MiCA: What legal framework in cryptocurrency emerged in the EU?

Introduction. Regulate, not prohibit  

On 20 April 2023, the European Parliament voted in the first reading of a new regulation on the regulation of crypto-assets – Markets in Crypto-assets Regulation (MiCA for short). The event is truly massive, as it is the first legal framework within the European Union to cover cryptocurrency comprehensively, rather than regulating one narrow area.

The regulation proposes a classification of crypto-assets, requirements for each type and demands for service providers. A separate act proposes changes to AML Directive 2015/849, which applied certain anti-money laundering requirements to crypto-assets.

Cryptocurrency has been divided into three classes, depending on the properties of each crypto-asset. The first class includes crypto-assets, other than asset-referenced tokens and currency-linked tokens (hereafter referred to as Others). The second class is Asset-referenced tokens (ART). The third class is currency-linked tokens (E-money tokens or EMT). As we can see the legislator defined clearly the second and the third class, squeezing all other classes into the first one. Apparently, it was done due to great variety of tokens and their properties. Below we will focus on the key features of each asset class.

It is important to make a serious note here. The reader who is deeply immersed in cryptocurrency knows the number and variety of properties that different tokens have. There is constant innovation in this area, with new configurations and types of tokens being invented. For example, Soul-bound tokens or SBT – a token tied to a single address or algorithmic tokens of many different types and logics. MiCA does not aim to regulate all types of tokens, it only provides a framework for the most common classes of crypto-assets. In the future, perhaps the framework will be expanded and we will see new classes and requirements for them. Keep in mind that this is the first regulation on this scale, the first attempt at it, and we are likely to see more changes and refinements in the future.

Below we briefly discuss three classes of crypto-assets.

Classification of crypto-assets

Although the Regulation is the first to describe Others, it makes sense to start with ART and EMT, to understand what distinguishes them from Others.

Asset-referenced token and Electronic money token

ART and EMT have a lot in common in terms of regulation. We will not go into them in detail as we are more interested in Others.
An ART is a crypto-asset that maintains a stable value by being linked to another value, right or a combination of the two, including one or more official currencies.

EMT is a crypto-asset that maintains a stable value by being pegged to one or more official currencies (USDT, USDC).

In order to make a public offering of a token or provide admission to trading of such a token, a legal entity must be authorised or be a credit institution.

The list of information that needs to be submitted is quite extensive, including details of the issuer of the token, including a description of risk management procedures, token holder complaints handling procedures, data protection and availability procedures and white-paper.

Others

This class covers all the most popular tokens that exist now, including utility tokens.

A person who publicly offers other tokens must:

1. Be a legal entity (you cannot offer tokens without registering as a legal entity);
2. Write a white paper;
3. Make such a white paper public and accessible;
4. Any marketing campaigns must comply with the rules set out in the individual articles (it must be notified that it is a marketing campaign, the information must not be misleading and must comply with the white paper, clearly identify the offeror and so on);
5. And to act honestly, fairly and professionally; to communicate with token holders in a fair, transparent and honest manner; to identify, prevent and disclose any conflicts of interest that may arise; and to maintain the security of its systems at a level accepted by the EU.

The white paper plays a key role in the token offering process; it is a kind of official token document, like a security prospectus, where any information regarding the token is detailed and fully disclosed.

What information should be in the white paper?

1. Details of the token issuer, offeror or platform operator if these are all different entities
2. about the token and the project itself
3. on a public offer or admission to trading
4. the rights and obligations associated with such a token
5. the technology behind it, the risks and the reserves

There is also an obligation to make changes, if any, and to notify them.

Similar requirements are imposed if the token is admitted to public trading, but if the initiative is on the side of the exchange operator, the obligation to comply with the requirements falls on the exchange.

Licensing and operating conditions of crypto-asset service providers

Previously, there were only two general types of authorisation that Virtual-assets service providers (VASP`s) could obtain: cryptocurrency storage licence and cryptocurrency-to-cryptocurrency/fiat exchange licence.

With the introduction of Mica, the list has expanded considerably. It is now more similar to the long-established rules for traditional financial markets. Below is a list of services that are subject to licensing.

Also, the MiCA sets out detailed requirements for providers:

1. Not to deceive customers;
2. Warn about the risks;
3. Maintain a level of minimum capital;
4. Provide information on the environmental impact of crypto-assets;
5. Act professionally and in good faith;
6. Keep all transaction records;
7. Organise an effective system of corporate governance;
8. Keep the funds safe.

These are general requirements for the provision of services, but there are also more detailed requirements for each individual service.

What is not regulated by MiCA?

Outside of MiCA there are many types of tokens available on the market: NFT, SBT, algorithmic stablecoins, governance tokens and others. Of course, one can look for similarities between these types of tokens and those described above, but as we have found out, technology and innovation will always be ahead of current regulation. It is worth evaluating tokens based on their spread among users and, based on popularity, regulating them one by one.

Implications for business

To counter the risks of money laundering, the European Securities and Markets Authority (ESMA) should create a public register of non-compliant crypto-asset service providers that operate in the European Union without authorisation.

This means that once MiCA comes into force, it will not be possible to operate further within the EU without registration and compliance. You will need to incorporate in one of the EU countries and obtain the relevant licence from the local regulator, which will be valid throughout the EU. However, please note that for a licence to be compulsory, the token or service must qualify under MiCA and not be subject to multiple exemptions. If you provide any services within the EU we recommend that you read the MiCA carefully to see if you qualify under the regulation.

Outcome

On 16 May 2023, the Council of the European Union approved the MiCA at its meeting. The Regulation was published in the Official Journal of the EU on 9 June 2023 and will apply 18 months after entry into force (the provisions relating to ART and EMT apply 12 months after entry into force), i.e. from approximately November 2024.

This regulation is a new milestone in the crypto industry and significantly moves the industry forward. It is exactly what crypto has been missing for so-called mass adoption, where people who are not prone to the current level of risk can participate in this market without excessive risk and with transparent regulation.

The only remaining question is the cryptocurrency community’s reaction to the changes. Major exchanges and traditional financial institutions have already welcomed the adoption of MiCA. However, it is unclear how ordinary crypto-users, who are used to the status quo, will react, because where there is regulation, there is disclosure and transparency. Our mission remains to help and guide crypto users through the world of regulation.