At the end of September, the European Commission (EC) adopted a comprehensive digital finance package, which includes a proposal for a Regulation on Markets in Crypto-assets (MiCA). Along with legislative documents, such as the MiCA, the package also includes a digital finance strategy. The Commission defines one of the main strategic priorities to be a financial services regulatory framework that is innovation-friendly and that spares the unnecessary burdens to the application of new technologies. In this context, the MiCA Proposal is one of the first specific practical steps.
In recent years, markets in crypto-assets have been continuously evolving. This inevitably created legal gaps and respectively, a need for a sound legal framework to clearly define the regulatory treatment of all crypto assets not yet covered by existing financial services legislation. The Commission believes such a framework will bring more legal certainty while supporting safe innovation in the crypto-asset industry.
Some Member States have already introduced national regimes for crypto assets and their related services. However, the MiCA Proposal indicates that the different approaches on a national level do not facilitate the cross-border provision of services in relation to crypto assets and could potentially lead to a fragmentation within the single market. For this reason, the proposed new regime at EU level is aimed at fostering harmonisation by replacing national legal frameworks applicable to crypto-assets.
The draft MiCA Regulation defines the term “crypto-asset” broadly as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”,
The scope of the Regulation includes:
► Crypto assets that do not qualify as financial instruments, deposits or structured deposits under EU financial services legislation;
► Requirements for crypto-asset issuers;
► Requirements for crypto-asset service providers;
► Regulation of crypto-assets to be offered to the public or admitted to trading on a trading platform in the EU;
► Prohibitions and requirements to prevent market abuse.
The draft MiCA Regulation distinguishes three categories of crypto-assets and establishes separate frameworks for each of them:
► Utility tokens –intended to provide digital access to a good or service, available on DLT, and that is only accepted by the issuer of that token. Such ‘utility tokens’ have non-financial purposes related to the operation of a digital platform and digital services;
► Asset-referenced tokens - aimed at maintaining a stable value by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets. By stabilising their value, those asset-referenced tokens are often used by their holders as a means of payment to buy goods and services and as a store of value;
► E-money tokens (‘stablecoins’) - intended primarily as a means of payment and aimed at stabilising their value by referencing only one fiat currency. The function of such crypto-assets is very similar to the function of electronic money, as defined in Article 2, point 2, of Directive 2009/110/EC. Like electronic money, such crypto-assets are electronic surrogates for coins and banknotes and are used for making payments.
In accordance with the MiCA Regulation, crypto-asset issuers will be required to publish an information document (white paper). Some exemptions are foreseen for SMEs. MiCA also sets a requirement for all crypto-asset issuers to be incorporated as a legal entity.
Issuers of asset-referenced tokens are required to be authorised as such and incorporated in the form of a legal entity, established in the EU. Authorisation and supervision of asset-referenced token issuers, as well as approval of their whitepapers, will be carried out by national competent authorities. An exception is provided for issuers of significant asset-referenced tokens, whose supervision is granted to the European Banking Authority (EBA).
Other requirements include capital and governance ones, rules on conflicts of interest and stabilisation mechanism, reserve of assets and requirements for the custody of the reserve assets.
Issuers of e-money tokens need to be authorised as a credit institution or as an ‘electronic money institution’ within the meaning of Article 2(1) of Directive 2009/110/EC. In accordance with the MiCA, ‘e-money tokens’ are deemed electronic money. Like issuers of asset-referenced tokens, e-money token issuers are supervised by national competent authorities, unless deemed significant, whereby their supervision is again granted to the EBA.
With respect to the providers of crypto-asset services, the MiCA sets out general requirements including prudential safeguards, rules on organisation and safekeeping of clients’ funds, rules on the information provided to clients, obligation to establish a complaint handling procedure. The Commission also seeks to put in place requirements for specific services:
► custody of crypto-assets;
► trading platforms for crypto-assets;
► exchange of crypto-assets for fiat currency or for other crypto-assets;
► execution of orders;
► placement of crypto-assets;
► reception and transmission of orders;
► advice on crypto-assets.
The enactment of the MiCA Proposal is subject to political deliberation and EU’s ordinary legislative procedure. Furthermore, according to the draft, there will be a phase-in period of 18 months following the day of entry into force, except for the provisions applicable to e-money tokens and their issuers, which will enter into application on the date of the entry into force. The aim is to have the regulation, together with the other legislative proposals from the EU digital finance package, in full effect by 2024.