Knowing the Regulation currently as a proposed legislation, it is important to note that on May 16, 2023 the European Parliament and the Council adopted the Regulation on Markets in Crypto-assets (MiCA), amending Directive (EU) 1093/2010. This, the first of its kind, regulation is expected to be implemented within the next 1.5 years and will transform the delivery of virtual currency services within the context of the EU Member States. Since crypto-asset market participants remain an important driver to the growth of this market, this article offers a comprehensive description of MiCA and its effects on market participants. It is worth mentioning that this is an incomplete list of the questions that one might have concerning mobile gaming, and we encourage going to an attorney for yet more answers.
EU-Wide Framework for Crypto-Assets
The crypto-asset legislation in MiCA also outlines the legal and regulatory regime for VASPs and crypto-assets, which include virtual currencies or cryptocurrencies. It provides provisions for the circulation of specific crypto-assets where the distributed assets consist of fiat instruments or other financial assets and e-money based on the block-chain.
On that note, this regulation has the pull of trying to harmonize with the EU’s digital age technique in order to create a competitive day and age friendly economy. It shall cater for all the capital raising processes by providing the enterprises with new methods of financing as well as the enhancement of efficient means for payment through innovative crypto-assets. It has been argued that the adoption of MiCA will open up possibilities for an expansion of the commercial application of blockchain technology hence leading to an improvement in the EU economy and the creation of employment for the citizens.
Classification of Crypto Assets
Prior to MiCA, the EU lacked a unified approach to classifying crypto-assets. While some assets were considered financial instruments under Directive 2014/65/EU, many virtual currencies (e.g., Bitcoin, Ethereum, Litecoin) remained unregulated at the EU level.
This fragmented regulation led to varying user confidence and hindered market development. MiCA aims to standardize definitions and introduce three types of crypto-assets based on their risk profiles. These classifications depend on whether the crypto-assets stabilize their value by referencing other assets, including official currencies and commodities like gold.
Electronic Money Tokens and Asset-Referenced Tokens
Electronic money tokens (e-money tokens) maintain a stable value by referencing one official currency and require enhanced supervision due to their potential financial market impact. Asset-referenced tokens maintain stability by referencing various values, such as multiple currencies or commodities. Algorithmic “stablecoins” will also fall under this regulation.
MiCA introduces additional requirements for significant e-money and asset-referenced tokens, including higher capital requirements and liquidity management standards.
Exclusions from Regulation
MiCA excludes certain crypto-assets, such as unique, non-fungible tokens (NFTs) and digital collectibles, from its scope. It also exempts assets issued by central banks and non-transferable assets, such as loyalty points limited to the issuer’s ecosystem.
Issuance and Listing of Crypto-Assets
MiCA outlines specific requirements for issuing and listing crypto-assets, with stricter rules for e-money and asset-referenced tokens due to their higher financial risks. Notably, issuers must publish a detailed whitepaper containing essential information and disclosures, ensuring transparency and consumer protection.
Marketing Communication
Marketing communications, including social media advertising, must be clear, fair, and not misleading, aligning with the information in the crypto-asset whitepaper. ICO organizers must act honestly and professionally, managing conflicts of interest and maintaining high security standards.
Supervision by Competent Authorities
While there is no requirement for pre-approval of crypto-asset whitepapers, regulators can request amendments and suspend or prohibit offerings. European supervisory authorities (ESMA and EBA) will publish guidelines on ICO standards.
Safeguarding Requirements and Investor Rights
To protect retail investors, MiCA requires secure holding of funds and crypto-assets during ICOs, preferably by third parties. Investors also have the right to withdraw within a limited period after acquisition.
Issuance of Asset-Referenced Tokens
Issuers of asset-referenced tokens must have an EU-based office and obtain authorization from a supervisory authority. They must provide continuous information to token holders and adhere to strict capital and governance requirements, ensuring transparency and stability.
Crypto-Asset Services
MiCA defines services which will be provided to and distributed among CASPs based on trading platforms and the custody and the administration of crypto-assets, in addition to advisory services. Because of the sensitive information, it’s stored, transferred and processed, CASPs are expected to adhere to strict criteria regarding their transparency, measures put in place protecting their clients, and company’s overall integrity.
Transitional Period and Passporting
The MiCA has set an 18-month grace period to allow existing CASPs to have time to undergo change within the law and acquire the required licenses. It also brings changes to legislation to allow CASPs passporting across the EU based on a single license.
Market Abuse Prevention
MiCA contains a subsection of rules in relation to market abuse which essentially includes rules in relation to the disclosure of inside information and market manipulation akin to rules in relation to financial markets.
ESMA’s EU-Wide Register
They will develop a TauT, which will create a public list of companies that successfully obtain an authorization to operate with CASPs and crypto-assets.
Penalties for Non-Compliance
MiCA provides severe sanctions for infringements; companies face fines between €5,000,000 and 12, which is much higher than the original cap of €10 million envisioned by ESMA. The sanctions may not be less than 5% of annual turnover, and in cases where a violation is severe, the sanctions may be up to 20% of the annual turnover. Local authorities are required to report the measures and penalties they imposed to the ESMA and the EBA.
Detailed Breakdown of MiCA’s Provisions
Establishing a Harmonized Crypto-Asset Framework
MiCA’s adoption marks a significant step towards harmonizing the crypto-asset regulatory landscape across the EU. By creating a unified framework, MiCA addresses the inconsistencies in national regulations that have previously hindered market growth and innovation. This harmonization will enhance user confidence and promote the development of innovative digital services and alternative payment instruments.
Defining Crypto-Assets Broadly
MiCA adopts a technologically neutral stance, using the term “token” to encompass all crypto-assets, whether they have their own blockchain or not. This broad definition ensures that all types of crypto-assets, including those currently outside the scope of EU legislation, are covered.
Classifying Crypto-Assets Based on Risk
MiCA introduces a risk-based classification system for crypto-assets. The primary categories include:
- Electronic Money Tokens (E-Money Tokens): These tokens maintain a stable value by referencing a single official currency. Enhanced supervision is required due to their potential impact on the financial market.
- Asset-Referenced Tokens: These tokens maintain stability by referencing multiple values, including official currencies and commodities. Algorithmic stablecoins fall under this category.
- General Crypto-Assets: This residual category includes all other crypto-assets not classified as e-money or asset-referenced tokens.
Addressing Exclusions from Regulation
Certain assets are explicitly excluded from MiCA’s scope, including NFTs and crypto-assets issued by central banks or representing unique, non-fungible assets like digital art and collectibles. These exclusions ensure that MiCA focuses on assets that pose significant financial risks and require regulatory oversight.
Comprehensive Issuance and Listing Requirements
MiCA sets out detailed requirements for the issuance and listing of crypto-assets. Issuers must publish a comprehensive whitepaper containing key information about the crypto-asset, the issuer, and the associated risks. This whitepaper must be transparent and accessible to potential investors, enhancing market integrity and investor protection.
Ensuring Transparent Marketing Communication
Marketing communications related to crypto-assets must be fair, clear, and not misleading. This requirement extends to all channels, including social media. ICO organizers must uphold high standards of honesty and professionalism, ensuring that all marketing materials align with the information provided in the whitepaper.
Strengthening Supervisory Authority
MiCA empowers competent authorities to supervise and regulate the crypto-asset market effectively. While pre-approval of whitepapers is not required, regulators can request amendments and take action against non-compliant offerings. ESMA and EBA will also issue guidelines to standardize ICO practices across the EU.
Enhancing Investor Protection
To protect retail investors, MiCA introduces stringent safeguarding requirements for funds and crypto-assets acquired during ICOs. Investors are granted a right to withdraw within a specified period, providing an additional layer of protection against potential risks.
Issuance of Asset-Referenced Tokens
Pursuant to the requirements of the primary legislation, issuers of asset-referenced tokens must receive authorization from a supervisory authority, and they are also required to provide ongoing information to token holders. These measures provide for transparency in the market, stability of returns, fair investor treatment, and protection of their interests.
Regulating Crypto-Asset Services
MiCA imposes the following obligations on CASPs upon its implementation early next year with regard to services ranging from trading, custody, and advisory: CASPs’ business models and practices for delivering CAS services must adhere to high standards of transparency, client protection, and operational soundness.
Implementing a Transitional Period and Passporting
In order to prevent disruption of operations, MiCA offers the incumbents an opportunity to do so within the next 18 months since the law’s enactment. The regulation also provides for a passporting system that would enable CASPs to provide their services in any of the EU nations without having to seek fresh permission, hence fostering the cross border MA.
Preventing Market Abuse
MiCA has measures on the prohibition of market abuse as outlined in the publishing of Inside Information, and market manipulation. These remedies lie in conforming and complementing financial market regulations and policies to provide an efficient, competitive, and transparent marketplace.
Establishing an EU-Wide Register
Like with other financial products, ESMA will also keep a central, accessible list of all authorized ‘crypto-asset issuers’ and ‘Crypto-Asset Servicing Providers’ (CASP). This register helps to increase the transparency of the securities markets and enables investors to assess the authenticity of the participants in the markets.
Imposing Penalties for Non-Compliance
Moreover, as an illustration of the penalties that MiCA makes for non-compliance, let us point out that it ranges from €5,000,000 to 12. Twenty to fifty percent of the annual gross turnover is a penalty in case of gross violation of the rules. National competent authorities are required to report to ESMA and EBA any measures taken and penalties imposed, to keep the sanctions sophisticated and similar across the European Union.
For more information on this development or to get a detailed understanding of the MiCA and how it may affect your business, get in touch with us. Our team is willing and capable to provide expert advice and support in order to help you.
