The European Commission has proposed a comprehensive new regime to regulate the crypto-asset industry. The proposal imposes disclosure and authorisation requirements on crypto-asset issuers and service providers which serve European markets. It also impacts other market participants as well as potential acquirers of certain institutions in the industry. Market players across the globe will need to consider if and how this could affect their business models and structures in the run-up to adoption. 

Regulation on Markets in Crypto-assets (MiCA)

Last week, the European Commission launched a bold new Digital Finance Strategy, as outlined in our previous blogpost. In this post, we explore the EC’s proposal for a regulation on markets in crypto-assets, a law which, if enacted, would have highly significant consequences for the crypto industry. 

Plugging the gap

As markets in crypto-assets have evolved, authorities across the world have been prompted to consider whether there are unintentional gaps in existing regulatory frameworks that ought to be closed. A lack of legal certainty has also been seen as a barrier to safe innovation in digital finance. EU authorities have been further concerned that differing national responses may lead to fragmentation within the single market.

MiCA is the Commission’s answer to these issues, and has been developed off the back of a public consultation. It seeks to establish a harmonised EU regime for the regulation of crypto-assets. 

The intention is for the new regime to be directly applicable in all EU member states, replacing existing national frameworks applicable to crypto-assets. This will inevitably raise questions for some national regulators in relation to the transition process and the treatment of entities approved under existing regimes. 

Scope

The draft regulation casts a wide net, defining the term “crypto-asset” very broadly as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. However, it seeks to avoid regulatory overlap (at an EU-level) by carving out crypto-assets that are otherwise regulated as financial instruments, e-money (except where they qualify as e-money tokens under MiCA), deposits, structured deposits or securitisations.

In relation to in-scope crypto-assets, it covers:

• the regulation of crypto-assets to be offered to the public or admitted to trading on a trading platform in the EU
• the regulation of crypto-asset service providers
• a market abuse regime for crypto-assets admitted to trading on a trading platform operated by a crypto-asset service provider
• a mechanism for the oversight of material acquisitions in respect of issuers of asset-referenced tokens (as defined below) and crypto-asset service providers.

Crypto-asset issuances

Three new categories

MiCA establishes separate frameworks in respect of three distinct categories of crypto-assets: e-money tokens, asset-referenced tokens and other crypto-assets. Issuers of crypto-assets that meet the criteria under the applicable regime will be permitted to offer those crypto-assets to the public or admit them to trading anywhere in the EU. Conversely, anyone across the globe issuing crypto-assets that could be subscribed for in the EU may be subject to these requirements.

E-money tokens

The e-money token regime is intended to capture tokens that commercially function as electronic money, including those that may be structured in a way that means they are not caught under the existing Electronic Money Directive. The drafters have sought to include equivalent requirements in order to avoid regulatory arbitrage between the two regimes. The new regime also seeks to cater for token-specific risks as well as the possibility of systemically important issuances, which are not addressed under the EMD.

The key features of the regime are summarised in the table below.

E-money tokens*
Meaning	A type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender
Required form of issuer	Legal entity established in the EU
Authorisation	Issuer must be authorised as a credit institution or electronic money institution
Whitepaper	Whitepaper must meet all relevant mandatory disclosure requirements set out in MiCA and be notified to the competent authority at least 20 working days before publication
Ongoing obligations	Issuer must comply with all ongoing requirements applicable to electronic money institutions
Claim on issuer/ redemption rights	Token holders must be provided with a direct claim on the issuer and the issuer must redeem at any time and at par value the monetary value of the tokens
Prohibition on interest	Issuers are prohibited from paying interest or any other benefit related to the length of time during which the token is held
Significant issuances	Additional prudential requirements apply to tokens that are deemed “significant” by the European Banking Authority (by reference to pre-defined criteria).

*Note: these are subject to certain exemptions (e.g. for de minimis issuances and issuances to qualified investors).

Asset-referenced tokens

The asset-referenced token regime broadly applies to tokens stabilised by currencies, commodities and/or crypto-assets, with the exception of a single currency. This regime (which would likely have applied in relation to the original Libra proposal) is intended to be the most stringent of the three, given the potentially heightened risks posed by these types of instrument in relation to market integrity, financial stability and monetary policy. 

The key features of the regime are summarised in the table below.

Asset-referenced tokens*
Meaning	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
Required form of issuer	Legal entity established in the EU
Authorisation	Issuer must be authorised as an asset-referenced token issuer under MiCA or as a credit institution
Whitepaper	Whitepaper must meet all relevant mandatory disclosure requirements set out in MiCA and be approved by home state authority in authorisation process
Ongoing obligations	Extensive ongoing obligations including around conduct, disclosure, complaints-handling, conflicts of interests, governance, own funds, management of reserve assets and orderly wind-down.
Claim on issuer/ redemption rights	No outright requirement for a direct claim or redemption right against the issuer or reserve. However, issuers that do not grant such rights are required to put in place mechanisms to ensure the liquidity of the tokens.
Prohibition on interest	Issuers are prohibited from paying interest or any other benefit related to the length of time during which the token is held
Significant issuances	Additional prudential requirements apply to tokens that are deemed “significant” by the European Banking Authority (by reference to pre-defined criteria).

*Note: these are subject to certain exemptions (e.g. for de minimis issuances and issuances to qualified investors).

 

Other crypto-assets 

This regime is intended to be a catch-all, to cover all crypto-asset issuances that are not covered by other regimes. The approach provides for a degree of regulatory oversight and control without burdening authorities with having to approve every issuer or issuance in advance.

 

Crypto-asset service providers

New authorisation requirement

MiCA requires anyone seeking to provide crypto-asset services in the EU (for example, in relation to custody, trading, exchange, brokerage, promotion or advice) to have been authorised in an EU member state for the services it wishes to undertake. For this purpose, it needs to establish a registered office in that state. An authorisation provided by one EU member will be valid across the EU. 

Authorised service providers must comply with a list of general requirements as well as the additional specific requirements applicable to the particular services they provide.

General requirements

The general requirements relate to:

• Conduct - e.g. obligations to act honestly, fairly and professionally and in the best interests of their clients.
• Prudential safeguards - in the form of own funds or insurance.
• Organisational requirements - including requirements around ownership, personnel, resilience, cyber-security, record-keeping and monitoring of market-abuse.
• Safeguarding of both crypto-assets and funds – these requirements seek to limit the ways in which crypto-asset service providers can deploy the crypto-assets and funds they hold on behalf of their clients.
• Complaints handling procedure – e.g. there must be effective and transparent procedures for the prompt, fair and consistent handling of complaints.
• Management of conflicts of interest – this includes conflicts between the service provider and its shareholders, its managers and employees or its clients as well as conflicts between clients.
• Outsourcing – e.g. authorised service providers may not outsource any of their regulatory responsibilities.

Service-specific requirements

Additional service-specific requirements apply in relation to each of the following services:

• Custody and administration of crypto-assets on behalf of third parties
• Operation of a trading platform for crypto-assets
• Exchange of crypto-assets (against fiat or crypto)
• Execution of orders for crypto-assets on behalf of third parties
• Placing of crypto-assets
• Reception and transmission of orders on behalf of third parties
• Advice on crypto-assets

AML/CTF

Crypto-asset service providers will also need to be mindful that their authorisations may be withdrawn if they fail to comply with national implementations of EU legislation in respect of money laundering or terrorist financing. 

Market abuse regime

MiCA also seeks to establish market abuse rules for crypto-asset markets. Under the proposal, crypto-assets that are admitted to trading on a crypto-asset trading platform that is operated by a crypto-asset service provider would be subject to the new rules. The rules include requirements relating to the disclosure of inside information as well as prohibitions on insider dealing, unlawful disclosures of inside information and market manipulation.

Acquisition-review mechanisms

Finally, it is worth noting that the proposed regime also includes mechanisms by which national authorities can review and control direct or indirect acquisitions of capital or voting rights in issuers of asset-referenced tokens and crypto-asset service providers. 

Potential acquisitions that meet the relevant thresholds (starting from 10% or more of capital or voting rights) must be notified to the supervising national authority, which will have around 60 working days to assess the proposal and determine whether to oppose it. This period may be extended if the authority requires further information. 

Notification of disposals of capital or voting rights may also be required in certain circumstances, namely where such disposals bring the relevant entity’s holding below the relevant thresholds.

Next steps

The proposal is now going through the EU’s ordinary legislative procedure. The aim is to have the three regulations in the Digital Finance Package in full effect by 2024. In the meantime, many market participants will want to consider the impact of the proposal on their business models and structures. 

Meanwhile, the UK government has committed to consult on the UK’s approach to cryptoasset regulation, including stablecoins, later this year. It remains to be seen to what extent the UK’s approach will follow the EU’s.

Should you need any advice on any of these matters please do not hesitate to get in touch