European legislators have agreed on a landmark law regulating crypto assets: Markets in Crypto-Assets (MiCA) Regulation

Context

On 30 June 2022, the European Parliament and Council reached a provisional agreement on the Markets in Crypto-Assets (MiCA) Regulation.

MiCA was first introduced in 2020 as part of the EU's Digital Finance Package, together with the Digital Operational Resilience Act (DORA) and a DLT Pilot Regime Regulation. These establish a comprehensive set of rules reflecting the EU’s ambition to embrace the digital transition and turn Europe into a global digital player.

MiCA aims to create a regulatory framework for the crypto-asset market that supports innovation and harnesses the potential of crypto assets, while also preserving financial stability and protecting investors.

Through this agreement, the EU is reaffirming that digital finance remains a top priority on its agenda and is set to become the first major jurisdiction to regulate crypto assets.
 

Who is in scope of MiCA?

Once in force, MiCA will apply to certain types of crypto assets and their issuers, as well as crypto-asset service providers (CASPs).
 

1. Certain types of crypto-assets and their issuers

MiCA will capture all crypto-assets not currently covered under existing financial service legislation. These range from utility tokens that provide access to a service to so-called “stablecoins” issued primarily for payments. MiCA splits crypto assets into three overarching categories: asset-referenced tokens (ARTs), e-money tokens (EMTs) and other crypto assets (the “catch-all” category).

To achieve legal clarity, the European Securities and Markets Authority (ESMA) will likely be mandated to further specify the conditions for which crypto assets are considered financial instruments (i.e., are in scope of existing financial service regulations) or vice versa (in which case these other cryptos would fall within the scope of MiCA).

Crypto-asset issuers will be required to produce and publish a crypto-asset whitepaper that includes all relevant information on the specific crypto asset. Members of the issuers' management body will have to meet probity standards, and misleading market communications by crypto-asset issuers are prohibited.

To avoid an undue administrative burden, national competent authorities (NCAs) will generally not approve a whitepaper before it is published (however, there are some exemptions to this, such as with stablecoins). The issuer will still need to notify the whitepaper to its NCA with an explanation of why the crypto assets should not be considered as financial instruments under Section C of Annex I to Directive 2014/65/EU (MiFID II) or any other category outside MiCA’s scope (e.g., e-money or deposit).

MiCA introduces several exemptions from the requirement to draft and publish whitepapers, such as in case of crypto assets that are offered for free, automatically created through mining activities, or offered to a small number of investors or solely to qualified investors. However, these exemptions again do not apply to ARTs and EMTs.
 

2. Crypto-asset service providers (CASPs):

CASPs (such as custodian wallet providers, crypto-asset trading platforms, crypto-exchanges against fiat currencies or other crypto assets) will need authorization to operate within the EU. They will be subject to prudential and organizational requirements, and rules on the safekeeping of clients' funds, mandatory complaint handling procedures and conflicts of interest.

There are also specific requirements depending on the CASP type. For example, CASPs providing custody services will have to respect robust requirements to protect consumers’ wallets and become liable if they lose investors’ crypto assets.

MiCA will also cover any type of market abuse related to any kind of transaction or service, notably for market manipulation and insider dealing.

Significantly, CASPs will benefit from the “EU passport” through MiCA authorization, allowing them to provide services throughout the EU.

Given the relatively small number of CASPs to date, they will be authorized and supervised by the NCA of the CASP’s registered office. ESMA and the European Banking Authority (EBA) will have powers to issue technical guidelines and binding decisions, with ESMA also maintaining a register of all CASPs.

Focus on stablecoins

As stablecoins have a real potential to be widely adopted by users to transfer value or as a means of payments, they could generate increased consumer-protection and market-integrity risks. For these reasons, this particular sub-category of crypto assets is a significant focus of MiCA and is subject to more stringent requirements.

As a precondition for MiCA authorization, stablecoin issuers must:

• Have a registered office in the EU;
• Build up a sufficiently liquid reserve, with a 1/1 ratio and partly in deposits; and
• Offer every stablecoin holder a claim at any time and free of charge, with the rules governing this reserve also providing adequate minimum liquidity.

Finally, all stablecoins will be supervised by the EBA—and, if ARTs reference EU currencies, the European Central Bank (ECB) and the currency’s national central bank of issue will provide an opinion on the prospective issuer’s application.

ESG considerations

Seemingly opting for a softer approach, European legislators have not explicitly banned Proof-of-Work (PoW) based digital currencies despite their energy consumption concerns. Through this move, the EU potentially marks an implicit adoption of Bitcoin, the best-known application of the PoW consensus mechanism.

However, actors in the crypto-asset market will still need to declare information on their environmental and climate footprint. ESMA will be tasked to develop draft regulatory technical standards on the content, methodologies and presentation of information regarding principal adverse environmental and climate-related impacts.

Application to NFTs

Non-fungible tokens (NFTs), i.e., digital assets representing real (digital) objects like art, music and videos, will be excluded from MiCA’s scope unless they fall under existing crypto-asset categories. The European Commission will assess if a Union-wide bespoke regime is required for NFTs in the future.

Next steps

The provisional agreement is now subject to European Council and Parliament approval before going through the formal adoption procedure. MiCA is expected to apply 18 months after it is finalized.

To avoid market disruption, MiCA allows for a transitional period for crypto assets already issued before it entered into force. Therefore, issuers of these crypto assets will be exempt from the obligation to publish a whitepaper and other applicable requirements.

However, this transitional period does not apply to ARTs and EMTs. Issuers and CASPs for these crypto assets will therefore have to obtain an authorization as soon as MiCA applies.

How Deloitte can help

Deloitte can help you navigate this new environment to understand and define your digital strategy, identify how these new instruments and tools may impact your organization, and even accompany your asset tokenization journey for financial or other purposes.

We can also help you stay ahead of the regulatory curve with our regulatory watch service.

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