While the approved text is now final and market players know what to expect, many of MiCA's technical aspects are still subject to further development and discussion over the coming months, in relation to which the European Commission is empowered to adopt regulatory technical standards.
Crypto-asset issuers and providers that offer services in the EU (including non-EU firms' cross-border offerings) should start preparing now for the new regime. Understanding whether their offering falls within MiCA's scope and the precise obligations to comply with is key to avoiding business disruption in the transition period and beyond.
Our previous briefing explored MiCA's main provisions in detail, and highlighted some of the key changes coming out of the compromise text when compared with earlier versions.
In more detail
Current EU regime limited to AML and virtual currencies
For EU countries that have not adopted national crypto regimes, only EU AML rules have been in force so far, limited to certain services for virtual currencies. Current AML rules in place only cover custodian wallet providers and those engaged in exchange services between virtual currencies and fiat currencies, which are both subject to a light-touch registration regime. Other services for virtual currencies (e.g., advisory, crypto-for-crypto exchange, etc.) or any services related to other types of crypto-assets (that do not qualify as 'virtual currencies') are not subject to an EU-harmonized regulatory regime, except those for crypto-assets that qualify as financial instruments (to which the existing EU financial rules apply).
What is within MiCA's scope?
MiCA applies to a wide range of crypto-assets, defined as "a digital representation of a value or of a right which may be transferred and stored electronically, using distributed ledger technology or similar technology."
While a special set of rules apply to asset-referenced tokens and e-money tokens, other types of crypto-assets and services remain out of scope (in particular, crypto-assets that qualify as financial instruments and certain non-fungible tokens or NFTs). Some decentralized finance (DeFi) models (e.g., crypto-lending, mining, etc.) and decentralized autonomous organizations (DAOs) are also not expressly covered by MiCA.
Given the wide regulatory scope and flexibility in the creation of rights assigned to crypto-assets, properly defining their nature, and hence the applicable rules, can often be a major challenge, particularly when seeking to remain outside the definition of a security token.
Authorization for crypto-asset service providers
MiCA sets forth new rules on the provision of certain crypto-asset services (e.g., placement, custody, exchange, transfer, advisory, portfolio management, etc.), building a regulatory authorization regime similar to the one in place for investment firms. Once authorized by a competent authority of an EU member state, the crypto-service provider may operate across the EU (under the so-called 'passport' regime similar to those already in force for other types of financial services).
Credit institutions, electronic money institutions and investment firms will not have to obtain a separate authorization under MiCA and will be able to provide crypto services leveraging and adapting their own authorization.
Crypto issuance and offering rules
MiCA regulates the offering of crypto-assets inspired by the rules of traditional markets, including the obligation to submit a "white paper" to the regulator (equivalent to a 'prospectus') for registration prior to an issuance, requiring its approval only for certain types of crypto-assets. Exceptions are provided for limited offerings to qualified investors and certain thresholds. Offering rules are stricter for the issuance of asset-referenced tokens (e.g., stable coins) and e-money tokens because of their higher risk to the financial system. Additional obligations also apply to issuers of asset-referenced tokens and e-money tokens that are considered "significant" (in light of their issuance value, the number of holders and the average number of transactions).
The rules on crypto-assets' issuance (other than e-money tokens and asset-referenced tokens) do not apply when: (i) they are offered free of charge (although they are not considered free of charge when granted in exchange for personal data); or (ii) they qualify as utility tokens that give access to an existing product or service, or that can be used only in a limited network of merchants.
Finally, MiCA introduces market abuse rules to prevent insider dealing and market manipulation, and a transaction cap on asset-referenced tokens and e-money tokens "widely used as a means of exchange."
Consumer protection remains a priority. Consumers will have a 14-day right of withdrawal from the transaction, exercisable up to the end of the offer period and before the crypto-asset is admitted to trading.
MiCA also affords a right of redemption against the issuer of e-money tokens and asset-referenced tokens — a very powerful level of guarantee, similar to existing rules for e-money and open-ended investment funds.
Additionally, insolvency risks are mitigated by obligations to safeguard funds and assets with a third party, and to have a 'reserve of assets' to cover the issuer's liabilities to investors in asset-referenced tokens.
1 Ratifying the text approved on 20 April 2023 by the European Parliament.
Related content: European Union: Crypto Regulation - MiCA Takes its (Near) Final Shape