The Council of the European Union has approved the world's first major rules aimed at regulating the cryptocurrency industry, the Markets in Crypto-Assets (MiCA) Regulation. This new legislation will turn the EU into a base where traders can operate in a regulated market, leaving UK and US regulation behind.
Given that MiCA is a regulation rather than a directive, it will apply directly to market actors without the need for transposition at a national level. Conflicting legislation by Member States will have to be revoked or amended.
MiCA aims to provide a harmonised framework for crypto-assets at the EU level, streamlining distributed ledger technology (DLT) and virtual asset regulation, while also protecting users and investors from potential risks such as market manipulation and money laundering. It seeks to promote innovation and competitiveness in the crypto-asset sector by creating a level playing field and removing regulatory fragmentation.
Following a surge in their market capitalisation and popularity, the EU has been examining the opportunities and challenges posed by crypto-assets and found that while some crypto-assets could fall within the scope of EU legislation, applying it to these assets effectively was not always straightforward. They also identified gaps and issues in the current rules that could pose risks to consumers, investors, and financial stability.
MiCA's application is split into two parts. The first part that deals with stablecoins will apply after 12 months from 30 June 2024, whilst the second part that deals with Crypto-Asset Service Providers (CASPs) will apply after 18 months from 30 December 2024.
MiCA foresees a number of implementing measures at the European level. To this end, the European Security and Markets Authority (ESMA) will publish three consultation packages in July 2023, October 2023 and the first quarter of 2024 to collect feedback from the public.
What will MiCA apply to?
Whilst MiCA generally focusses on crypto-assets, defining them as any "digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology (DLT) or similar technology". DLT is a digital system which records transactions and their details in multiple places simultaneously. Unlike conventional databases, DLT does not use central data storage, thus increasing accessibility, transparency and authenticity of the data. MiCA concentrates its regulatory focus on three sub-types of crypto-assets as follows:
- Asset-referenced tokens (ARTs): includes crypto-assets that purport to maintain a stable value by referencing to any other value or right, or a combination, including one or more official fiat currencies
- Electronic money tokens (EMTs): includes crypto-assets that are used as a means of payment, and purport to maintain a stable value by referring to the value of a single legal tender fiat currency
- Other crypto-assets: covers all other crypto-assets that are not ARTs and EMTs. This category will therefore presumably cover utility tokens, and cryptocurrencies of the kind which we have become so familiar, such as Ether and Bitcoin. This definition is the vaguest of the three, and thus its extent is currently unknown.
Issuers of crypto-assets
MiCA's application also outlines three regulatory regimes, encompassing: frameworks for issuers of stablecoins (ARTs and EMTs); issuers of non-stablecoins, and crypto-asset service providers (CASPs).
The regulation requires that all issuers who wish to offer crypto-assets to the public in the EU may do so if they comply with certain requirements. These requirements obligate the issuers to draw up and circulate a crypto-asset white paper and notify the regulators of its publication. Each white paper should detail the characteristics of the issuer, the crypto-asset, project timelines, circulation (amongst other matters) with the regulation establishing minimum disclosure, transparency, and disclosure requirements. Only once the white paper has been published can the issuers offer their crypto-asset throughout the EU, and seek admission to trading platforms.
For issuers of ARTs and EMTs, the regulation stipulates a stricter framework, due to their impact relating to financial stability and their use as monetary intermediaries. An authorisation requirement is imposed on issuers of ARTs, with the obligation to both notify and submit their white paper for prior approval, whilst EMTs may be offered or listed on trading platforms only by authorised credit institutions or e-money institutions. Additionally, whilst issuers of EMTs are only required to safeguard funds received, issuers of ARTs are also required to maintain a reserve of assets.
MiCA also introduces an enhanced regime for ARTs and EMTs that are considered 'significant.' Significant ARTs and EMTs are those that have a potential impact on financial stability or monetary policy due to either their large customer base or the high number of transactions conducted using them. These tokens are subject to more stringent rules and supervision by the EBA and European Central Bank (ECB). Issuers of significant ARTs must meet additional criteria relating to remuneration policies, interoperability requirements and liquidity management policies, whilst EMTs must meet additional criteria relating to rules on reserve asset custody, rules on reserve asset investment, and an orderly wind-down plan. Supervision for both is delegated to the EBA, which has the authority to classify tokens as significant at either its own discretion or at the request of an issuer, under Articles 50 and 51.
Crypto-asset service providers
The Regulation also sets out that CASPs (crypto-asset service providers) intending to provide crypto-asset services (such as investment advice, portfolio management, brokerage services or operating a trading platform) in respect of EU customers will require prior-authorisation and a seat in Europe. The regulation has created a range of categories under which crypto-asset services can trigger the authorisation requirement for CASPs to obtain a license, alongside far-reaching rules that CASPs must adhere to (namely governance and transparency requirements). A CASP licence is required for: persons located or established in the EU; or persons established outside the EU (in countries such as the UK), who are targeting clients within the EU.
Leaving the UK and US trailing behind?
In 2022, then-Chancellor Rishi Sunak declared his ambition to transform the UK into a "global hub for crypto-asset technology" and accordingly, the Treasury has been consulting with the Government on that basis. As of 29 June, the Financial Services and Markets Bill 2023 has now received Royal Assent, which amongst other things, treats cryptocurrency trading as a regulated financial activity. The same week, the Law Commission also published their recommendations for reform and development of the law relating to digital assets. The UK's regulatory approach to cryptocurrencies is indicative not only of the growing legitimacy of digital assets, but also the Government's intentions to provide a stable framework from which the crypto industry can grow in the UK.
In the US, often seen as the centre of crypto and Web3-related innovation, they are quickly falling behind in providing clear and transparent regulation in this space. Indeed, Coinbase, the largest US crypto exchange, is considering relocating its headquarters elsewhere unless the country changes its approach to regulation. The regulatory ambiguity has been exacerbated in recent months by the SEC's (Securities and Exchange Commission) failure to provide a workable environment for crypto trading platforms, with rigorous enforcement action against a variety of digital-asset trading platforms. Further, the SEC’s pursuit of regulation-by-enforcement suffered a blow when a court ruled in the SEC’s case against Ripple Labs that crypto-tokens as such are not securities subject to regulation by the SEC. The decision did however sow confusion for market participants by ruling that crypto-tokens can nonetheless be securities under certain circumstances of sale. While SEC Commissioner Hester Peirce stated that MiCA could serve as a model for the U.S., federal agencies appear divided in how to regulate digital assets, and given no single regulator presently oversees cryptocurrencies or its exchanges, the approach has been muddled. The current balance of power in D.C. also makes for some difficulty, with a variety of bills being introduced to both the House and Senate which have resulted in no meaningful developments.
With the EU now providing a promising harmonious framework under which entities dealing in digital assets can work with legal clarity and certainty, whilst supporting innovation and fair competition, it provides an appetising proposition for future investment and development compared to the slowed pace seen in those nations book-ending the Atlantic. Not only that, but MiCA's application to any persons that are engaged in the issuance of crypto-assets or service provision in the EU means that operators from the UK and US will need to quickly familiarise themselves with the EU's new framework in order to maintain their access to the large pools of European investors. Indeed, this legislation will impact players across the entirety of the sector, from large to small.