MiCA’s Overview – Part 2

What is MiCA about?

The final version of the MiCA (Markets in Crypto-assets) Regulation of the European Parliament and 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. The entry into force of the rules applicable to service providers that issue stablecoins 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.

The European Parliament voting on the text was initially expected to occur in December 2022. Still, due to a delay in the entry into force of this Regulation, voting will only take place after February 2023, which means that the full entry into force of MiCA will only happen in 2024.

Transitional provisions will give extra time to service providers already regulated by Member State laws, in order to comply and become authorized under MiCA. Although existing Crypto-Assets Service Providers (CASPs) may continue to provide services following national law for more 18 months after MiCA comes into effect, such firms may or not benefit from a simplified authorization procedure depending on the circumstances.

MiCA regulates the issuance, offer to the public and trading of crypto assets within the European Union. The regulation will apply to a wide diversity of crypto assets, covering many cryptocurrencies that can be used for speculative purposes and tokens used for payment, such as stablecoins or that refer to underlying assets.

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.

Passporting

CASPs need authorization from the competent national authority to operate within the EU and to benefit from the passporting regime.

Issuers may take advantage of the passporting regime and carry out their activity in any other Member State. There are no provisions on third-country equivalence that may cause potential duplicative regulatory issues for service providers that seek to offer their services around the world.

Third Country Firms

MiCA expressly states that if a third country CASP or any entity acting on its behalf has potential clients in the EU, reverse solicitation cannot occur (notwithstanding any contractual clause or disclaimer indication otherwise). It is essential that CASPs located outside the EU familiarize themselves with MiCA provisions and consider the extent to which their activities could bring them within the scope or if they can only rely on the reverse solicitation provisions.

For example, UK crypto-asset service providers, from crypto exchanges and wallet providers to trading platforms, will be unable to solicit business in the E.U., relying on reverse solicitation unless authorized and complying with MiCA requirements. This means UK crypto-asset service providers with an EU client base must establish a local branch or subsidiary to be licensed in an E.U. Member State.

Types of tokens

MiCA defines three types of crypto assets that are within the scope of this Regulation:

• E-money Tokens – e. assets whose value is pegged to a fiat currency (e.g. USD, EUR, etc.);
• Asset referenced tokens (ARTs) – 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– 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 under MiFID;
• 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);

NFTs

NFTs are unique tokens whose value cannot be compared with other equivalent assets. Thus, NFTs are excluded from MiCA regulation.

Excluded NFTs given in the recitals of MiCA include:

• “Digital art and collectables, whose value is attributable to each crypto asset’s unique characteristics and the utility given to the token holder”.
• “Crypto assets-representing services or physical, unique and not fungible assets, like product guarantees or real estate”.

However, not all kinds of NFTs should be excluded from MiCA regulatory scope, as certain NFTs belie their configuration as unique and non-fungible, in particular:

• The fractional parts of excluded NFTs are not themselves considered excluded NFTs;
• The issuance of crypto-assets as NFTs in a large series or collection indicates the fungibility of those NFTs, calling into question if they can be excluded;
• The attribution of a unique identifier to a crypto-asset is not enough to classify that crypto-asset as an excluded NFT; and
• The rights or assets represented by NFTs should also be considered unique and non-fungible to exclude that NFT.

Thus, particular care is needed to ensure that NFTs intended to be excluded from the scope of the MiCA are sufficiently covered by the scope of exclusion set out in Article 2 of the Regulation.

The Commission must also consider the development of markets in NFTs and their regulatory treatment to assess whether further Regulation is needed, which we believe is essential.

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 (“ARTs”). It sets out explicit thresholds, with the possibility of competent local authorities increasing them, and rules on how and where funds should be kept or held in custody.

Own funds

Issuers of ARTs shall have “own funds” equal to:

• EUR 350,000; or
• 2% of the average amount of the reserve assets; or
• a quarter of the fixed overheads of the preceding year, to be reviewed annually.

Reserve of assets

All ARTs issuers shall constitute and maintain a reserve of assets. Still, ARTs can also use reserve assets to invest in highly liquid financial instruments with low market risk, low credit risk and low concentration risk.

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 offeror or the person seeking admission to trading;
• Information about the issuer, if different from the offeror or person seeking admission to trading;
• Information about the operator of the trading platform when it prepares the white paper;
• If different from the persons referred above, the identity of the person that prepared the crypto-asset white paper and the reason why that person prepared the crypto-asset white paper;
• Information about the crypto-asset project;
• Information about the offer to the public of crypto-assets or their admission to trading on a platform;
• Information on the rights and obligations included in the crypto-assets;
• Information about the crypto-assets;
• Information on the underlying technology, such as the type of blockchain consensus mechanism used;
• Information on risks;
• Information on the principal adverse environmental and climate-related impact of the mechanism used to issue the crypto-asset;

All this information shall be fair, transparent, and not misleading. Also, the crypto-asset white paper shall not contain any material omissions and shall be presented concisely and comprehensibly. Otherwise, the issuer and its bodies will be liable for not providing clear information.

Crypto-asset issuers must notify the white paper to the competent national authority 20 (twenty) days before its publication. After the notification, the offeror must share the whitepaper on its website/online platform.

Competent authorities shall notify the applicant issuer immediately when the crypto-asset white paper is missing the required information. Furthermore, if the application and the crypto-asset white paper are incomplete, they shall set a deadline by which the applicant issuer has to provide any missing information.

Firms must ensure that their white paper covers the content required under MiCA. In addition, issuers will have to consider if any additional EU or domestic regulatory frameworks apply in parallel, for example, the EU Anti-Money Laundering Directive.

Crypto-asset service providers (“CASPs”)

MiCA defines CASPs as (…) “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis”.

A CASP must comply with detailed requirements regarding suits governance arrangements and risk management, including systems and controls requirements. Crypto asset service providers also have to monitor and disseminate possible conflicts of interest and have in place internal know-your-costumer policies.

MiCA covers the following activities:

• Custody and administration of crypto-assets on behalf of third parties;
• Operation of a trading platform for crypto-assets;
• Exchange of crypto-assets against fiat currency or exchange of crypto-assets against other crypto-assets;
• Execution of orders for crypto-assets on behalf of third parties;
• Placing of crypto-assets;
• Reception and transmission of orders on behalf of third parties;
• Advice on crypto-assets;

Supervision and MiCA

CASPs with more than 15 million active users will be classified as “Significant CASPs” and will remain supervised by the Competent Authorities at a national level. In addition, the European Securities and Markets Authority (ESMA) will have an “intervention power” to prohibit or restrict the provision of crypto asset services by CASPs if there are chances of threat to market integrity, investor protection, or financial stability.

The European Banking Authority will supervise stablecoins with more than 10 million users or a reserve of assets worth more than € 5 billion. The European Central Bank will also have veto rights in respect of any stablecoin with which it has concerns.

ESMA will operate a crypto blacklist to name and warn investors of any CASP that fails to comply with MiCA requirements.

How to obtain a MiCA “license” from now on?

According to Recital 77a of MiCA, the national regulatory frameworks applicable to CASPs before the entry into force of MiCA differ among Member States; that’s why it’s essential that Member States that don’t have in place strong prudential requirements for CASPs currently operating under their regulatory frameworks can require such CASPs to be subject to stricter standards than those under the national regulatory frameworks.

Member States might not apply or reduce the 18-month transitional period allowing CASPs to provide services based on their national framework. Operating under the transitory provisions of MiCA means working without a MiCA license for an additional 18 months after the entry into effect of MiCA, potentially set to be in 2024.

The EU legislator defines that any CASP currently operating in an EU Member State under a regime that does not have the same strong prudential requirements stipulated under MiCA may potentially not be able to benefit from the 18 months transitory period if that Member does not amend its local framework according to MiCA requirements by no later than 12 months after the date of entry into force of MiCA.

CASPs that are regulated under a regime that is already of a sufficient standard will quite likely be allowed to benefit from the transitory period in full for 18 months after the date of application, potentially with a minimal process involved to convert their national license/registration into a MiCA one, depending on how closely they are already regulated in comparison to MiCA requirements.

From now on, MiCA will be the primary legislative framework regulating crypto-asset service providers. That’s why it is crucial to choose the proper European jurisdiction in which one has authorization(s) to benefit from the transitory provisions under MiCA.

Currently, the only three jurisdictions in the European Union with an ad-hoc regulatory regime that can be sufficiently proximate to MiCA are Malta, Liechtenstein, and France, with the competent authority in each jurisdiction being the respective financial services authority.

Malta was the first EU Member State to promulgate a comprehensive regulatory framework in November 2018 which is the framework most similar to MiCA’s Regulation.

France followed in May 2019 with a PACTE law regulating Digital Asset Service Providers under a framework similar to Malta’s that requires voluntary registration for some services and obligatory registration for others. Also, Bitcoin decided to define its headquarters in France due to its CASP regulation.

On the other hand, Liechtenstein promulgated a Blockchain Act in January 2020 that introduces novel rules, such as physical validators, which act as gatekeepers between physical assets and their digital twins.

Malta’s framework is similar to MiCA, and the Malta Financial Services Authority is the most experienced in regulating the crypto asset industry. In addition, this country holds certain well-known CASPs, such as OkCoin Europe.

In sum, if a CASP wants to beneficiate from the applicable transitory provisions of MiCA regulation, it must choose very carefully which EU country will be the headquarters of the company.

It is important to note that there are some entities exempted from MiCA transitory provisions stipulated in Article 53(a), namely: i) authorized credit institutions, ii) central securities depositories, iii) investment firms, iv) market operators, v) e-money institutions, vi) management companies of UCITs and vii) alternative investment fund managers, these entities may offer certain crypto asset services by simply notifying the relevant financial services authorities.

Finally, suppose a CASP doesn’t want to obtain a license as a bank or any of those entities either. In that case, the remaining option is the one already referred to as “reserve solicitation”, which is taking on board clients that approach a CASP outside the EU.

Concluding, CASPs not located in these jurisdictions mentioned above should consider the option of being regulated before the date of application of MiCA, not only to enjoy the full extent of the transitory period but also to align their operations with the expectations under MiCA.

CASPs in other jurisdictions must make significant changes to their set-up in a short period if the Member State in which they are located decides not to benefit them from the transitory period.

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 occur using the same payment means as the retail holder used for the initial transaction.

Also, the competent national authority may withdraw the issuers’ authorization in certain situations, such as the serious infringement of the provisions of this Regulation, the issuer has ceased to engage in business for six successive months or has not used its authorization for twelve consecutive months, among other situations.

The possibility of withdrawing issuers’ authorization gives massive power to competent national authorities to decide who can and cannot stay in the market.

Analyzing MiCA’s text shows us that information rights are fundamental to the issuance or offer of crypto-assets in the EU. MiCA’s Article 21 emphasizes the need to notify competent authorities of Member States of the changes in the issuer’s business model that significantly influence the purchase decision of any actual or potential holder.

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 common practice in this 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 significantly 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.

MiCA also sets out a transparency and disclosure requirement for offers and marketing crypto-assets that are not EMTs and ARTs, such as utility tokens or algorithmic stablecoins. This disclosure regime does not include authorization or licensing for issuers; it only contains white paper publication requirements and obligations to act honestly, reasonably and professionally and manage conflicts of interest, among others.

The EU has been defining some measures regarding sustainability, and MiCA regulation is another example of this.

Regardless of the type of crypto-asset, all white papers must include information about the adverse environmental and climate-related impact of the mechanism used to issue the crypto-asset.

The European Securities and Markets Authority (“ESMA”) will create technical regulatory standards about principal adverse environmental and climate-related impacts.

Two years from now, the European Commission will have to cast a report based on crypto-assets impact on the environment and the necessity to introduce mandatory minimum sustainability standards.

In its report on the MiCA application, the European Commission is mandated to create policy options and add more measures to mitigate adverse environmental impacts when necessary.

Some of MiCA’s provisions may contend with blockchain’s essential trait of being permissionless. While the safeguard of investors and consumers is, at 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 industry and may soon 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.

MiCA does not expressly refer to DeFi because it is an emerging technological trend in a very early stage. Still, DeFi is growing fast and will require a fast response by European Regulation. Most DeFi services are not covered by MiCA, such as portfolio management, insurance, lending, and payments. However, in this latter case, the payment services of electronic money tokens are regulated by Directive (EU) 20158/2366, as they are deemed electronic money.

DeFi will need a separate, self-regulatory entity such as the European Decentralized Bank to thrive.

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.

The EU will, sooner rather than later, update the legal framework arising from MiCA to cover all the legal innovation the 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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