BY DR SOHA MAAD
The Markets in Cryptoassets (MiCA) is the first regulatory framework for cryptoassets in the world. MiCA covers issuers and service providers, with the aim of protecting consumers and investors while ensuring financial stability and supporting innovation and bridging the gap between crypto firms and banks. The regulation, which will enter into force between mid-2024 and early 2025, positions Europe as an attractive region in the crypto market.
This article presents a complete overview of MiCA. The overview covers the objectives, the scope, the classification of cryptoassets in the MICA framework, the crypto-asset services providers and services considered in MiCA framework, the obligations for issuers of crypto-assets under MiCA framework, the importance of MiCA, and key dates to note for future implementation. The article also analyses the impact of MiCA regulation on innovation and growth in Europe, and the impact on various entities including cryptoassets, cryptoassets issuers, cryptoassets service providers CAPS, and crypto payment service providers. The article also overviews the impact on Non Fungible Tokens (NFT) and Decentralized finance (DEFI). The article presents the European Banking Federation view on the impact of MiCA on banks regulatory framework. It also covers the landmark impact of MiCA on blockchain regulation and the impact on the legal framework of stablecoins. The article also draws attention to the Environmental, Social, and Governance (ESG) considerations in MiCA regulatory framework and highlights the challenges posed by MiCA. The article concludes with the industry implications of the Markets in cryptoassets regulation and the road ahead for Arab banks to prepare for MiCA implementation and develop a pan Arab cryptoasset regulatory framework that can interoperate with MiCA and that is adapted to the needs of the Arab region.
Overview of Mica
The European Commission introduced the Markets in Crypto-Assets (MiCA) regulation as part of its digital finance regulatory framework. MiCA is a pioneering legislative framework for regulating crypto markets. It undoubtedly places the European Union (EU) as a global pace-setter. Crypto markets are multi-jurisdictional. Regulatory efforts similar to MiCA would contribute to the creation of a safe, robust and necessary ecosystem for cryptoasset markets globally.
The Markets in Cryptoassets regulation focuses on certain categories of crypto-assets which are currently out of scope of existing regulations. It also establishes a legal framework for crypto-asset services providers as well as consumer protection.
MiCA will apply directly across the European Union (EU) without any need for national implementation laws. This will ensure consumer protection and an effective and harmonised access to the innovative crypto-asset markets across the single market.
The Markets in Cryptoassets regulation has four essential objectives:
- Ensuring legal certainty by establishing a sound legal framework for crypto-assets in its scope that are not covered by existing financial services legislation;
- Supporting innovation and fair competition in order to promote the development of crypto-assets by instituting a safe and proportionate framework;
- Protecting consumers, investors and market integrity in consideration of the risks associated with crypto-assets;
- Ensuring financial stability, with the inclusion of safeguards to address potential risks to financial stability.
A majority of cryptoassets which are not already governed by other regulations, such as security tokens and central bank digital currencies, fall into the scope of MiCA. These include:
- E-money tokens
- Asset-referenced tokens
- Utility tokens
- Crypto-assets, other than e-money tokens or asset-referenced tokens, offered to the public are also in scope of the regulation, underlining the objective to have a broad scope.
Classification Of Cryptoassets In MICA Framework
MiCA defines a crypto-asset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” The Regulation draws a distinction between ‘cryptocurrencies’ on one hand and ‘tokens’ on the other. MiCA also sets requirements for cryptoasset issuers and cryptoasset service providers (CASPs). Cryptoasset issuers must provide complete and transparent information about the cryptoassets they issue, and comply with disclosure and transparency rules. Cryptoasset service providers must be registered and implement security measures and anti-money laundering compliance.
MiCA provides a regulatory framework for digital assets that use decentralized ledger technology (DLT). The main cryptoassets covered by MiCA are:
- Asset-referenced tokens (ARTs): are a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets. An example of this is Digix (DGX), backed by an equivalent amount of physical gold stored in a secure vault.
- Electronic money tokens (EMT): which maintain a stable value by referring to the value of a fiat currency that is legal tender. The difference between ARTs and EMTs is the configuration of the underlying asset that supports the price. ARTs use non-cash assets or a basket of currencies, while EMTs use a single currency, which brings them closer to the concept of electronic money.
- Cryptoassets that are not considered ARTs or EMTs, such as ‘utility tokens,’ which are intended to provide digital access to a good or service, available on DLT, and are only accepted by the issuer of that token.
Crypto-Asset Services Providers And Services In Mica Framework
Certain standard services, when performed and provided with respect to any type of crypto-asset falling into the scope of MiCA, shall be captured and regulated under MiCA. The custody and administration of crypto-assets on behalf of third parties as well as the provision of advice on crypto-assets are part of the services qualifying as crypto-asset services. Entities providing crypto-asset services shall qualify as crypto-asset service providers.
Crypto-asset service providers shall be licensed to provide crypto-asset services. Some criteria shall be satisfied by crypto-asset service providers applying for the authorisation to benefit from a European passport.
The Markets in Cryptoassets regulation should not be considered as a standalone initiative. The European Commission’s digital finance strategy not only relies on MiCA, but also on the DLT Pilot Regime and the Digital Operational Resilience Act (DORA), thus demonstrating transversal reach.
Market players are likely to have to observe certain environmental, social and governance (ESG) standards while engaging in digital finance.
Obligations For Issuers Of Crypto-Assets Under Mica
Issuers of crypto-assets falling into the scope of MiCA, namely those offering crypto-assets to third parties, may be subject to several obligations including, without limitation:
- The publication of a whitepaper having some similarities with prospectuses published under the prospectus regulation
- The necessity to be authorised to issue crypto-assets
- Compliance with certain prudential rules when marketing crypto-assets
- The obligation to act honestly, fairly and professionally with crypto-asset holders, in particular in relation to conflict management and prevention or maintenance of security access protocols
- The applicable regime depends on several elements considering notably the type of crypto-asset offered and the amount of the offer.
The Importance Of Mica
MiCA will provide regulatory certainty and stronger protections for consumers in the crypto market, while supporting innovation. To achieve these goals, MiCA establishes mechanisms to ensure that stablecoins are truly stable, require enhanced transparency in the market, and prevent players from creating excessive risk, while making sure that the assets under custody are genuinely protected.
MiCA also seeks to mitigate the environmental impact of cryptocurrencies. Some cryptocurrency mining (the process of validating transactions and adding new units to the blockchain) requires high-powered equipment that consumes large amounts of energy that may come from fossil fuels such as coal. The industry also requires a considerable volume of computer components and generates electronic waste.
MiCA is designed as a building-block of a wider regulatory effort, which includes initiatives such as the Digital Operational Resilience Act (DORA), the DLT Pilot Regime and the Transfer of Funds Regulation (TFR).
Key dates of the Markets in Cryptoassets regulation are:
24 September 2020 – Adoption by the Commission of the proposal for a regulation on Markets in Crypto-Assets.
19 February 2021 – European Central Bank opinion.
24 February 2021 – European Economic and Social Committee opinion.
24 June 2021 – European Data Protection Supervisor opinion.
30 June 2022 – Provisional agreement reached between European Parliament and Council.
20 April 2023 – Plenary vote by the European Parliament.
The entry into application of the Markets in Cryptoassets regulation was initially expected by mid-2023. However, it is delayed to end of 2024 (at the latest).
Impact On Innovation And Growth In Europe
The European market has been served by regulated and licensed e-money tokens (EMTs) since 2019. The paper by Jón Helgi Egilsson at University of Iceland argues that MiCA weakens the current legislation by fragmentation, increases financial instability, and appears to prioritize banks’ interests over fostering innovation and growth in the European Union (EU). Protecting banks’ interests may hinder innovation, limit opportunities for positive societal impact, and raise antitrust questions.
Blockchain technology and e-money tokens have made it possible to bypass intermediaries such as banks for digital payments and fund storage. Europe has a competitive advantage in e-money for blockchains thanks to its well-designed technically neutral legal framework for issuing e-money. MiCA includes also a regulation for e-money tokens.
Accorrding to Jón Helgi Egilsson, MiCA fragments the legal framework by introducing four regulatory subsets for significant or non-significant e-money token issuers, depending on whether the issuer is a bank or an electronic money institution (EMI). This unnecessary complexity reduces clarity and may lead to discrimination.
MiCA requires EMIs to safeguard at least 30% as bank deposits, potentially increasing financial instability, and securing commercial banks as intermediaries in payments.
MiCA’s safeguarding requirements make banks gatekeepers for their competitors and entrench unequal access to public resources of deposit facilities of central banks.
MiCA puts harmful restrictions on EMT issuance in non-EU currencies, which will limit Europe’s competitive advantage in Web3 and its ability to compete in the global currency market.
Impact On Crypto Firms
MICA framework could help crypto firms get banked. MiCA regulation is set to open up more banking services to crypto firms, according to industry experts, as many banks are likely to be more willing to deal with licensed entities. But questions remain about implementation specifics and the crypto sub-sectors that are not covered by the landmark legislation.
Under MiCA, crypto asset services providers (CASPs) that seek to serve EU clients must gain licenses from national authorities. The previous lack of regulatory clarity around crypto had caused many banks to avoid dealing with such firms, leaving many in the sector unbanked. This positive shift should lead to a more transparent and secure industry, encouraging banks to reconsider their perception and become more receptive to offering accounts to licensed crypto businesses. Banks will be able to take a much more proactive position on providing services to businesses that they understand are operating to a certain standard.
The European Union EU’s measures differ from the United States (US) approach, as the US Securities and Exchange Commission SEC and other regulators have sought to regulate Coinbase, the Tron network, and others by enforcement.
The more predictable regulatory environment in the EU might make it difficult for crypto businesses in the US to operate and raise capital. MiCA’s regulatory clarity could draw many companies away from the US, bringing new jobs and investment to the EU.
Impact On Cryptoassets
MiCA is expected to have a huge impact on providers of crypto asset services in the European Union (EU), as well as providers based outside the EU, and financial institutions due to the opportunities it will create for banks, investment firms and insurance companies. Parties will have to comply with certain legal obligations and may need a licence. Crypto service providers for example will be required to declare information on their environmental and climate footprint.
Impact On Cryptoasset Issuers
MiCA requires that crypto-asset issuers will be authorized and supervised by national competent authorities (NCAs) in the Member States in which they are based. NCAs will be required to designate a single point of contact for CASPs and MiCA relevant issuers providing cross-border business.
Issuers of certain types of crypto assets are required to disclose all relevant information relating to specific crypto assets and publish this information in a white paper.
Impact On Crypto Assets Service Porivders Caps
In order to operate in the European Union EU, CASPs such as brokers, exchanges and ‘custodian wallet providers’ must be licensed by obtaining an ‘EU passport’ issued by national competent authorities (NCAs). Although requirements may vary depending on the specific CASP, MiCA imposes prudential requirements and governance standards on all CASPs, which are overseen by NCAs.
Impact On Crypto Payment Service Providers
One of the biggest challenges of operating in the space of crypto payments is navigating the complex web of regulations. That is why the recent confirmation of the Markets in Crypto-Assets (MiCA) regulation is such a significant development for the crypto and payment communities. The MiCA regulation is a comprehensive set of rules that will bring clarity and regulation to the world of cryptocurrencies in the European Union (EU). It is set to revolutionize the cryptocurrency industry, providing legal clarity and investor protection for digital assets, including stablecoins and utility tokens.
The new regulation mandates strict compliance rules around disclosure, governance, and business conduct, promoting market integrity and investor security.
MiCA is the largest and most significant crypto-related legislation to come out of a major jurisdiction, promising to reshape the industry for years to come.
Impact On Nfts And Defi
Non fungible tokens (NFTs), which are digital objects held by an internet user, will be exempt from MiCA. However, a reclassification for NFTs is always possible if they qualify as a financial instrument or a crypto-asset.
Decentralised financing (DeFi) and crypto lending are not (yet) addressed in MiCA.
Impact On Banks Regulatory Framework
MiCA closes gaps in banks regulatory framework. The European Banking Federation (EBF) supports the digital transformation of banking, positioning and representing European banks to boost innovation while ensuring resilience.
According to EBF, new and amended EU legislation targeting crypto-assets needs to deliver:
- a technology-neutral and innovation-friendly EU financial services framework.
- a fair competition in a digitally transformed market, characterized by a level playing field, with proportionate regulation – “same activities, same risks, same rules, same supervision” principle.
- innovation balanced with proper protection of investors and consumers.
- a resilient financial ecosystem, following a risk-based approach while avoiding disproportionate burden on financial institutions.
According to EBF, MiCA is an essential first step for the financial sector in the European Union EU. It will allow the EU economy and citizens to make use of the benefits of crypto-assets in future, while offering required safeguards and protection. In the global context, a proportionate MiCA, properly embedded and aligned with existing financial regulation, has the potential to become a benchmark for other regions.
European banks welcome MiCA to close gaps of the regulatory framework for crypto-assets that are not considered financial instruments. The EBF welcomes MiCA and its intended rules in an area that is presently largely unregulated at the EU level.
Impact On Blockchain Regulation
MiCA is a landmark in the history of blockchain regulation in the European Union EU. While MiCA still raises a number of questions, the definitive demarcation of how tokens are to be treated is likely to provide greater legal certainty and thus transform Europe’s current fragmented crypto-asset legislative and regulatory framework into possibly the world’s largest and most significant uniform regulatory framework.
MiCA applies to persons engaged in the issuance of crypto-assets and to CASPs in the EU. MiCA will equally impact those persons from outside the EU.
MiCA landmark achievements for blockchain regulation include:
- providing clarity around security tokens such as “payment tokens”, “utility tokens” but also “stable tokens”;
- introducing definitions of what constitutes “crypto-asset services” (CAS) and how these are regulated. These services include:
- Custody and administration of crypto-assets on behalf of third parties;
- Operation of a trading platform for crypto-assets;
- The exchange of crypto-assets for other crypto-assets;
- The execution of orders for crypto-assets on behalf of third-parties;
- The reception and transmission of orders for crypto-assets on behalf of third parties;
- The marketing of newly issued crypto-assets or crypto-assets that are already issued but that are not admitted to trading on a trading platform for crypto-assets, to specified purchasers and which does not involve an offer to the public or an offer to existing holders of the issuer’ crypto-assets;
- Providing advice on crypto-assets;
- introducing new requirements for issuers of crypto-assets;
- setting out general requirements on crypto-asset services;
- putting in place a client segregation requirement;
- applying and extending existing market integrity measures with respect to prevention of market abuse, insider information, insider dealing and market manipulation;
- stipulating a change in control framework that applies to acquisitions and dispositions of crypto-asset service providers.
- introducing a regime for minimum capital requirements;
- setting definitive rules for the relationship between a crypto-asset issues and token holders;
- creating and developing infrastructure for the trading and settlement of crypto-assets.
Impact On The Legal Framework For Stablecoins
Stablecoins, which are primarily issued for payment purposes, have been the focus of policymakers for some time. In particular, the rapid growth, increasing global use and critical role of stablecoins motivated European regulators to impose strict requirements to mitigate the increased risks to consumer protection and market integrity. In order to obtain a MiCA licence, issuers of stablecoins are required to meet the following conditions:
- Have a registered office in the EU.
- Build up a sufficiently liquid reserve.
- Offer every stablecoin holder a claim at any time and free of charge.
Actors in the crypto asset market will also have to provide information on their environmental and climate footprint. Although Proof-of-Work cryptocurrencies (PoW), such as Bitcoin, are notorious for their huge energy consumption, MiCA is not issuing a ban on crypto currencies that use the PoW algorithm. Instead, it instructs to prepare a report on the environmental impact of crypto assets and to introduce a mandatory minimum sustainability standard for mechanisms such as PoW.
Challenges Posed By Mica
While MiCA may mark a quantum leap in how cryptoassets are regulated, it may provide opportunities for some and compliance challenges for others in respect of business in the EU. Affected stakeholders will want to take early action, to first assess the impact of MiCA and put any action plans to seize opportunities that MiCA introduces and deal with greater compliance obligations that are entailed.
Industry Implication For Mica And Road Ahead For Arab Banks
Arab banks should be prepared for MiCA implementation and should develop a pan Arab cryptoasset regulatory framework that can interoperate with MiCA and that is adapted to the needs of the Arab region.
The MiCA initiative will affect the ability of market players to diversify their business by developing a cryptoasset strategy. The regulation is likely to provide a harmonised legal framework with strong safeguards for historically non-regulated crypto-assets as well as for the service providers engaged in that business and the consumer.
Arab banks should take into account the following key considerations for establishing a pan Arab cryptoasset regulatory framework that can interoperate with MiCA and that is adapted to the needs of the Arab region:
- Developing a uniform legal framework for crypto-assets markets.
- Devising a classification of cryptoassets adapted to Arab countries needs and operations.
- Developing technologies to trace cryptoasset operations.
- Enhancing consumer protection and safeguarding against the bad manipulation of cryptoasset market and the use of cryptoassets in financial crime.
- Preventing money laundering using cryptoassets.
BBVA, EPRS European Parliamentary Research Service, BNP Paribas, Paper by Jón Helgi Egilsson, Paper by BEN STRACK, European Banking Federation, Dentons, PWC, gocrypto.com, mazars.com, EUROPEAN PARLEMENT
Glossary Of Key Terms Related To Mica
crypto-asset and sub-types:
- ‘Crypto-asset’ is the generic terminology for a ‘digital representation of value or rights which may be transferred and stored electronically, using Distributed Ledger Technology DLT (or similar technology)’.
- An ‘asset-referenced token’ (ART) is a type of crypto-asset which is meant to maintain a stable value by referring to the value of several currencies that are legal tender (fiat currencies), one or several commodities, or one or several crypto-assets, or a combination of such assets.
- An ‘e-money token’ (electronic money token, EMT) is type of crypto-asset which is meant to be a means of exchange and maintains a stable value by referring to the value of a fiat currency that is legal tender.
- Asset-referenced tokens and e-money tokens are often described as ‘stablecoins’.
- A ‘utility token’ is intended to provide digital access to a good or service, available on Distributed Ledger Technology DLT, and is only accepted by the issuer of that token.