Approval of the first regulatory framework within the crypto-assets area: MiCa the ambitious game-changer

On 20 April 2023 the European Parliament gave its final approval to the Market in Crypto-assets regulation (“MiCa”). MiCa was published on 9 June 2023 in the EU’s Official Journal and entered into force on 30 June 2023.  

MiCa provides a first legal framework for crypto-assets falling outside the scope of existing European financial legislations and regulations and creates a harmonised set of rules for crypto-assets and related activities and services. This new game-changer regulation ensures that the European financial framework embraces the new digital era, protects the financial actors and the European financial stability. 

1. MiCa the highly anticipated regulation in the crypto-assets area 

New technologies in the banking and payments fields gave rise to new services as well as new business models while challenging financial institutions and introducing new market players. As a response to these changes, the European Commission adopted, on 24 September 2020, a digital finance legislative package in order to encourage a competitive and ambitious European financial sector dealing with innovative digital products all at the same time ensuring protection for financial players and maintaining the European financial stability¹ (the “EU Financial Package”).  

The EU Financial Package consists of the European financial strategy and three legislative proposals relating to, amongst others, (i) digital operational resilience², (ii) markets in crypto-assets, (iii) a pilot regime for market infrastructures based on distributed ledger technology³  (“DLT”) and (iv) a directive to amend certain EU rules regarding financial services⁴. 

MiCa which is not a self-standing initiative but is inherent to the wider EU Financial Package has finally been adopted by the European Parliament on 20 April 2023 after two years of debates and discussions⁵. MiCa aims to set out an ambitious EU-wide harmonised regulatory framework in order to (i) provide greater legal certainty, (ii) support innovation and fair competition in the European Union (“EU”), (iii) ensure a higher level of consumers’ and investors’ protection and (iv) guaranty the market integrity and stability all in compliance with the existing EU financial regulations⁶.  

MiCa is the response to a large number of legal reports and public consultations, identifying risks and opportunities to promote innovation, to ensure safety for investors and the overall EU economy⁷and to reduce fragmentation within the EU legal framework. By taking the form of a regulation instead of a directive, MiCa is directly applicable in all EU member states without the need for any implementation process. As such, the EU regulator allows for a greater degree of harmonization by avoiding the risk of national legal discrepancies and introduces an EU passporting regime for crypto-assets and services related.  

The below is a brief overview of the scope of MiCa and the prudential regime applicable to the various players in the crypto-assets industry and their activities. 

2. Scope of MiCa  

MiCa is not limited to natural or legal persons established in the EU but extends to any natural or legal person, and certain other undertakings, regardless of their location, that are engaged in the issuance, offer to the public and/or admission to trading of crypto-assets or that provide services relating to crypto-assets in the EU⁸. 

MiCa’s scope encompasses all types of crypto-assets, except those already subject to EU legislation or regulation, in particular under European financial laws⁹. Crypto-assets that fall within the definition of categories already regulated, such as for examples, “financial instruments” as described under MiFID II¹⁰, “electronic money” as defined in the E-Money Directive¹¹ or “securitisation” as defined in the Securitisation Regulation¹², are falling outside of the scope of MiCa and the corresponding relevant legislation in force will continue to apply.  

Also excluded from the scope of MiCa are, among others, persons providing crypto-assets services exclusively for their parent companies, for their own subsidiaries or for other subsidiaries of their parent companies¹³.  

3. Classification and clarification of crypto-assets  

MiCa broadly defines a crypto-asset as “a digital representation of value or of a right that is able to be transferred and stored electronically, using distributed ledger technology or similar technology”¹⁴. The following crypto-assets fall within the scope of MiCa: (i) assets-referenced tokens (“ARTs”)¹⁵, (ii) electronic money tokens (“EMTs”)¹⁶ and (iii) crypto-assets other than ARTs and EMTs (e.g., utility token).  

As a result, the regulation aims at clarifying the distinction between, on the one hand, crypto-assets qualifying as “financial instruments” thus falling under the existing financial service regulatory framework, notably MiFID II and on the other hand, tokens qualifying as “crypto-assets” under MiCa. The classification depends on the inherent terms of the instrument and not on the underlying technology (substance over form approach).  

The European Securities and Markets Authority (“ESMA”) is expected to issue guidelines for the purpose of ensuring a clear delineation of crypto-assets covered by MiCa and financial instruments, which classification will have to be done on a case-by-case basis. To promote a common approach towards classification of crypto-assets, the European Banking Authority (“EBA”), the ESMA and the European Insurance and Occupational Authority (“EOIPA”) as well as competent authorities should promote discussions on classification¹⁷.   

4. Offer and admission to trading of crypto-assets  

An issuer of crypto-assets is defined as a natural or legal person, or other undertaking, offering to the public any type of crypto-assets or seeking the admission of such crypto-assets to a trading platform¹⁸.  

MiCa imposes disclosure requirements on issuers of all types of crypto-assets falling under its scope. However, since ARTs and EMTs are considered as “stablecoins”, i.e. a crypto-asset where the value is supposed to be linked to a stable reference asset (e.g. a fiat money, exchange-traded commodities or other cryptocurrency), they are subject to more stringent requirements than other crypto-assets as they might disturb the stability of the European markets.  

1. Issuers of crypto-assets other than ARTs or EMTs  

4.1.1. Requirements  

Only legal entities can offer tokens to the public in the EU or seek their admission to trading¹⁹ (the “Registration”).  

To offer crypto-assets other than ATRs or EMTs to the public or to have them admitted on a trading platform in the EU, issuers must prepare and publish a crypto-assets’ white paper (the “White Paper”)²⁰ which content and form must comply with article 6 and Annex I of MiCa. Any information disclosed in the White Paper must be fair, clear and not misleading.  

The White Paper shall contain, amongst others, the following information relating to:  

• the offeror or the person seeking admission to trading;  
• the issuer, if different from the offeror or person seeking admission to trading; 
• the crypto-assets and the rights and obligations attached to it;  
• the crypto-assets project;  
• the risks related to the issuer, the product and to the project implementation;  
• the technical details regarding the underlying technology and information relating to the holding, storage and transfer of crypto-assets; and 
• the number of crypto-assets to be issued, the price and their terms and conditions. 

Besides from the White Paper, all marketing communications²¹ relating to the offer or the admission to trading of such crypto-assets need to comply with certain requirements as set on article 7 of MiCa e.g. marketing communications must be clearly identifiable, information in the marketing communications has to be consistent with the information in the White Paper, etc.  

Finally, the White Paper and, where applicable, the marketing communications shall be notified to the relevant competent authority of the EU home Member State²² of the offeror and be published on the offeror’s website to make it publicly available before the starting date of, the offer or the admission to trading of those crypto-assets²³. The White Paper and, where applicable, the marketing communications, shall remain available as long as the crypto-assets are held by the public. Failure to meet these standards will be sanctioned²⁴. The White Paper does not need to be approved by a competent national authority, but the latter still has the power to suspend or prohibit the issuance of crypto-assets that do not fulfil MiCa’s requirements²⁵.  

Similar to the Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market (as amended)²⁶ (the “Prospectus regulation”), the White Paper aims to provide all relevant and detailed information on to activities and identity of the offeror, the issuer and/or the person seeking admission to trading. It must contain all the information an investor needs before making an investment decision.  

Accordingly, the White Paper aims to ensure that adequate and equivalent disclosure standards are in place in all EU Member States and that all investors may benefit from the same level of information to ensure a minimum protection for investors.  

4.1.2. Exemptions to drawing a White Paper 

Drafting a White Paper will involve pluri-disciplinary expertise such as legal, financial and information technology. However, a White Paper is not required when (i) the offering is considered as small i.e. to less than 150 persons per EU Member State or for a total consideration of less than 1,000,000 EUR on a 12-months period and/or (ii) the crypto-assets are offered to qualified investors i.e. professional investors²⁷.  

In addition, a White Paper is not required when, among others, (i) crypto-assets are offered for free, (ii) crypto-assets are automatically created as reward for the maintenance of the DLT or the validation of transactions, (iii) the offer concerns a utility token providing access to a good or service that exists or is in operation and (iv) the holder of the crypto-assets has the right to use it only in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror²⁸. 

4.1.3. Liability for information given in White Paper 

Offerors of crypto-assets, person seeking admission to trading or operator of the trading platform as well as any member of their administrative, management or supervisory body must ensure to provide complete, fair, clear and not misleading information²⁹ in the White Paper and shall be liable to a crypto-assets’ holder for any loss incurred due to that infringement³⁰.  

Moreover, the offerors and persons seeking for admission to trading of crypto-assets have to identify, prevent, manage and disclose any conflicts of interest that may arise and have to maintain all of their systems and security access protocols in conformity with the appropriate EU standards³¹. It should also be noted that, in order to ensure a maximum level of consumer protection, article 13 of MiCa imposes a right of withdrawal. Retail holders who purchased crypto-assets either directly from an offeror or from crypto-assets providers placing crypto-assets on behalf of that offeror, have the right to withdraw their token purchase within 14 calendar days. 

2. Issuers of “stablecoins” (ARTs or EMTs) 

1. Requirements 

ARTs issuers in the EU must be authorised by the competent authority of their home Member State to make an offer to the public of ART or to have them admitted to trading³² (the “ARTs Authorisation”). The application for ARTs Authorisation must comply with the requirements set out under article 18 of MiCa and should include, among others, an assessment of the issuer’s own capital, the draft White Paper, the issuer’s business model soundness, the crypto-assets features and security protocols in place.   

Moreover, no authorisation is needed when (i) the offering is solely addressed to qualified investors, or (ii) the average outstanding value of the ART does not exceed 5,000,000 EUR over a period of 12 months, calculated at the end of each calendar day³³.  

The relevant competent national authority has the final say and can withdraw any ARTs Authorisation it has granted³⁴. The authorisations granted by the relevant national competent authority shall be valid in the entire EU and entitle ARTs and EMTs issuers to offer to the public or to seek admission to trading of crypto-assets in all EU member states³⁵.  

EMTs issuers must (i) be authorised as an electronic money institution under the E-Money Directive or as a credit institution³⁶ and (ii) submit a White Paper to the relevant competent national authority³⁷ (the “EMTs Publication Obligations”). EMTs issuers may be exempted from the obligation to qualify as an electronic money institution or a credit institution to the extent they fall under article 1§4, 1§5 and article 9§1 of the E-Money Directive (i.e. already exempted or not falling into the scope of the E-Money Directive). However, even if exempted, the EMTs issuers have to comply with the EMTs Publication Obligations³⁸.   

All EMTs issuers (even established in a third country) must notify their relevant EU Member State competent national authority where the crypto-assets are intended to be offered or where the admission to trading is firstly intended³⁹. 

2. White Paper and marketing communications 

Both ARTs and EMTs offrerors have to publish a White Paper and, where applicable, marketing communication as set out in MiCa⁴⁰. No White Paper exemption applies regardless of the size, value or offering’s target⁴¹.  

All the information required to be included in the White Paper is listed in Annex II for ARTs and Annexe III for EMTs. 

3. Additional requirements for significant ARTs and EMTs 

ARTs and EMTs may be classified as “significant” due to their large scale and the greater risk they represent to the EU financial stability in which case they will need to comply with more stringent requirements ⁴².  

When ARTs or EMTs are considered as significant by the competent national authority, issuers’ supervision will be done by the EBA⁴³. Under MiCa, the crypto-assets are classified as significant when three of the following conditions are met, namely:  

• Number of holders is larger than 10,000,000;  
• The value, the market capitalisation or the size of the reserve of assets of the issuers is higher than EUR 5,000,000;  
• The average number and average aggregate value of transactions per day is higher than 2,500,00 transactions and 500,000,000 EUR respectively;  
• The issuers are providers of core platforms services designed as gatekeeper;  
• The issuers’ activities are performed on an international scale;  
• The crypto-assets or their issuers are interconnected with the financial system; and  
• The issuers offer different types of crypto-assets or related services.  

The appropriateness of the thresholds to classify ARTs or EMTs as “significant” should be reviewed by the European Commission in the future⁴⁴. 

5. Crypto-Assets Service Providers (“CASPs”) 

CASPs are defined as “any person whose occupation or business is the provision of one or more crypto-assets services to third parties on a professional basis”⁴⁵. The type of services covered mainly relate to, amongst others, the custody and administration of crypto-assets on behalf of third parties, the operation of a trading platform for crypto-assets, advising on crypto-assets, etc⁴⁶. 

CASPs have to be authorised by the relevant competent authority of one of the EU Member State to offer crypto-assets services within the EU⁴⁷ (the “CASPs Authorisation”). No license is needed if the CASPs are approached by prospective clients based on the reverse solicitation principle⁴⁸. In this respect, a non-EU CASP cannot solicit and/or prospect clients in the EU or even promote such services and activities without a CASPs Authorisation. Depending on the type of crypto-assets services, the application for a CASPs Authorisation must include specific additional information⁴⁹.   

The CASPs Authorisation is a passport allowing all CASPs to extend their activities across the EU without acquiring additional national licenses⁵⁰. However, authorised CASPs must have a registered office in an EU Member State where they carry at least part of their crypto-assets services as well as their effective management and one of the directors has to be resident in the EU⁵¹.  

CASPs have to act honestly, fairly and professionally in the best interests of their clients⁵² and comply with prudential requirements by demonstrating sufficient capital⁵³, good governance and internal control obligations⁵⁴.  

MiCa also provides a tailored-made regime for specific crypto-assets services ⁵⁵ as well as for significant CASPs, i.e. CASPs who in one year have at least 15,000,000 active users on average in the EU⁵⁶. 

6. Anti-money laundering, countering the financing of terrorism (“AML/CFT”) and prevention and prohibition of market abuse involving crypto-assets (“MAR”) 

1. AML/CFT purposes and crypto-assets transfers traceability  

With the crucial encouragement of the financial action task force (“FATF”) establishing AML/CFT standards, the EU is making it more and more difficult for criminals to misuse financial assets for AML/CFT purposes. A short time ago, FATF recommendation n°16 relating to wire transfers extended the “travel rule” to a range of new cryptocurrency products and services⁵⁷. The recommendation required that countries have to collect, hold and exchange identifying information from the originators and beneficiaries of domestics and cross-border wire transfers to create a suitable AML/CFT audit trail⁵⁸.  

Indeed, the speed and global spread of the crypto-assets as well as the anonymity behind it raise obvious risks of use for criminal purposes, especially cybercrime⁵⁹. 

With regards to the above, the regulation implementing the AML/CFT “travel rules” for crypto-assets was adopted on 20 April, 2023⁶⁰ (the “Transfer of Funds Regulation”)⁶¹. By updating rules on information accompanying the transfers of funds⁶² and extending the scope of the rules to transfers of crypto-assets, the EU regulator aims to ensure financial transparency on exchange of crypto-assets and provides the EU with a solid harmonised legal framework to fight against AML/CFT.  

The Transfer of Funds Regulation will highly impact all EU crypto-assets and particularly CASPs. These rules implement identification and verification of clients in crypto-assets transfers⁶³. The companies that allow the transfer of funds now have to identify and declare the originator and the beneficiary for AML/CFT purposes regardless of whether they are domestic or cross-border⁶⁴. In brief, the information relating to the source of the crypto-assets and its beneficiaries will have to travel along the transaction and be registered on both sides of the transaction. The Transfer of Funds Regulation sets up a due diligence requirement for CASPs as they now have to consider their counterparties‘ risk exposure and their ability to safeguard data, even personal identifiable information (the “Know-Your-Counterparty Requirement”).  

2.  MAR  

MiCa introduces a set of rules to prevent and prohibit market abuse behaviours involving crypto-assets and applying to acts carried out by any person concerning crypto-assets that are admitted to trading or in respect of which a request for admission has been done⁶⁵. This legal framework follows the main features as the current regime applicable to traditional players in the financial market⁶⁶. 

7. What is next ? 

The entry into application of MiCa is expected to take place for issuers, of ARTs and EMTs, 12 months after its entry into force and will fully be applicable, 18 months after its entry into force⁶⁷. MiCa was published in the Official Journal of the European Union on 9 June 2023 and launched the ticking clock for the forthcoming application.  

ESMA, in close cooperation with the EBA, EIOPA and the European Central Bank shall develop draft regulatory technical standards on the content, methodologies, and presentation in order to ensure consistent and harmonized disclosures by issuers of crypto-assets and CASPs within the EU while taking into account their sustainability impacts. Moreover, the consultation work has already begun by the recent publication in July 2023 of the first package (three packages will be published until Q1 2024) in order to collect feedbacks from the public as soon as possible to elaborate these awaited technical standards⁶⁸.  

Crypto-assets providers and service providers should begin considering MiCa’s implications on their businesses in order to operate a smooth transition.  

The technology always has a head start on law and develops at a blistering pace. However, we must acknowledge the important step forward made by the European regulator in its meaningful race to regulate borderless, decentralized and constantly evolving environment. MiCa takes credit for its hard work towards an EU harmonised regulatory framework to provide a “friendly” environment for crypto actors and to maintain the EU financial stability. This long-awaited regulation consists in a balance between preventing norms, protecting crypto stakeholders and promoting innovation. The work has just begun, and the next steps require the input of all market players involved with the aim to promote an innovative financial success.