Last year we covered several different crypto phenomena, ranging from crypto taxation to the fall of Terra Luna. We have enjoyed writing about these topics since they show the ingenuity and passion that people have towards cryptos, fintech and Web3 overall. A common theme through our article series has been regulatory uncertainty, and the fact that the authorities have yet to address several pitfalls pertaining to Web3 innovations.
Now, as 2022 has turned to 2023, we wish to conclude our article series with perhaps the most promising crypto phenomenon of them all – the EU regulation proposal on Markets in Crypto Assets, or MiCA.
MiCA – A Part of The EU’s Digital Finance Package
Before we address MiCA, we must first discuss the background and reasoning behind the emerging crypto regulation in the EU. The spearhead of this regulation is the Digital Finance Package adopted by the European Commission on 24 September 2020. The package is comprised of the EU’s Digital Finance Strategy and three regulatory proposals.
The goal of the package is to bolster the European Digital Single Market legal framework with a strategy and regulatory instruments that aim to allow for innovation and preserve financial stability in blockchain-based digital assets. The package was presented to make sure that legislation does not hinder innovation and the development of new digital financial instruments, and that such instruments are regulated.
The EU’s Digital Finance Strategy has four main priorities:
- Removing fragmentation in the Digital Single Market
- Adapting the EU regulatory framework to facilitate digital innovation
- Promoting a data-driven finance
- Addressing the challenges and risks with digital transformation, including enhancing the digital operational resilience of the financial system
The three proposed regulations contained in the Digital Finance Package are:
- The proposal for a regulation of the European Parliament and of the Council on markets in crypto-assets (“MiCA”)
- The proposal for a regulation of the European Parliament and of the Council on a pilot regime for market infrastructures based on distributed ledger technology (DLT) (“DLT Pilot Regime”)
- The proposal for a regulation of the European Parliament and of the Council on digital operational resilience for the financial sector (“DORA”)
The DLT Pilot Regime is a brand-new pilot system designed to allow for market infrastructures based on distributed ledger technology (‘DLT’) to develop trading and settlements for DLT financial instruments whereas DORA aims to strengthen the IT security of financial entities.
While the Digital Finance Package is relevant to web3 and Fintech space in its entirety, in this article we will focus solely on MiCA and MiCA’s impact on the crypto sphere.
Markets in Crypto-Assets – MiCA
MiCA is now going through the European Parliament's first reading and is expected to be approved in the first half of 2023, and it will presumably become applicable in all Member States during 2024.
Essentially, MiCA tries to answer some of the long-debated questions concerning cryptos, such as:
“What is crypto, really?”
“What obligations should arise from offering crypto or issuing stablecoins?”
“How should obligations be imposed to issuers and service providers?”
To ensure that the EU’s financial service legislation is fit for the digital age, the aim of MiCA is to provide a clear legal framework for crypto-asset service providers (or ‘CASPs’), as well as for the issuers of ‘stablecoins’, or asset-referenced tokens and electronic money tokens. Moreover, MiCA strives to define the digital financial instruments offered by these service providers and in order to bring certainty to the ambiguous terminology used for different types of digital financial instruments in the crypto sphere.
To achieve these goals, MiCA imposes several different obligations on market actors who wish to provide crypto-asset services or issue crypto-assets, such as e-money tokens or asset-referenced tokens. For example, actors applying for a CASP authorisation need to provide a crypto-asset white paper, a document that contains general information on the applicant, the project and the key technical aspects of the technology used for the crypto-asset. Even though the authorisation process can seem tedious, the authorisation granted to the CASP or issuer is EU-wide, meaning that the applicant can provide crypto-asset services everywhere within the Union with the CASP or issuer authorisation.
MiCA divides crypto-assets to three subcategories:
- Asset-referenced tokens
- Electronic money tokens (or e-money tokens)
- Crypto-assets other than asset-referenced tokens or e-money tokens, including utility tokens
In addition to CASPs, other actors that MiCA concerns are issuers of tokens (see the list above). Issuers of significant asset-referenced tokens or e-money tokens are subject to specific obligations and requirements, as explained below.
When crypto-asset services are provided in a decentralised manner and without an intermediary, they do not fall within the scope of MiCA. When crypto-assets have no identifiable issuer, they are not subject to the MiCA regulation - an issuer may be unidentifiable when the crypto-asset in question is issued through or by a smart contract.
Crypto-asset definition and scope of MiCA
The definition of a crypto-related asset or token is currently somewhat unclear. At the moment, terms such as cryptocurrency, crypto-asset, virtual asset, virtual currency and digital asset are used somewhat interchangeably in general conversation, while the meaning of these terms can differ.
MiCA defines a ‘crypto-asset’ as a “means a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology”.
The definition of a crypto-asset in MiCA is – as intended by legislators – an umbrella definition, and it covers most of current (and ideally, future) digital assets, such as stablecoins (e.g. tether) and cryptocurrency (e.g. ether).
That being said, MiCA is not intended to cover all crypto-assets. Assets that under current EU financial legislation are to be considered as MiFID -financial instruments, structured deposits or traditional e-money do not necessarily fall under MiCA. In addition, virtual assets that are non-transferrable to others and only accepted by the issuer (i.e. a limited network) fall outside MiCA.
MiCA is still in its proposal stage, so the definition could technically still be subject to change.
Providing crypto-asset services according to MiCA
MiCA defines a CASP as a “legal person or other undertaking whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis, and are allowed to provide crypto-asset services in accordance with Article 53”.
According to MiCA, the provision of crypto-asset services is permitted only if the provider of crypto-asset services has a CASP authorisation. CASPs have to apply for an authorisation from the competent authority in their Member State to be allowed to provide crypto-asset services in the Union.
In addition to CASPs, other entities can also provide crypto-asset services if they are a credit institution, central securities depository, investment firm, market operator, e-money institution, a management company of UCITS or an alternative investment fund. Other entities than CASPs have certain conditions to be allowed to provide crypto-asset services and are exempt of certain articles of MiCA. For example, a credit institution would only have to notify the competent authority in their home Member State at least 40 working days before providing crypto-asset services, and they do not have to apply for authorisation in the way that CASPs do.
“Stablecoins” – asset-referenced tokens or e-money tokens
The MiCA proposal defines two categories of stablecoins that seek to maintain a stable value by referencing to another asset or several assets.
Asset-referenced tokens are defined as a “type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing to any other value or right or a combination thereof, including one or more official currencies”. An example of a stablecoin that could fall under the definition of an asset-referenced token is TerraUSD, that tried to hold its stable value by referencing to the LUNA coin, with the price of TerraUSD held in place algorithmically through supply and demand.
(This article does not discuss stablecoins or other possible asset-referenced tokens. For more information on stablecoins, we wrote an article you can find here).
E-money tokens are defined as a “a type of crypto-asset that purports to maintain a stable value by referencing to the value of one official currency”. The stablecoin Tether (USDT) could be defined as an e-money token – it purports to maintain a stable value by referencing to the value of the United States Dollar.
Issuers of asset-referenced tokens and e-money tokens
Issuers of asset-referenced tokens have special requirements for them to be allowed to issue and offer asset-referenced or e-money tokens.
Issuers of asset-referenced tokens have to apply for an authorisation to offer asset-referenced tokens to the public or to seek their admission to trading on a trading platform for crypto-assets. There are several requirements for the application that a legal person intending to issue asset-referenced tokens must take into account. An applicant must, for example, provide a crypto-asset white paper and give a legal opinion on why the asset-referenced token is not a crypto-asset excluded from the scope of MiCA and why it is not an e-money token.
Issuers of asset-referenced tokens must also keep in mind the reserve of assets required by MiCA. Issuers must have a certain amount of own funds and a reserve of assets to secure the claim towards the issuer of an asset-referenced token. The European Banking Authority, European Central Bank and the European Securities and Markets Authority will work together in creating technical standards and guidelines that will, for example, determine the size of the reserve of assets.
Issuers of e-money tokens need to primarily be electronic money institutions or credit institutions in order to be allowed to issue e-money tokens. They also have to produce a crypto-asset white paper and notify it to the competent authority.
In addition, specific additional obligations are set out for issuers of asset-referenced or e-money tokens that are considered significant due to their large holder base or the substantial number or value of daily transactions (i.e. ‘issuers of significant asset-referenced tokens’). Such obligations are, for example, an obligation to adopt a remuneration policy and a higher reserve of assets as well as more sizeable own funds.
The Digital Finance Package is an ambitious venture to the digital. MiCA will without a doubt have an impact throughout the crypto sphere, especially in Europe. In light of recent events in the crypto markets, new legislation that would bring security, stability and credibility to the world of crypto would be more than welcome. Time will tell whether the EU’s regulatory instruments will reach their goal to stabilize and secure the crypto industry.
We would like to thank all those who have enjoyed reading our articles during the year 2022 (and the beginning of 2023). As the Web3 environment is under constant change, we are bound to meet again this year around some novel and exciting topics.
Our Associate Trainee Patrik Anthoni took part in writing this Article.