What EU’s MiCA regulation means for crypto-asset service providers

MiCA was proposed by the European Commission in 2020 as part of a broader digital finance package, which also includes the Digital Operational Resilience Act (DORA) and the Distributed Ledger Technology (DLT) pilot regime proposal.

With MiCA, the EU is paving the way and pursuing its ambition to turn the EU into an attractive place for crypto-asset service providers (CASPs) to do business globally.

What does MiCA propose? 

Broadly, the objective of MiCA is to regulate the issuance, offer to the public and trading of crypto assets. If introduced as currently drafted, it will lay out a comprehensive framework that sets out requirements for the operation and governance of major crypto-asset issuers and service providers, as well as detailed protections for holders of crypto-assets and other clients of service providers.

MiCA will provide a unified licensing regime for the EU, with no need for any national implementation laws. CASPs would not require permission from each individual EU country to offer their services in preferred jurisdictions within the EU. 

Competent authorities at member state level would supervise all CASPs and enforce the requirements prescribed under MiCA. Those authorities will supervise CASPs with over 15 million users – classified in the text as ‘significant CASPs’. Those providers are subject to a higher level of supervision. In addition, the European Securities and Markets Authority (ESMA) would have intervention powers to prohibit or restrict the provision of crypto-asset services by a CASP if it has concerns about the CASP’s operations. In particular, ESMA would be able to use its intervention powers if the CASP was damaging the integrity of the market, financial stability or investor protection.

Objectives of the MiCA Regulation

Four broad objectives are at the core of the proposed regulation. These are: 

• To provide legal certainty for crypto-assets not covered by existing EU financial services legislation, for which there is currently a clear need;
• To replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation;
• To establish uniform rules for crypto-asset service providers and issuers at EU level;
• To establish specific rules for stablecoins, including when these are marketed as e-money.

Who will MiCA apply to?

Broadly, the MiCA text provides for the regulation of many digital representations of value or rights that use DLT, with few exceptions.

• MiCA would apply to all CASPs operating in the EU.
• Stablecoin issuers would be subject to liquidity requirements and would require a presence in the EU. In addition, stablecoins would be subject to direction and supervision from the European Banking Authority (EBA). The EBA would supervise stablecoins that have more than 10 million users or a reserve of assets that are worth more than €5 billion. In addition, if the European Central Bank (ECB) has concerns on the legitimacy and the credibility of any stablecoin, it could reject it.
• Non-fungible tokens (NFTs) that are individual and distinct would be excluded from the scope of MiCA unless the issuer creates a “collection” of assets for purchase. The entities behind NFT collections that fall under the scope of the MiCA Regulations would be obliged to provide a ‘white paper’ that explains what exactly the product is and how it will operate on the blockchain.

Environmental disclosures

Financial services firms are taking significant steps to comply with environmental disclosure requirements.

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. 

Market manipulation

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.