The Impact of MiCA on the EU’s Crypto Landscape

The forthcoming Markets in Crypto-Assets Regulation (MiCA) aims to standardise the regulatory landscape for crypto-assets within the European Union (EU). This is particularly significant for crypto-assets that do not currently fall under existing financial services legislation. My Compliance Office (MCO) recently explored how companies can prepare for MiCA.

Published on 12 July, the initial Consultation Package of this regulation solicits opinions on rules pertaining to crypto-asset service providers. Key areas of focus include authorisation, identification, conflict of interest management, and complaint resolution, with feedback due by 20 September.

MiCA is projected to be in full effect by 2024, following a set of key milestone events. After the EU Parliament’s approval on 20 April 2023, and endorsement by the Council of the EU on 16 May, the Final Text of the regulation was published on 9 June. The first Consultation Package was then published on 12 July. Subsequent packages are expected in October 2023 and Q1 2024. The application of rules for asset-referenced and e-money tokens is anticipated by June 2024, and the application of rules for the remaining asset classes by December 2024.

Europe and the UK have emerged as leading pioneers in crypto regulation. According to the European Parliament Legislative Train document ‘Europe Fit for the Digital Age’ from June 2023, the absence of comprehensive regulation leaves consumers and investors at substantial risk. Differing rules across Member States have led to regulatory fragmentation, creating an unlevel playing field in the Single Market, impeding cross-border expansion of crypto-asset service providers, and leading to regulatory arbitrage. Moreover, the crypto asset subset of ‘stablecoins’ poses additional challenges if widely adopted by consumers.

Mark Browne, partner at Clerkin Lynch LLP, commented on the necessity of MiCA, citing the lack of clarity in EU legislation regarding tokens. He noted that the potential for conflicting national-level regulations further confounds the situation. In his view, this regulatory ambiguity undermined consumer protection and discouraged regulated businesses from seeking opportunities in the region.

As defined in Regulation (EU) 2023/1114, MiCA aims to establish a comprehensive legislative framework for crypto-assets. It encompasses all relevant issuers and service providers within the EU, while accounting for future technological and innovative developments. MiCA classifies regulated crypto-assets into three categories: Electronic Money Tokens (e-Money Tokens), Asset Referenced Tokens, and Utility Tokens. Each is subject to differing requirements based on associated risks.

However, MCO stated that the scope of MiCA does not cover certain areas, including Non-Fungible Tokens (NFTs), Central Bank Digital Currencies, Financial instruments under MiFID II, the European Investment Bank and its subsidiaries, and funds (unless qualifying as e-money tokens). Despite this, Browne anticipates further guidance to clarify potential overlaps and ambiguities.

As per Regulation (EU) 2023/1114, the MiCA regulation broadly defines a “crypto-asset” as “a digital representation of value or of a right that is transferable and storable electronically using distributed ledger technology or similar technology”. Browne recommends understanding the terminology outlined in the MiCA legislation, dividing definitions into five categories: Token definitions, technology definitions, participant definitions, activity definitions, and legal definitions.

The legislation also sets forth key provisions regarding transparency, disclosure, authorisation, and supervision of transactions for those issuing and trading crypto-assets. It mandates consumer protection safeguards for both issuers of crypto-assets and Crypto-Asset Service Providers (CASPs). Measures to prevent market abuse and requirements for Environmental, Social, and Governance (ESG) disclosures are also included. Article 111 outlines potential penalties for non-compliance, ranging from fines to suspension.

During the MiCA implementation phase, the European Securities and Markets Authority (ESMA) is inviting public feedback on technical standards via consultation packages. The first consultation package, published on 12 July 2023, is particularly interested in the views of crypto-assets issuers, service providers, and financial entities dealing with crypto-assets. ESMA Chair Verena Ross reminded consumers that despite the introduction of MiCA, crypto investments still entail risk.

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