Agreement Reached on European crypto-assets regulation (MiCA)

By Peter Oakes, Founder of Fintech UK
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Background:

• MiCA is part of the larger digital finance package, which contains a digital finance strategy, a Digital Operational Resilience Act (DORA) – that will cover CASPs - and a proposal on distributed ledger technology (DLT) pilot regime for wholesale uses.
• MiCA is intended to bridge a gap in existing EU legislation:
  • ensuring that the current legal framework does not pose obstacles to the use of new digital financial instruments.
  • ensuring that such new technologies and products fall within the scope of financial regulation and operational risk management arrangements of firms active in the EU.
  • ensuring the supporting of innovation and uptake of new financial technologies.
  • providing an appropriate level of consumer and investor protection.

Timeline:

• 24 September 2020: European Commission came forward with the MiCA proposal
• 24 November 2021: The Council adopted its negotiating mandate on MiCA
• 31 March 2022: Trilogues between the co-legislators commenced
• 30 June 2022: Provisional agreement reached.
• Next Steps: The Provisional agreement must now be approved first by the Economic and Monetary Affairs Committee  followed by a plenary vote of the European Union Parliament and the Council of the European Union Council also has to approve the deal, before the MiCA Regulation can come into force.
• Early 2024: It is expected that MiCA should be implemented by early 2024.

 
What:

• The EU brings crypto-assets, crypto-assets issuers and crypto-asset service providers to come under a single EU regulatory framework for the first time.
• On Thursday, 30 June 2022, the Economic and Monetary Affairs Committee negotiators for the European Parliament struck a provisional political agreement with the European Union Council on new rules on crypto-assets. 

Scope:

• issuers of unbacked crypto-assets (this means that Central Bank Digital Currencies are not in scope),
• stablecoins
• trading venues where crypto-assets are held
• wallets where crypto-assets are held.
• non-fungible tokens (NFTs) i. e. digital assets representing real objects like art, music and videos, are excluded from MiCA except if they fall under existing crypto-asset categories.

Why:

• Regulatory Framework: MiCA designed to protect investors and preserve financial stability.
• Legal Certainty: Pan-EU wide definitions, legal provisions and authorisation standards not only serve the Regulatory Framework, but provide enhanced legal certainty for issuers, holders, users, regulators and government agencies.
• Innovation: MiCA designed to provide for innovation and fostering attractiveness of the EU crypto-asset sector.
• Uniformity: MiCA designed to bring more clarity (and hopefully remove any possible regulatory arbitrage going forward) and uniformity of approach to crypto assets in the EU.  Particularly important as some member states have national legislation for crypto-assets but without a specific regulatory framework at EU level, the EU risk fragmentation and arbitrage.
• Consumer & Investor Protection: An urgent need for an EU-wide regulation has arisen because of recent developments (such as the crypto-crash / ‘crypto winter’).  MiCA aims to better protect Europeans who have invested in crypto-assets and prevent their misuse. Like all regulations, MiCA will protect consumers against some, but not all, of the risks associated with investing and help them avoid fraudulent schemes.
• Reputation: MiCA aims at putting to an end to the crypto wild west.
• Standard Setting: MiCA will confirm the EU’s role as a standard-setter for digital asset innovation in a pan-EU regulatory environment.

Consumer Protection:

• Currently, consumers have very limited rights to protection or redress, especially if the transactions take place outside the EU. With the new rules, crypto-asset service providers will have to respect strong requirements to protect consumers wallets and become liable in case they lose investors’ crypto-assets. MiCA will also cover any type of market abuse related to any type of transaction or service, notably for market manipulation and insider dealing.

ESG:

• Actors in the crypto-assets market will be required to declare information on their environmental and climate footprint. The European Securities and Markets Authority (ESMA) will develop draft regulatory technical standards on the content, methodologies and presentation of information related to principal adverse environmental and climate-related impact. Within two years, the European Commission will have to provide a report on the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work.

Financial Crime:

• Crypto-assets will be covered by EU updated anti-money laundering (AML), legislation.  MiCA will not duplicate the anti-money laundering provisions as set out in the newly updated transfer of funds rules agreed on 29 June 2022. 
• This means that the ‘travel rule’.i.e. the rules on information accompanying the transfers of funds will be extended to transfers of crypto assets.  The EU is adamant about meeting the international standards on the exchange of crypto-assets, in particular recommendations 15 and 16 of the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog.  Read the FATF’s release on 29 June 2022 ‘Targeted Update on Implementation of FATF’s Standards on VAs and VASPs.’ For further information.
• The European Banking Authority (EBA) will be tasked with maintaining a public register of non-compliant crypto-asset service providers.
• Crypto-asset service providers (CASPs), whose parent company is located in countries listed on the EU list of third countries considered at high risk for anti-money laundering activities, as well as on the EU list of non-cooperative jurisdictions for tax purposes, will be required to implement enhanced checks in line with the EU AML framework.
• Tougher requirements may also be applied to shareholders and to the management of the CASPs), notably with regard to their localisation.

StableCoins:

• A strong regulatory framework will apply to stablecoins to protect consumers.  The EU feels that this should be self-evident given the recent crystallising of risks incurred by holders in the absence of regulation, as well as the contagion impact stablecoins have on other crypto-assets.
• Stablecoins issuers must:

1. build up a sufficiently liquid reserve
2. apply a 1/1 ratio and partly in the form of deposits. 
3. provide every “stablecoin” holder with a claim at any time and free of charge by the issuer
4. ensure that the rules governing the operation of the reserve provides provide for an adequate minimum liquidity.

• Stablecoins will be supervised by the EBA, with a presence of the issuer in the EU being a precondition for any issuance.

Asset-Referenced Tokens:

• Asset-referenced tokens (ARTs) based on a non-European currency used as a means of payment will be constrained to preserve the EU’s monetary sovereignty. Issuers of ARTs will need to have a registered office in the EU to ensure the proper supervision and monitoring of offers to the public of asset-referenced tokens.

Non-Fungible Tokens:

• Non-fungible tokens (NFTs), i. e. digital assets representing real objects like art, music and videos, are excluded from the scope except if they fall under existing crypto-asset categories. Within 18 months the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate and horizontal legislative proposal to create a regime for NFTs and address the emerging risks of such new market.

Regulatory Framework:

• CASPs will require an authorisation to operate within the EU.
• Regulators (i.e. national authorities) required to issue authorisations within three months.
• Regarding the largest CASPs, national authorities will transmit relevant information regularly to the European Securities and Markets Authority (ESMA).

Next steps:

• The Provisional agreement must now be approved first by the Economic and Monetary Affairs Committee  followed by a plenary vote of the European Union Parliament and the Council of the European Union Council also has to approve the deal, before the MiCA Regulation can come into force. See more here.
• It is expected that MiCA should be implemented by early 2024.
  

Further reading:

• 30 June 2022 Digital finance: agreement reached on European crypto-assets regulation (MiCA)
• 29 June 2022 Anti-money laundering: Provisional agreement reached on transparency of crypto asset transfers
• 29 June 2022 Targeted Update on Implementation of FATF’s Standards on VAs and VASPs
• 24 November 2021 Digital finance package: Council reaches agreement on MiCA and DORA
• 24 November 2020 Commission proposal for a Regulation on Markets in Crypto-assets
• Digital finance (background information)