However, with the rapid development of the crypto-asset market, risks regarding the trading of crypto-assets have begun to emerge. These include speculative phenomena affecting the value of individual crypto-assets, the lack of transparency regarding the legal nature of these assets, increasing regulatory fragmentation regarding crypto-assets in individual EU member states, lack of specific legislation, and technological advances which have left many people confused as to how to approach these innovations are all risk factors that prompted the EU to create its own comprehensive piece of legislation.
These concerns are all addressed within the MiCA (Markets in Crypto-Assets) project, a future regulation on crypto-asset transactions within the EU.
MiCA is currently a European Commission project, which will result in the entry into force of the Regulation of the European Parliament and of the Council on Markets in Crypto-Assets, amending EU Directive 2019/1937. It is one of the pieces of legislation introduced as part of the so-called digital finance package, an EU strategy that aims to unify the digital market for financial services, stimulate innovation, as well as provide stability and protect investors from risk. Other documents included and worth noting are: Regulation of the European Parliament and of the Council on the operational digital resilience of the financial sector (DORA), Regulation of the European Parliament and of the Council on a pilot system for distributed ledger technology (DLT)-based market infrastructures, and the Communication on the EU Retail Payment Strategy.
What is the scope of the regulation?
Among the crypto-assets covered by this regulation, one can distinguish (i) utility tokens, i.e. assets that are not treated as money, but as a right to a future product or service. By definition, these act as digital vouchers; (ii) asset-linked tokens (the so-called stablecoins) – crypto-assets that, by definition, should maintain a stable value by reference to another asset, such as another cryptocurrency or the dollar exchange-rate. According to the EU legislator, such cryptocurrencies generate the greatest risks because they aspire to act as a means of payment; and (iii) tokens that are e-money, whose main purpose is to be used as a means of exchange, and whose value is maintained by reference to the value of a fiat currency.
Somewhat controversially, several items have also been excluded from the MiCA regulations, including (i) DeFi, or decentralised finance which include, for example, cryptocurrency exchanges operating on the basis of smart contracts; (ii) CBDCs (central bank digital currencies), which are the equivalent of fiat currencies issued by central banks, but based on blockchain infrastructure; and (iii) NFTs – non-fungible tokens – except where they qualify under existing cryptocurrency categories.
In terms of entity scope, MiCA's coverage includes two categories of entities - issuers of cryptoassets and providers of crypto-related services. The starting obligation for issuers of regulated assets (except for, among others, issuers of NFTs or cryptoassets offered for free) is the publishing of a so-called white paper, a document which is a simplified equivalent of a prospectus. The white paper will have to be delivered at least 20 days before the first issuance to the relevant financial market supervisors in a given EU country, such as the KNF, Poland’s national financial supervisor. These authorities will then be able to allow or prohibit the issuance of the cryptoasset in question. In addition to this, in the case of stablecoins, the issuer will be required to have an offering license and explicit prior approval of the white paper by the national financial supervisory authority.
Any Credit institution, Crypto-asset service providers or Investment Firm that provide custody services will have to respect strong requirements to protect consumers wallets and will become liable in case they lose investors’ crypto-assets, unless it can prove that the loss has arisen as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts to the contrary.
Competitive advantage of functioning institutions over new entrants to the market
The entry into force of this legislation will create a new financial reality that will primarily benefit financial institutions that are already regulated and can be issuers interested in providing services throughout the EU. Obtaining authorisation in one country will enable the provision of services throughout the EU, which will make it much easier for these entities to operate due to the lack of the need to obtain a license in each country separately. In addition to this, the regulation removes from currently regulated players some of the obligations that new players in the market will have to fulfil. For countries such as Germany, where licenses already exist for certain cryptocurrency-related financial services, simplified authorisation procedures will be introduced to update this license. This could prove to be a major competitive advantage for EU countries that are already pioneers in the crypto space. Service providers operating in these countries will be able to obtain new licenses faster.
High standards for significant issuers
On the other hand, however, the MiCA serves stablecoin issuers with a package of additional obligations. In addition to the obligation to develop the previously mentioned white paper, the EU requires, among other things, filing with a supervisory authority, obtaining the status of a credit or e-money institution and meeting the institutional requirements for e-money.
Not all stablecoin issuers are equal. The MiCA provides additional requirements for those entities that will qualify as so-called issuers of significant tokens.
According to the current draft of the MiCA, such entities would be required to meet additional requirements such as the obligation to implement a special remuneration policy that promotes prudent risk management. According to the draft, regulators should develop technical standards that will specify the minimum content of the required policy. Stricter requirements will also apply to the amount of required own funds. The entry into force of the requirements in question may limit stablecoin issuance, while affecting the reduction of risks to the EU's financial stability and monetary policy. On the other hand, however, such shaping of regulations may disrupt one of the main objectives of the Union, namely the promotion of innovation in the financial sector.
Cryptocurrency market players will also be obliged to provide information on their environmental and climate footprint. MiCA does not exclude the obligation to provide proof of work.
MiCA also places a strong emphasis on consumer protection. Issuers of stablecoin will be required to create a sufficiently liquid reserve partly in the form of deposits. Any stablecoin cryptocurrency holder will be able to receive a claim from the issuer for free at any time, and the rules governing the reserve will also ensure adequate minimum liquidity. In addition, all stablecoins will be under the supervision of the European Banking Authority (EBA), and a condition of any issuance will be the presence of the issuer in the EU.
The development of stablecoins based on a non-European currency as a commonly used means of payment will be restricted, which is aimed at strengthening the sovereignty of the eurozone. Issuers of such tokens will also be required to maintain a registered office in the EU to ensure adequate oversight and monitoring with regard to public offerings of asset-linked tokens.
The MiCA will create a harmonised European cryptoasset market, which aims to establish legal certainty across the EU through clear asset classification and transparent guidelines for service providers and issuers. If the regulations meet with widespread acceptance, one can cautiously predict that more institutional investors and resources will enter the market. This could help its further development. In addition to this, MiCA, due to the scale of the European single market, could follow in the footsteps of the General Data Protection Regulation (GDPR) and also become a contributor to shaping similar regulations in other parts of the world.
The full legal text of the MiCA has been approved. Now it must be formally approved by the EU Parliament and is expected to be published early next year before taking effect sometime in 2024.