and a seat in the EU. MiCA stipulates a broad set of general and service specific rules CASPs will need to adhere to. These include governance, capital/insurance and transparency requirements. In terms of transparency, CASPs are i.a. required to inform about adverse environmental and climate-related impacts of the consensus mechanism used to issue the crypto-asset. CASP are automatically classified as significant (sCASP) by law when they reach a threshold of 15 million active users within the EU on average in one calendar year. However, unlike sARTs and sEMTs, sCASPs are not subject to stricter rules than regular CASPs.
Increasing Focus on Boards
Some of the EU's current law proposals (such as DORA and the Network and Information Society Directive (NIS 2)) appear to increasingly focus on board accountability. MiCA also stipulates a number of obligations for management bodies. For example, it requires the management bodies of ART issuers and CASPs to "assess and periodically review" the effectiveness of the policy arrangements and compliance procedures (Art. 30(2a), 61(5) MiCA). Moreover, management bodies of ARTs and sEMTs issuers must ensure effective and prudent management of the asset reserves and that the issuance or redemption of tokens is always matched in the reserves (Art. 32(3), 52(1)(a) MiCA). Infringements may lead to significant administrative fines for the management body. Additionally, to further protect holders of crypto-assets, the management body of an entity can separately be held liable for the information provided to the public through the crypto-asset white paper (Art. 14(1), 22(1), 47(1) MiCA).
Market Abuse Rules
MiCA additionally stipulates a set of market abuse rules modeled after the existing rules for the traditional capital market under the Market Abuse Regulation ((MAR), Art. 76 et seq. MiCA). In this regard, MiCA includes a duty of issuers, offerors and persons seeking admission to trading to disclose inside information and prohibitions of insider dealing, unlawful disclosure of inside information and market manipulation as well as rules for the prevention and detection of market abuse. As under MAR, these rules apply potentially worldwide with regard to crypto-assets that are admitted to trading on a trading platform operated by a CASP or for which a respective request to be traded has been made, irrespective of whether the action or omission actually takes place on the trading platform. However, for proportionality reasons, lawmakers decided not to transfer the full set of rules that we know from MAR to the crypto market as to avoid suffocating it in its early stages. Notably, and in contrast to the MAR/CS MAD regime, the legislator has so far not made it compulsory that intentional and serious offenses of insider dealing, unlawful disclosure of inside information and market manipulation under MiCA be punished as criminal offenses. Rather, this has been left up for discretion of the individual member states.