Well over two years after the Markets in Cryptoassets Regulation (MiCA) was first proposed, the European Parliament gave it the green light on 20 April 2023 and MiCA was adopted by the Council on 16 May 2023. MiCA is likely to enter into force in July 2023 following publication in the Official Journal, with some provisions applying a year later and the rest from January 2025. MiCA has been welcomed in some crypto quarters – while meeting certain of its requirements will be challenging, crypto businesses value clarity and consistency in regulation and recognise the importance of investor protection measures in a sector still reeling from recent high profile collapses.
We discussed MiCA in our previous blog post here after the EU co-legislators reached political agreement last summer. This post focuses on the key takeaways from MiCA and its impact on crypto-markets.
If, as is widely expected, MiCA enters into force in July 2023:
- Provisions relating to asset reference tokens (ARTs) and e-money tokens (EMTs) will apply 12 months later, in July 2024.
- Other provisions will apply 18 months after entry into force, in January 2025.
- Transitional and grandfathering arrangements will be available in some circumstances e.g unless a Member State chooses not to apply the transitional regime or chooses to reduce its duration, crypto-asset service providers (CASPs) providing services before MiCA becomes applicable should be able to continue to do so for a further 18 months after MiCA starts to apply or until they become authorised. Transitional measures are also available to operators of trading platforms and issuers of ARTs.
For entities which are already authorised to provide cryptoassets services under a Member State’s national law at the time of application of MiCA, Member States may choose to apply a simplified authorisation procedure for an 18 month period.
2. What will MiCA mean for crypto businesses?
MiCA’s impact on businesses which are not currently authorised will be significant, although the onerousness of the obligations under MiCA will depend on the types of cryptoasset being issued and activities being carried on. Although grandfathering and transitional regimes will be available, firms must not underestimate the time it will take to implement MiCA, from assessing MiCA’s scope, to applying for authorisation and implementing MiCA requirements into their systems and processes. Here are some issues which businesses should consider:
Authorisation and notification: The first thing businesses will need to do is consider whether their existing activities fall within the scope of MiCA. If so, they will be required to either notify the relevant national regulator or seek authorisation depending on whether they are already authorised financial institutions.
Compliance framework: Some of MiCA’s requirements for CASPs and issuers have been likened to those applicable to firms within the scope of MiFID, for example around conflicts of interest, ensuring that communications (including whitepapers) are fair, clear and not misleading, as well as other organisational, conduct and prudential rules. There are also change in control provisions, as well as a market abuse regime for cryptoassets. Firms will need to set up a compliance framework to meet these ‘mini-MiFID’ requirements.
Repapering: Repapering in some areas may also be necessary e.g:
- Written agreements: Existing agreements will need to comply with MiCA which requires certain agreements with third parties to be in writing (e.g CASPs which outsource to third parties must enter into written outsourcing contracts; and issuers of ARTs must enter into written agreements which regulate the flow of information with custodians of reserve assets).
- Client terms: Client terms and conditions and agreements will need to be amended to take account of mandatory contractual and client consent requirements within MiCA.
- White papers: Issuers of EMTs and ARTs will need prior approval of their white paper, which must contain certain mandatory disclosures, from a competent authority before being able to issue, offer or market their tokens; while issuers and offerors of other tokens need only notify the regulator and provide a copy of their white paper before doing so. ART white papers will need to be supported by a legal opinion as to why the ART is neither an EMT nor a token excluded from MiCA’s scope.
Sustainability: Although the call for a ban on proof-of-work crypto mining ultimately did not receive sufficient support amongst co-legislators, ESMA will, as part of its work to develop technical standards on sustainability indicators, review and consider the various types of consensus mechanisms used to validate cryptoassets transactions, their incentive structures and the use of energy, the production of waste and greenhouse gas emission.
Liability: Crypto businesses must consider the liability attached to their activities and services under MiCA. For example, CASPs providing custody and administration services would be liable to their clients for the loss of any cryptoassets or of the means of access to the cryptoassets as a result of an incident that is attributable to the provision of the relevant service or the operation of the CASP. The CASP’s liability will be capped at the market value of the cryptoasset that was lost at the time the loss occurred. So, a CASP would effectively be held liable for any damages resulting from an ICT-related incident, including an incident resulting from a cyber-attack, theft or any malfunctions. However, the CASP would not be liable where it is able to demonstrate that the incident occurred independently of the provision of the relevant service or the event occurred independently of the operations of the CASP e.g where the problem is inherent in the operation of the distributed ledger that the CASP does not control.
3. Non-EU businesses
MICA applies to those engaged in the issuance, offer to the public and admission to trading of cryptoassets or that provide services related to cryptoassets “in the Union”. Non-EU businesses wishing to carry on cryptoassets activities within the EU or with EU customers should consider how the territorial scope of MiCA will impact on their current and future business models. Should they seek authorisation under MiCA? Will promotions or advertisements available to customers in the EU be treated as providing services and carrying on crypto activities in the Union? Will businesses be able to rely on MiCA’s reverse solicitation provisions?
Businesses considering setting up in the EU should note that, under MiCA, CASPs and ART issuers must have a registered office in the EU.
Similar to certain existing financial services legislation, such as MiFID, MiCA contains “reverse solicitation” rules, where an EU client may, at its own exclusive initiative, initiate the provision of crypto services by unauthorised non-EU firms. Firms should note that the EU is already wary of the reliance on reverse solicitation by third country firms in other areas of financial service and this is an area which the EU is keeping a close eye on. MiCA provides that ESMA will, within 18 months of MiCA’s entry into force, develop guidelines to specify when a third country firm is deemed to solicit clients established or situated in the Union and guidelines on supervisory practices to detect and prevent circumventions of MiCA reverse solicitation rules.
4. What might MiCA mean for EU crypto-markets in practice?
Only time will tell. It will be interesting to see how EU crypto-markets develop in light of MiCA and whether some of the issues raised during negotiations materialise, for example:
- How hard will it be in practice for stablecoins to meet MiCA’s white paper requirements – will the stablecoins offering in EU reduce as some find they cannot meet these requirements?
- MiCA caps the issuance of ARTs which are widely used as a means of exchange when the average number and average aggregate value of transactions per day associated as means of exchange within a single currency area is higher than 1 million transactions and EUR 200 million per day. This cap also applies to EMTs denominated in a non-EU currency and there are fears that the language in MiCA around the concept of ‘means of exchange’, which includes the use for settlement of transactions in other cryptoassets, could restrict the use of foreign currency-referencing stablecoins, such as USD-referencing EMTs, in the EU from 2025.
- Will the ban on CASPs and issuers paying interest on EMTs or ARTs result in these cryptoassets appearing less attractive as a result?
5. Will all requirements be found in MiCA once it is finalised?
The text adopted by the Council on 16 May 2023 can be found here. The final text should be published in the Official Journal before the summer. MiCA sets out the framework for the regulation of cryptoassets in the EU but certain details will be settled in technical standards and delegated acts. For example, in relation to sustainability of cryptoassets, a topic which was much debated by EU co-legislators during the legislative process, ESMA will be developing technical standards on the content, methodology and presentation of information related to principal adverse environmental and climate-related impact.
ESMA will also clarify certain issues in the form of guidance, notably including:
- criteria and conditions for cryptoassets (including, NFTs) to be considered financial instruments (rather than MiCA cryptoassets);
- systems and security protocols to be used (or related standards to be met); and
- when services involving the transfer of EMTs are considered payment services subject to regulation outside of the MiCA regime.
Related anti-money laundering legislation, the first piece of EU legislation for tracing transfers of cryptoassets and blocking suspicious transactions, received the green light at the same time as MiCA. Under the ‘Travel Rule’, information on the source of the asset and its beneficiary will have to travel with the transaction and be stored on both sides of the transfer.
6. MiCA 2.0?
Although MiCA 1.0 has not yet entered into force, MiCA 2.0 has already been called for in some circles. The European Central Bank has called for MiCA 2.0 to cover cryptoassets staking and lending, DeFi and assets without an identifiable issuer, such as Bitcoin.
MiCA itself already incorporates review mechanisms: The Commission will publish an interim report on the application of MiCA within two years of MiCA’s entry into force (by mid-2025) and the final report will be due within 4 years of MiCA entering into force (by mid-2027). Legislative proposals may accompany both the interim and final reports.
MiCA also sets out potential areas for future regulation. The Commission will report on the latest developments on cryptoassets and, if appropriate, propose legislation, within 18 months of MiCA entering into force (by January 2025). The report will include the treatment of services associated with the transfer of EMTs, as well as an assessment of the necessity and feasibility of regulating:
- lending and borrowing of cryptoassets; and
- ‘unique and non-fungible cryptoassets’ (ie NFTs), as well as offerors of, and providers of services related to NFTs.
Watch this space – although MiCA 1.0 is not yet in force, MiCA 2.0 is unlikely to be far off and will likely have a much broader scope and reach than MiCA 1.0.
7. What about the UK?
HM Treasury is currently consulting on the future financial services regulatory regime for cryptoassets. Read our briefing on the consultation here. The House of Commons Treasury Select Committee published a report on 17 May where it controversially recommends that the government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service. It would be surprising if the UK government decides to move away from the proposals set out in its February consultation on the future regulatory regime for cryptoassets because of the report recommendations. Yet a future administration with different leadership might. Much will depend on the speed at which the government proceeds with its plans to regulate cryptoassets.