European ‘MiCA’ regulation on digital assets: Where do we stand?
The proposed European Union Regulation on Markets in Crypto Assets, or MiCA, (hereinafter the “regulation”) was put to a vote in the European Union Parliament’s Committee on Economic and Monetary Affairs on March 14, 2022, and in the end, the proposed amendment to ban or restrict proof-of-work-based crypto assets, which would have effectively resulted in a ban on Bitcoin (BTC), was rejected.
The question of how crypto assets will be assessed from an environmental regulation perspective remains, however, with the Member of the European Parliament in charge of the text indicating that crypto assets will be included, like all other financial products, in the area of the union’s taxonomy (the process of classifying economic activities that have a favorable impact on the environment), without specifying the treatment of these assets in view of this taxonomy.
The proposed regulation is part of the digital finance package that also includes a proposal for a pilot scheme for market infrastructures based on distributed ledger technology (DLT) of interest to the security token sector, adopted by the Parliament’s Economic and Monetary Affairs Committee in January this year and due to come into force by the end of 2022.
The EU Commission has been considering several options for regulating the crypto asset sector. It finally chose the option of full harmonization within the EU of the rules applicable to issuers and service providers in crypto assets, with an EU passport, over the option of an opt-in regime to obtain the EU passport with the application of national regimes. For stablecoins, the Commission has favored a tailor-made legislative regime combined with regulation under the E-Money Directive.
Let us take stock of the main provisions of the MiCA Regulation, which, after the trialogue among the Council, the Parliament and the Commission following the vote on March 14, should also enter into force before the end of the year and which pursues four objectives: legal certainty, support for innovation, consumer and investor protection and market integrity, and financial stability.
In addition to determining the competent authorities and their administrative sanctioning powers, as well as the anti-market abuse rules, the main provisions of the Regulation relate to the purpose and scope of the Regulation (I), the rules applicable to the issuance of utility crypto assets (II), asset-referenced tokens (III), electronic money crypto assets (IV), and the rules applicable to crypto asset service providers (V).
I. Purpose and scope of the regulation
The purpose of the regulation is to establish rules concerning:
- Transparency and disclosure requirements for the issuance and admission to trading of crypto assets.
- The authorization and supervision of crypto asset service providers, issuers of asset-based tokens and issuers of electronic money tokens.
- The operation, organization and governance of asset-based token issuers, electronic money token issuers and crypto asset service providers.
- Consumer protection rules for the issuance, trading, exchange and custody of crypto-assets.
- Measures to prevent market abuse in order to ensure the integrity of the crypto-asset markets.
The regulation applies to persons in the EU who issue crypto assets or provide services relating to crypto assets. The Regulation does not apply to:
- rypto assets that are financial instruments (equity securities issued by companies with shares, debt securities, units or shares in collective investment undertakings and financial futures contracts) or electronic money except where the latter qualifies as electronic money tokens under the Regulation.
- ertain entities or persons, such as the European Central Bank and the national central banks of the member states, insurance undertakings, a liquidator or administrator acting in insolvency proceedings, persons providing crypto asset services exclusively for their parent undertaking, their subsidiaries or other subsidiaries of their parent undertaking, the European Investment Bank, the European Investment Bank and public international organizations. Authorized credit institutions and investment firms will only be subject to certain provisions of the Regulation or will have the provisions governing them adapted.
II. Rules applicable to the issuance of crypto utilities
This category, which the Regulation calls “crypto-assets other than tokens referring to assets or electronic money tokens,” corresponds to crypto assets intended to provide digital access to a good or service, available on the DLT system, and which are only accepted by the issuer of this token (“utility tokens”). These “utility tokens” have a non-financial purpose related to the operation of a digital platform and digital services and should be considered as a special type of crypto asset. These may include cryptocurrencies such as Bitcoin, Ether (ETH) or Tezos (XTZ).
The Regulation prohibits offering to the public or seeking admission to trading on a trading venue crypto assets unless the issuer is a legal entity and a white paper complying with the Regulation has been prepared, notified to the competent authority and published.
Rules in terms of fair, honest and professional conduct and communications are provided for, as well as in terms of managing conflicts of interest and compliance with protocol security standards.
The obligation to produce a white paper does not apply when crypto assets are offered free of charge (which is not the case when buyers provide personal data or when the issuer receives payment of third-party fees, commissions or other benefits); are automatically created by mining or transaction validation; when they are unique and nonfungible (nonfungible tokens are, therefore, excluded from the obligation to publish a white paper); offered to fewer than 150 persons per member state; the amount of the offer does not exceed 1 million euro over a period of 12 months; or when the offer is reserved solely for qualified investors.
It should also be noted that the issuer of crypto assets must offer a right of withdrawal to the consumer, which can be exercised over a period of 14 calendar days.
III. Rules applicable to the issuance of asset-referenced tokens
This category of crypto assets consists of tokens that aim to maintain a stable value by referring to several legal tender currencies, one or more commodities, one or more crypto assets, or a basket of these assets. By stabilizing their value, these asset-based tokens are often intended to be used by their holders as a means of payment for the acquisition of goods or services and as a store of value.
An issuer wishing to offer or apply for admission to trading on a trading venue of asset tokens is required to obtain authorization from the competent authority of its home member state unless the average amount outstanding of the asset tokens does not exceed 5 million euro over a period of 12 months, or the offer is intended only for qualified investors.
The authorization gives access to the European passport. A white paper must be prepared.
Such an issuer is subject to a number of obligations, including those relating to marketing communications, conflicts of interest and governance: 350,000 or 2% of average reserve assets, whichever is higher.
These reserve assets must be prudently and efficiently managed, segregated from the issuer’s assets and entrusted to credit institutions or crypto asset service providers. These reserve assets may only be partially invested in highly liquid and low-risk financial instruments.
Furthermore, interest payments to holders of such tokens are prohibited.
Specific rules are provided for acquisitions of issuers of tokens referring to assets, including the obligation to notify the competent authority of the proposed acquisition, which may object to the acquisition.
Finally, there are additional obligations for issuers whose tokens refer to assets that are material. The European Banking Authority shall determine what tokens are material, for example, in view of the market capitalization of the tokens (such determination may also be requested voluntarily by the issuer).
IV. Rules applicable to the issuance of crypto assets of electronic money
This third category corresponds to crypto assets intended primarily as a means of payment with the aim of stabilizing their value by reference to a single fiat currency. Like e-money, these crypto assets are electronic substitutes for coins and banknotes and are used to make payments. They differ from e-money in that holders of e-money always have a claim on the e-money institution and have the contractual right to demand repayment of the e-money held, at any time and at face value, in legal tender fiat currency, which is not necessarily the case for e-money tokens.
The main obligation for the issuer of electronic money tokens is the authorization as a credit institution or as an electronic money institution within the meaning of Directive 2009/110/EC (hereinafter “Electronic Money Directive”), which it must obtain, as well as the publication of a white paper in accordance with the Regulation.
Such authorization and publication of a white paper will not be required if the electronic money tokens can only be held by qualified investors or if the average outstanding amount of tokens over 12 months does not exceed 5 million euro (or such lower threshold as may be set by a member state).
Holders of electronic money tokens have a claim on the issuer of the tokens. Electronic money tokens that do not confer a claim on all their holders are prohibited.
By way of derogation from the Electronic Money Directive, no issuer of electronic money tokens or provider of crypto asset services shall grant interest to the holders of such tokens.
Specific rules are provided for electronic money tokens of significant importance.
V. Rules applicable to providers of crypto asset services
Crypto asset services shall only be provided by legal persons who have their registered office in a member state of the union and who have been authorized as crypto asset service providers.
Authorization as a crypto asset service provider will be valid throughout the union and must enable crypto asset service providers to provide throughout the union the services for which they have been authorized, either under the right of establishment, including through a branch or under the freedom to provide services.
Crypto asset service providers will act honestly, fairly and professionally in the best interests of their clients and potential clients and will provide their clients with fair, clear and not misleading information, in particular in their commercial communications, which must be identified as such. Crypto asset service providers must warn their customers of the risks associated with the purchase of crypto assets. They must make their pricing policy available to the public by posting it in a prominent place on their website.
A crypto asset service provider must at all times have in place prudential safeguards in an amount at least equal to the higher of the following two amounts:
(a) The amount of the minimum ongoing capital requirement applicable to it, depending on the nature of the crypto asset services it provides, either:
- For the services of reception and transmission of orders on behalf of third parties, advice on crypto assets, execution of orders on crypto assets on behalf of third parties and placement of crypto-assets: 50,000 euros.
- For services of custody and administration of crypto assets on behalf of third parties: 125,000 euros.
- For services of operating a platform for trading crypto assets, exchanging crypto assets for fiat currency or for other crypto assets: 150,000 euros.
(b) One-quarter of the previous year’s fixed overheads, which are recalculated annually.
There are a number of specific obligations depending on the crypto asset service. An acquisition regime for crypto asset service providers is also provided.
This article was co-authored by Thibault Verbiest and Jérémy Fluxman.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Thibault Verbiest, an attorney in Paris and Brussels since 1993, is a partner with Metalaw, where he heads the department dedicated to fintech, digital banking and crypto finance. He is the co-author of several books, including the first book on blockchain in French. He acts as an expert with the European Blockchain Observatory and Forum and the World Bank. Thibault is also an entrepreneur, as he co-founded PayFoot. In 2020, he became the chairman of the IOUR Foundation, a public utility foundation aimed at promoting the adoption of a new internet, merging TCP/IP and blockchain.
Jérémy Fluxman has been an associate at international law firms in Paris and Luxembourg in the fields of private equity and investment funds, as well as at a Monaco law firm since 2017. He holds a Master II in international business law and is currently an associate at the Metalaw firm in Paris, France where he advises on fintech, blockchain and crypto finance.