Article

The Potential Impact of MiCAR Regulation on the Digital Asset M&A Market

Unlocking strategic opportunities

The article discusses the potential impact of the Markets in Crypto-assets Regulation (MiCAR) on the European M&A landscape for digital assets. By presenting key regulations impacting the M&A market, it derives major developments, including market entry through licensing, market entry through acquisition, market stimulation, and facilitation of investment. These developments imply possible recommendations for action to effectively navigate complexities and seize opportunities in the changing regulatory environment.

Digital assets, such as cryptocurrencies and other blockchain-based assets, are increasingly important due to their potential to offer new investment opportunities and drive financial innovation. The market capitalization of digital assets has grown significantly over the years, reaching an all-time high of nearly $3 trillion USD in November 2021. However, the lack of clear regulatory frameworks has raised concerns about their security and stability, which is relevant for investment decisions & further growth. 

In this publication, we present a concise overview of the potential impact that the Markets in Crypto-assets Regulation (MiCAR) [1] may have on the European M&A landscape for digital assets. We highlight potential strategic developments and outline necessary actions for effectively navigating the changing regulatory environment.

Regulatory authorities are paying close attention to the developments of this new asset class. For those involved in M&A, particularly within financial institutions and FinTechs, having regulatory certainty and understanding the impact of financial market regulations on the crypto-asset sphere has become increasingly important. 

MiCAR provides a new set of regulatory guidelines which aim to establish a comprehensive regulatory framework for crypto assets [2] in the EU, with the goal of improving consumer and investor protection. The following table represents key elements within the MiCAR which are potentially impacting M&A activities: 

In conclusion, MiCAR represents a substantial advancement towards the widespread acceptance of crypto assets in the EU. This regulatory clarity is likely to promote an increase in transactions, including cross-border, as well as bolster the European market for businesses engaged in crypto assets through ancillary positive effects not directly related to M&A. We have identified four key developments impacting M&A transactions: 

  1. Market entry through licencing: To effectively traverse the evolving European crypto landscape and seize emerging opportunities while adhering to MiCAR provisions, companies looking to enter or grow in the European market must consider various approaches. For EU-based firms, this entails seeking a license in their domicile or target country of operation, while non-EU organizations can either establish an EU subsidiary to apply for a license or acquire an EU-licensed entity. The expansion of non-EU companies into the EU is exemplified by for examples companies looking for licensing in Europe under MiCAR [5]. 
  2. Market entry through acquisition: Another pragmatic strategy for businesses aiming to cater to EU clientele involves the acquisition of entities already adhering to relevant regulations. This tactic enables non-EU firms to capitalize on the acquired entity's established reputation, client base, and technical expertise in the EU market, while mitigating the risk and cost associated with pursuing a license independently. Consequently, the MiCAR functions as a cohesive market entry point, facilitating expansion within the EU and empowering companies to provide services across multiple jurisdictions. This development is expected to fuel a surge in M&A activity within the sector.
  3. Market stimulation: In addition to its direct impact on M&A, MiCAR is poised to catalyse a range of broader market implications, shaping a robust narrative for the European crypto sector. The heightened activity resulting from MiCAR's implementation is likely to attract new entrants, intensify competition, ignite innovation, and propel comprehensive market growth. Notably, the establishment of consistent regulations and benchmarks under MiCAR is anticipated to foster cross-border trading and investment, concurrently reducing the prospects for regulatory arbitrage. This harmonized regulatory framework will not only benefit the overall market ecosystem but also bolster M&A transactions, culminating in a vibrant and thriving European crypto landscape.
  4. Facilitation of Investment: Executing thorough due diligence procedures to confirm target companies' adherence to the most recent regulations is of paramount importance. Owing to the complexity and possible alterations in MiCAR, engaging regulatory experts to ensure compliance with the requirements is essential. Investors should also confirm that the target utilizes appropriate technology solutions for managing crypto assets, as well as for monitoring and reporting compliance, customer identity verification, and AML checks. 

As we look ahead, the MiCAR will undoubtedly reshape the European crypto landscape by providing a unified framework that streamlines market access and fosters growth. By understanding and embracing these key developments, companies can navigate the complexities of this evolving ecosystem and seize opportunities in the EU market. By adopting strategic approaches, prioritizing regulatory compliance, and staying attuned to the ever-changing regulatory environment, businesses can effectively capitalize on M&A opportunities, contribute to the sector's expansion, and ultimately, thrive in the burgeoning European crypto market.

If you want to learn more about our M&A capabilities in crypto to master the regulatory requirements, please contact our cross-functional team of Blockchain and M&A specialists.

 

Foot notes

[1] For further details on the content of MiCAR please refer to Deloitte’s German article “MiCAR: Neue Verordnung sorgt für EU-weite Veränderungen im Kryptomarkt“

[2] ‘crypto-asset’ means a digital representation of a value or a right which may betransferred and stored electronically, using distributed ledger technology or similartechnology 

[3] ‘crypto-asset service’ means any of the services and activities listed below relating toany crypto-asset:

(a) the custody and administration of crypto-assets on behalf of third parties;

(b) the operation of a trading platform for crypto-assets;

(c) the exchange of crypto-assets for funds;

(d) the exchange of crypto-assets for other crypto-assets;

(e) the execution of orders for crypto-assets on behalf of third parties;

(f) placing of crypto-assets;

(fa) providing transfer services for crypto-assets on behalf of third parties;

(g) the reception and transmission of orders for crypto-assets on behalf of third parties;

(h) providing advice on crypto-assets;

(hb) providing portfolio management on crypto-assets.

[4] ‘issuer of crypto assets’ means the natural or legal person or other undertaking whoissues the crypto assets 

[5] For example please see Circle’s press release as per April 7,2023 "Circle Applies for Regulatory Approvals in France, Doubling Down on European Expansion" 

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