European Union: MiCA and its Impact on Blockchain and Crypto Assets.

European Union & MiCA.

On April 20, 2023, the European Union (EU) approved the Markets in Crypto-Assets Regulation (MiCA), a comprehensive regulatory framework for crypto assets and blockchain dedicated to the 27 EU member states.

The publication in the Official Journal of the European Union is estimated to take place at the end of June 2023, with the regulation coming into effect in July 2023.

Twelve months after MiCA comes into effect, the provisions relating to tokens and assets will become applicable; for the remaining provisions, applicability will come into force between 18 and 24 months after the enforcement of MiCA.

The aim of this new regulation is to harmonize laws and regulations on cryptocurrencies among EU member states and ensure consumer protection and market stability.

In this article, we will discuss the most relevant aspects of MiCA and its potential implications for the blockchain and crypto asset industry.

Origins of MiCA: Why did the EU decide to take action?

Currently, Europe is not home to the largest cryptocurrency companies, with most of the creation and capture of value occurring in the United States and Asia.

However, there are several reasons why the EU has decided to proceed with such a comprehensive and binding set of regulations for blockchain and crypto assets. Let’s explore some of them.

Previous reports and directives.

In 2018, the European Commission tasked EU financial supervisory authorities with examining the applicability of EU financial laws to crypto assets such as Bitcoin (Link).

In 2019, the European Banking Authority (EBA) published a report advising the Commission to take action, as “crypto assets largely fall outside the scope of EU legislation and pose significant risks for consumer protection and money laundering.”

Requests for regulatory harmonization from the crypto world.

The EU’s 5th Anti-Money Laundering Directive has led to a patchwork of national regulations for registering and licensing cryptocurrency companies.

Some countries, such as Germany, Austria, Malta, Lithuania, and France, have introduced dedicated licensing regimes, while others, like Ireland, have created simple AML registrations.

Operating at the EU level has become a bureaucratic and burdensome process for cryptocurrency companies.

Requests for regulatory harmonization have increased from both the industry and regulatory authorities and policymakers, partly to prevent regulatory arbitrage.

The regulation of cryptocurrencies must be seen in the context of the EU’s ambition to be a global leader in technology regulation overall.

Recent policy initiatives such as the GDPR, the Digital Markets Act, or the Digital Services Act aim to establish global technological standards, and an emerging and promising sector like cryptocurrencies is just another piece to implement this proactive strategy.

Objectives of MiCA: What is the EU trying to achieve?

High-profile incidents like the failures of listed projects such as FTX, Terra Luna, and Celsius are well-known within the industry. With the introduction of MiCA, Europe aims to create a sustainable environment for cryptocurrencies, away from scams, false promises, and massive financial losses.

Below are the target objectives of MiCA:

Protect consumers who buy cryptocurrencies or use crypto asset services to prevent the worst excesses witnessed during the ICO mania in 2017/18 (and more recently in 2022).
Create regulatory harmonization, close arbitrage gaps, and allow companies to operate on an EU-wide basis without the need for 27 different licenses and supervisors.
Provide legal certainty for companies and institutions entering the space, with clear regulations for various services (token issuance, exchange, custody, etc.), enabling fair competition and innovation.
Take a leading role in how to regulate cryptocurrencies globally, doubling the ambition to influence technological and economic innovation through early and comprehensive policy frameworks.

The MiCA rules: What does MiCA entail for cryptocurrency companies?

What MiCA does not cover.

MiCA does not apply to the European Central Bank (ECB), national central banks, the European Investment Bank, the European Stability Mechanism, and international public organizations.
MiCA does not provide detailed AML rules for cryptocurrency companies, which are currently being discussed within the AMLR or have already been finalized within the TFR, the EU’s implementation of the FATF travel rule formally adopted by the European Parliament today.
Furthermore, MiCA does not cover cryptographic assets (or cryptographic asset services) considered to be securities in order to avoid duplication of frameworks. These services around tokenized securities are covered by MiFID, and for those who want to experiment with securities trading and settlement on blockchains, the EU has adopted an officially launched “DLT pilot regime” in March 2023. Lastly, MiCA does not cover deposits as defined in the EU Directive on deposit guarantees.

What MiCA covers.

MiCA basically covers all forms of token offerings, stablecoin issuance, cryptographic asset services such as exchange and custody, as well as new market abuse rules for the entire sector.

Unlike in the United States, where a stablecoin bill and a bill for centralized market operators are being negotiated separately, the EU has decided to include these concepts under the same regulatory umbrella.

Asset taxonomy.

MiCA introduces an asset and service taxonomy with respective requirements.

Cryptographic assets A cryptographic asset is a “digital representation of value or rights, which can be transferred and stored electronically, using blockchain or similar technology.” Most cryptographic assets should fall under this catch-all category, including Bitcoin and Ethereum.
Utility tokens A utility token is a subtype of cryptographic assets “intended to provide access to a good or service provided by its issuer.” There are lighter requirements for the issuance of utility tokens, but not many are expected to fall into this category.
Asset-referenced tokens (ART) An asset-referenced token (ART) is a token that aims to stabilize its value by referencing a basket of currencies, commodities, cryptographic assets, or other non-monetary assets. This category was created with Libra 1.0 in mind, which anchored its value to a basket of fiat currencies similar to IMF special drawing rights.
E-money tokens (EMT) An e-money token (EMT) aims to stabilize its value by referencing the value of a single fiat currency, such as USDC, USDT, BUSD, or EUR. This concept and most of its requirements stem from the existing regulatory concept of e-money in the EU. EMTs can only be offered by authorized Electronic Money Institutions; otherwise, if such an EMT offering is made to qualified investors with an average circulation amount not exceeding €5,000,000, it will be exempt.
Crypto-Asset Service Providers (CASP) A central register managed by the European Securities and Markets Authority (ESMA) will serve for the registration of all crypto-asset service providers (CASP). These CASPs, once authorized, will be able to offer their services across all EU member states.

Requirements for cryptographic asset issuers.

Issuers (“offerors”) of cryptographic assets (with exemptions for utility tokens and small-scale cryptographic assets) must draft a detailed white paper containing:

all relevant information about the project,
the issuer,
the involved risks,
the technology used,
the token’s economic design,
the environmental impact of the token’s consensus mechanism.
Cryptographic asset issuers must notify their national competent authority (e.g., BaFin in Germany) about their white paper at least 20 days before its publication. MiCA does not require explicit approval, but the authority can prohibit the issuance of the cryptographic asset.

Requirements for asset-referenced token issuers (ART).

Unlike “standard” cryptographic assets, the publication of an ART white paper requires explicit prior approval from the national competent authority.

The entity issuing ARTs must be established in the EU, meet certain prudential requirements for “own funds” (2% of the ART offering), meet reserve management standards (regarding segregation, custody, investment, etc.), and have resolution and liquidation plans.

As mentioned earlier, issuers of “significant ARTs” will be subject to even higher standards (such as 3% own funds, plus additional requirements for interoperability, liquidity, and governance).

Additionally, the European Banking Authority (EBA), rather than national financial authorities, will be responsible for supervising these entities.

Requirements for e-money token issuers (EMT).

Only regulated Electronic Money Institutions (EMIs) or credit institutions will be able to issue e-money tokens in the EU. Unlike ART issuers, the competent authority only needs to be informed of the EMT white paper.

E-money tokens have strict redemption obligations and are prohibited from bearing interest for EMT holders (same for existing EMIs). Overall, they have similar requirements for “own funds” (2% of the offering) and reserve management (e.g., only investments in high-quality liquid assets) as ART issuers.

Once again, issuers of “significant EMTs” are supervised by the EBA and must comply with higher requirements in terms of own funds (3%), interoperability, liquidity, resolution, and governance.

Impact on cryptocurrency companies and blockchain in the EU.

MiCA represents a fundamental change for the cryptocurrency and blockchain industry in the European Union.

Until now, cryptocurrency companies in the EU have had to deal with each individual national regulator to operate in the entire EU market.

With the implementation of MiCA, the same binding EU regulations will apply to all 27 member countries.

Once a company obtains a MiCA license in one country, it will be able to “passport” the license and offer the licensed service throughout the EU’s single market.

MiCA could be a positive opportunity for cryptocurrency companies and the EU economy as a whole, but its success largely depends on the adoption of practical implementation standards and the enforcement of regulations by EU supervisory authorities.

If MiCA proves feasible for the industry, consumers, and regulators, it will have a global impact. Otherwise, many jurisdictions may choose a completely different political path.

The potential global impact of MiCA.

MiCA has the potential to become a global reference point in the cryptocurrency and blockchain industry, similar to the GDPR in the field of privacy.

However, much will depend on how implementation standards and enforcement practices develop in the coming years.

If MiCA proves workable and functional for the industry, consumers, and regulators, it is likely that many companies and jurisdictions worldwide will adopt MiCA standards for their services and regulations.

Conversely, if MiCA proves too restrictive or impractical, it could limit the growth and adoption of cryptocurrencies and blockchain globally.

Conclusions.

MiCA represents a significant step in regulating cryptocurrencies and blockchain at the European and global levels.

If well-implemented and applied, MiCA could promote regulatory harmonization, innovation, and growth in the cryptocurrency and blockchain sector in the EU and beyond.

However, the success of MiCA will depend on the ability of EU supervisory authorities to develop practical and realistic implementation standards, and on the willingness of companies and jurisdictions to adopt such standards.

Only time and the market will tell whether MiCA will have the desired impact on the cryptocurrency and blockchain industry.

Sources: