MiCA’s overview
What is MiCA about?
The final version of the MiCA (Markets in Crypto-assets) Regulation of the European Parliament and of the Council, amending Directive (EU) 2019/1937, was published on October 5th, 2022. It will enter into force in early 2023.
To avoid market disruption, MiCA provides for a transitional period. Entry into force of the rules applicable to service providers issuing stable coins will be delayed by 12 months, and the remaining provisions will apply after 18 months. It is expected that by the end of 2024, the entire Regulation will be in force.
MiCA’s four essential objectives are:
- Ensuring legal certainty by establishing a solid legal framework for crypto-assets within its scope, provided they are not covered by existing financial services legislation;
- Supporting innovation and fair competition by promoting the development of crypto-assets within a safe and balanced framework;
- Protecting consumers, investors and market integrity given the risks associated with crypto-assets;
- Ensuring financial stability, with the inclusion of safeguards to address potential risks.
- MiCA imposes obligations on entities issuing crypto-assets and crypto-asset service providers (CASPs) in the European Union. Issuers may take advantage of the passportingregime and carry out their activity in any other country in the European Union.
Broadly, the objective of MiCA is to regulate the issuance, offer to the public and trading of crypto assets.
Types of tokens
MiCA defines three types of crypto assets that are within the scope of this Regulation:
- E-money Tokens– i.e. assets whose value is pegged to a fiat currency (e.g. USD, EUR, etc);
- Asset referenced tokens (ARTs)– i.e. assets whose value is pegged to more than one fiat currency or any other assets/ a combination of different assets (e.g. other crypto assets or commodities);
- Crypto assets other than e-money tokens and asset reference tokens– i.e. crypto-assets not qualifying as E-money tokens or ARTs and that do not fall outside the scope of MiCA;
Assets considered out of scope include:
- Assets that meet the definition of a financial instrument;
- Non-Fungible Tokens (NFTs) – MiCA defines the features a token must have to be considered a non-fungible token. The assessment should be conducted focusing on the token’s characteristics. Sole reliance on the designation of the token as an “NFT” by its issuer is not valid;
- Loyalty tokens (utility tokens are in scope);
- Issuers may see their tokens qualified as “significant”by the European Banking Authority (EBA), according to their customer base, issuance value, and number and value of transactions, amongst other criteria.
MiCA stipulates stringent additional obligations for “significant” tokens, such as remuneration policies, governance arrangements, capital requirements, special internal governance rules, and enhanced duties to prevent conflicts of interest. Obligations also include participating in a college of issuers chaired by the EBA and rules on the custody and the investment of the reserve assets and higher funds requirements.
In addition, MiCA sets requirements for keeping “own funds” and “reserve assets” for asset-referenced tokens. It sets out explicit thresholds, with the possibility of competent local authorities increasing such thresholds, and rules on how and where funds should be kept or held in custody.
Whitepaper requirements
Issuers (or offeror or persons seeking admission to trading) should prepare a White Paper containing a detailed description of the planned crypto-asset offering unless they are issuing:
- Crypto-assets offered for free;
- Crypto-assets for the maintenance of DLT;
- Small Offers (less than 150 people per Member State);
- Small offers (total consideration less than EUR 1 million);
- Offers solely to qualified investors;
- Unique and not fungible Crypto-assets.
MiCA also covered the aspects that the White Paper should contain, such as information about the issuer, the project, an explanation of the underlying technology, and a risk description.
Our comments
On the consumer protection side, MiCA provides the right of withdrawal to anyone who buys crypto-assets directly from the offeror. For 14 days, withdrawal from the agreement to acquire the crypto-assets is possible without incurring fees or costs and without the need to justify such withdrawal. The reimbursement shall be carried out using the same means of payment as the retail holder used for the initial transaction.
MiCA also contains the first explicit rules against market abuse involving crypto-assets, by governing the disclosure of inside information and prohibiting insider dealing and market manipulation, a rather common practice in sector.
Above all, MiCA is a Paneuropean harmonized regulation. Therefore, it is the new cornerstone of crypto-assets regulation and will inspire and guide other jurisdictions to design their laws.
MiCA (and its future iterations) will greatly contribute to rule standardization concerning the issuance of crypto-assets and the requirements for their commercialization, bridging the existing EU rules on payments, crowdfunding, e-money and financial instruments. It will also harmonize the legal provisions that differ from one Member State to another.
From now on, the provision of services in crypto-assets must only be performed by duly authorized service providers under MiCA legislation. As a result, we may see a change in the type of services provided by EU-based service providers as a reaction.
In fact, some of MiCA’s provisions may contend with blockchain’s essential trait of permissionlessness. While the safeguard of investors and consumers is, at a first glance, achieved, on the other hand, constraints put in place may lead to the exile of some businesses to less regulated jurisdictions.
The new taxonomy combined with the qualification of crypto-assets provides a better delimitation of the rules applicable to the crypto-assets; legal certainty is MiCA’s best contribution to the sector. However, the adopted taxonomy may be perceived as incomplete or dissimilar to the traditional taxonomy adopted in the sector and may soon easily become outdated.
Although the right of withdrawal has been introduced and represents a significant step forward in consumer protection, it will not apply to crypto-assets admitted to trading on a trading platform before the retail holder’s purchase.
A grey area will continue to cast a shadow on NFTs and DeFi. Tokens that are “unique and not fungible with other crypto-assets” fall outside the scope of the regulation.
In terms of PR for the sector, MiCA is nevertheless a necessity. It provides CASPs with further legitimacy and credibility.
We expect that the EU will sooner, rather than later, update the legal framework arising from MiCA with the goal of covering all the legal conundrums innovation during next years will bring, particularly in the DeFi space.
Please contact us should you require any assistance in relation to Crypto businesses.
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