The environmental impact of cryptocurrency has been a well-discussed and controversial topic in the market. In its early stages, concerns were raised whether MiCA would ban crypto mining entities such as bitcoin from operating across the EU as the ‘proof of work’ consensus mechanism used by bitcoin is considered to result in the use of a lot of power as miners strive to mine new blocks.
In the proposed text, MiCA calls on cryptocurrency businesses to declare information on their environmental and climate impact. Each CASP would be required to disclose what type of blockchain consensus mechanism it uses in a public whitepaper. ESMA would be tasked with developing what exactly these disclosures from CASPs should look like in more detail.
If introduced as drafted, MiCA would contain the world’s first explicit rules to define and ban specific forms of market manipulation in digital assets.
MiCA would deal with so-called front running, where CASPs use advanced knowledge of impending trades to take advantage of price movements that will result from those trades.
MiCA also includes measures to deal with insider trading, which has been a concern amongst investors in CASPs. MiCA would require CASPs to publicly disclose inside information regarding their organisation and tokens as soon as practically possible. This would need to be done in a manner that guarantees a swift and broad dissemination among the public.
One of the most common concerns raised with crypto-assets is so-called wash trading. In this context, wash trading means executing a transaction in which the seller is on both sides of the trade, which paints a misleading picture of an asset’s value and liquidity. Under MiCA, CASPs would be expected to be fully transparent and implement surveillance and enforcement mechanisms to deter any potential market abuse.
Response from CASPs and regulators to MiCA
Most CASPs see MiCA as an enabler for innovation and progression in the sector. MiCA is seen as necessary to give CASPs further legitimacy and credibility to progress in the current financial market.
Regulators in the EU have agreed that MiCA would provide one of the most comprehensive regimes for digital assets to date.
When can we expect the regulations to be finalised?
Provisional agreement on MiCA was reached by the European Parliament and Council of Ministers – the EU’s two main law-making bodies – in the summer. Both the Parliament and Council must vote to formally adopt the legislation before it can become EU law. Earlier this month, the Economic and Monetary Affairs Committee at the Parliament endorsed the text, paving the way for all MEPs to vote on the proposed new legislation at the next plenary session, which is scheduled for 9 November.
MiCA would apply 18 months after the text comes into force, which will only happen 20 days after its publication in the Official Journal of the EU. It is likely that it will not begin to have effect until early 2024.
To avoid any potential disruption in the market, MiCA provides for a transitional period for crypto-assets already issued before the legislation comes into force. CASPs will be exempt from the obligation to publish a white paper in relation to those legacy issuances.
Co-written by Carrie McMeel of Pinsent Masons.