MiCA: Making Progress

The European Council (Council) and the European Parliament (Parliament) announced on 30 June 2022 that they had reached a provisional agreement on the proposal for regulation on markets in cryptoassets (MiCA). The text of MiCA was published in the Official Journal of the EU on 9 June 2023¹ and entered into force on 29 June 2023. The main operative provisions apply from 30 December 2024.

Background

Prior to the adoption of MiCA, only a small number of cryptoassets were regulated under existing legislation (for example, security tokens that are financial instruments are regulated under MiFID)². Per the Council’s Digital Finance webpage, MiCA “brings cryptoassets, cryptoasset issuers and cryptoasset service providers under one regulatory framework for the first time”.³  Our earlier OnPoint Countdown to MiCA: The EU’s cryptoassets regulation discusses the background to MiCA as well as the co-legislators negotiations before they reached agreement on the final text.

How does MiCA apply to “cryptoassets”?

MiCA brings certain types of cryptoassets within the regulatory and legal perimeter, but it will not attempt to regulate every form of cryptoasset. MiCA defines cryptoasset as "a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology".⁴ Distributed ledger technology (DLT) is defined as "a technology that enables the operation and use of distributed ledgers".⁵ MiCA is limited to cryptoassets that do not qualify as MiFID financial instruments, deposits or structured deposits or traditional e-money under existing EU financial services legislation.

MiCA makes a distinction between three subcategories of cryptoasset, each of which are subject to more specific requirements. The three categories are:

1. Utility tokens - a type of cryptoasset that is intended to provide digital access to a good or service, available on DLT, and that is only accepted by the issuer of that token.
2. Asset-referenced tokens - aimed at maintaining a stable value by referencing several currencies that are legal tender, one or several commodities, one or several cryptoassets, or a basket of such assets.
3. E-money tokens or electronic money tokens - cryptoassets that are intended primarily as a means of payment, aimed at stabilising their value by referencing only one fiat currency, and that have a function that is very similar to the function of electronic money.

Key requirements

MiCA lays down the following requirements for cryptoasset issuers and cryptoasset service providers (CASPs):

• Transparency and disclosure requirements for the issuance, offer to the public and admission of cryptoassets to trading on a trading platform for cryptoassets (‘admission to trading’).
• Requirements for the authorisation and supervision of CASPs, issuers of asset-referenced tokens and issuers of e-money tokens, as well as for their operation, organisation and governance.
• Requirements for the protection of holders of cryptoassets in the issuance, offer to the public and admission to trading of cryptoassets.
• Requirements for the protection of clients of cryptoasset service providers.
• Measures to prevent insider dealing, unlawful disclosure of inside information and market manipulation related to cryptoassets, to ensure the integrity of markets in cryptoassets.⁶

MiCA does not aim to regulate cryptoassets that qualify as MiFID financial instruments, deposits or structured deposits or traditional e-money under existing EU financial services legislation.

Cryptoasset activities in scope of MiCA services

MiCA regulates the following cryptoasset services and activities (defined in Article 3):

• Providing custody and administration of cryptoassets on behalf of clients.
• The operation of a trading platform for cryptoassets.
• The exchange of cryptoassets for "funds" as defined as in the the revised Payment Services Directive  (PSD2)⁷ (broadly, banknotes and coins, scriptural money or electronic money).
• The exchange of cryptoassets for other cryptoassets.
• The execution of orders for cryptoassets on behalf of clients.
• Placing of cryptoassets.
• The reception and transmission of orders for cryptoassets on behalf of clients.
• Providing advice on cryptoassets.
• Providing portfolio management on cryptoassets.
• Providing transfer services for cryptoassets on behalf of clients.

CASPs

Only persons who are authorised as CASPs⁸ in accordance with Article 63 of MiCA may provide cryptoasset services in the EU. MiCA sets the provisions on authorisation and operating conditions of CASPs, defining the provisions on authorisation, detailing the content of such an application, the assessment of the application and the rights granted to competent authorities to withdraw an authorisation.

MiCA lists the regulated services and activities that apply to any cryptoassets and in relation to which authorisation under MiCA is required. MiCA also requires national competent authorities to ensure that any authorisations they grant specify the cryptoasset services that CASPs are authorised to provide. MiCA also sets out the operating conditions that apply to authorised CASPs.

The specific requirements that apply to CASPs providing advice on cryptoassets and providing portfolio management of cryptoassets are set out in Article 81.

Regulated entities that already licensed in the EU as a credit institution, central securities depositary, investment firm, market operator, electronic money institutions, UCITS management company or alternative investment fund manager (AIFM) are not required to obtain a new authorisation to act as a CASP. Instead they are required to register as a CASP with their competent supervisory authority.

Cross-border provision of cryptoasset services

One of the most attractive aspects of MiCA to firms looking to provide cryptoasset activities in the EU is “passporting”: CASPs authorised in one member state will be able to operate across the EU under an EU passport. To benefit from the passport, the CASP that intends to provide cryptoasset services in more than one Member State needs to submit the following information to the competent authority of the home Member State (i.e. the Member State where the CASP is authorised):

• A list of the Member States in which the CASP intends to provide cryptoasset services.
• The cryptoasset services that the CASP intends to provide on a cross-border basis.
• The starting date of the intended provision of the cryptoasset services.
• A list of all other activities provided by the CAPS not covered by MiCA.

Delegated acts, technical standards and guidelines

MiCA confers on the Commission the power to adopt delegated acts for a period of 36 months after the Regulation entered into force (that is, by 29 June 2026) (MiCA Article 139). The Delegated Acts relate to several provisions of MiCA including, amongst others, in relation to definitions (Article 3(2)), classification of asset-referenced tokens as significant asset-referenced tokens (Article 43(11)), product intervention by competent authorities (Article 105(7)).

Under MiCA, the Commission is empowered to adopt certain regulatory technical standards (RTS). The European Banking Authority (EBA) or European Securities and Markets Authority (ESMA) is mandated to submit the draft RTS to the Commission for endorsement no later 30 June 2024. In addition, the EBA or ESMA, is mandated to draft implementing technical standard (ITS) in relation to certain provisions of MiCA.

ESMA published a consultation paper on its first set of RTS and ITS under MiCA on 12 July 2023⁹. The consultation closed on 20 September 2023. The first consultation package covers five RTS and two ITS and includes technical standards for the following mandates, focused on the authorisation process of CASPs and regulatory processes within CASPs:

• Article 60(13): RTS on content of notification from selected entities to NCAs.
• Article 60(14): ITS on forms and templates for notification from entities to NCAs.
• Article 62(5): RTS on the content of the application for authorisation for CASPs.
• Article 62(6): ITS on forms and templates for CASP authorisation application.
• Article 71(5): RTS on complaint handling procedure.
• Article 72(5): RTS on management and prevention, disclosure of conflict of interest.
• Article 84(4): RTS on intended acquisition information requirements.

According to its MiCA webpage,¹⁰ ESMA will consult on a second package of level 2 measures by October 2023. It is likely to cover:

• Sustainability indicators.
• Business continuity requirements.
• Trade transparency data and order book record-keeping.
• Record-keeping requirements for CASPs.
• Classification, templates and format of cryptoasset white papers.
• Public disclosure of inside information.

The third and final consultation package is expected to be published in Q1 2024.

In addition, MiCA provides for the development of guidelines in relation to certain specific aspects of MiCA, for example ESMA is mandated to issue guidelines on the criteria and conditions for the qualification of cryptoassets as financial instruments.

Timing

The provisions relating to the development or adoption of Delegated Acts, and various regulatory technical standards and implementing technical standards, apply from 29 June 2023.

The provisions relating to issuers of asset-reference tokens and e-money tokens (that is, stablecoins) apply from 30 June 2024.

The remaining provisions that apply to CASPs apply from 30 December 2024.

ESMA has prepared an implementation timeline.¹¹

The UK Position

The UK will not follow or adopt MiCA. However, the UK is taking steps to develop regulation in this area.¹² The first UK regulatory change relates to the marketing of cryptoassets, with the change in force from 8 October 2023.¹³

Conclusion

The implementation of MiCA is to be welcomed as it brings in a uniform EU regulatory framework for cryptoassets which are not currently regulated by existing EU financial services legislation, and will give market participants greater legal certainty. It is important to note that the requirements under MiCA in some respects are less strict than those under traditional EU securities law, the rationale for this approach being to avoid potential obstacles in the future as cryptoassets develop and evolve.

As pointed out by the chair of ESMA¹⁴, even though the implementation of MiCA is a step forward, it has to be noted that there is no such thing as a safe cryptoasset and that consumers need to be aware that MiCA does not provide the same protection as what exists for traditional financial products. Market participants planning to provide services in relation to cryptoassets will have to analyse their current cryptoassets, policies, procedures and processes to make sure that they comply with the new requirements MiCA introduces. Nonetheless, a uniform legal regime underpinned by “passporting” should help enable the EU to develop as a cryptoasset hub.

Footnotes

1. The text of MiCA is available here.
2. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance.
3. The Council’s webpage is available here.
4. MiCA Article 3(5).
5. MiCA Article 3(1).
6. MiCA Article 1(2).
7. Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and repealing Directive 2007/64/EC.
8. A CASP is defined as “a legal person or other undertaking whose occupation or business is the provision of one or more crypto-asset services to clients on a professional basis, and that is allowed to provide crypto-asset services in accordance with Article 59” (MiCA Article 3(15)).
9. The Consultation Paper is available here.
10. The ESMA MiCA webpage is available here.
11. The timeline is available here.
12. See our OnPoint on Treating Crypto Fairly: The New UK Government Consults on a Comprehensive Regulatory Regime for Cryptoassets.
13. See our OnPoints on FCA issues final rules for marketing cryptoassets in the UK and Update on UK Cryptoasset Marketing Rules: What do firms need to do by 8 October?.
14. The speech delivered by the ESMA Chair is available here.