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MiCA: EU legislators agree rules to tame crypto "Wild West"
Practical Law UK Articles w-036-3669 (Approx. 6 pages)
MiCA: EU legislators agree rules to tame crypto "Wild West"
by Marina Reason, Partner and Patricia Horton, Professional Support Lawyer, Herbert Smith Freehills
| Law stated as at 06 Jul 2022 • European Union |
In this article, Marina Reason (Partner) and Patricia Horton (Professional Support Lawyer) summarise their understanding of where MiCA has landed following political agreement. As the agreed text of MiCA is not yet publicly available, some of the detail of the agreement may not be reflected in the article.
The European Parliament and Council of the EU reached a preliminary political agreement on the Regulation on Markets in Cryptoassets (MiCA) on 6 June 2022.
The EU's push for first mover advantage and becoming a "standard setter" for crypto regulation is coming together, as MiCA must be considered alongside:
- Political agreement having already been reached in other pieces of legislation in the digital space (including the Recast and revised Wire Transfer Regulation on 29 June 2022, the Regulation on digital operational resilience for the financial sector (DORA) earlier in March 2022 and crypto-related amendments to the MiFID II Directive (2014/65/EU) (MiFID) and other product legislation in May 2022) (see Legal updates: Political agreement reached on proposed Regulation on information accompanying transfers of funds and certain cryptoassets and Political agreement reached on proposed Regulation on digital operational resilience (DORA) and Practice note, Hot topics: EU Digital Finance legislative package: Amending Directive: Legislative process).
- The planned expansion of scope of anti-money laundering (AML) requirements to align the Fourth Money Laundering Directive ((EU) 2015/849) (MLD 4) (as amended by the Fifth Money Laundering Directive (MLD 5)) with MiCA and capture additional cryptoassets (see Practice note, Hot topics: EU AML and CTF legislative package: Changes to regime: Increased scope).
- The DLT Pilot Regime Regulation having already come into force in June 2022 (see Practice note, Hot topics: EU Digital Finance legislative package: DLT Pilot Regime Regulation).
This article summarises our understanding of where MiCA has landed following political agreement. As the agreed text of MiCA is not yet publicly available, some of the detail of the agreement may not be reflected.
"We are the first continent to have a cryptoasset regulation. In the Wild West of the crypto-world, MiCA will be a global standard setter. |
When will MiCA apply?
Following political agreement on MiCA, the final text will now be worked on by technical experts before it is put before the Parliament and Council for approval. MiCA will enter into force following approval and publication in the Official Journal of the European Union, which is expected to be towards the end of 2022. The majority of provisions will become applicable 18 months later, in mid-2024, except for the requirements related to stablecoins (referred to in MiCA as "asset referenced tokens" (ARTs)), which are expected to apply within 12 months of MiCA entering into force (likely to be end 2023/early 2024). Technical standards and delegated acts specifying certain elements of MiCA will need to be adopted before MiCA becomes applicable.
Grandfathering and transitional arrangements will be available. For example, cryptoasset service providers (CASPs) providing services before MiCA becomes applicable should be able to continue to do so for a further 18 months after MiCA starts to apply (potentially end 2025/early 2026) or until they become authorised.
MiCA overview
By way of a quick recap, MiCA introduces a sweeping set of rules that will regulate issuers and intermediaries of certain cryptoassets.
Cryptoassets in scope
The assets in scope are:
- Tokens that are not stablecoins or e-money. This will capture tokens such as utility tokens, cryptocurrency and exchange tokens. Importantly, whilst non-fungible tokens (NFTs) are generally out of scope, some NFTs may be captured (as discussed below).
- Stablecoins (referred to in MiCA as ARTs). These are effectively cryptoassets whose value is pegged to one or more fiat currency or other value or rights. This will likely include algorithmic stablecoins that aim to maintain a stable value in relation to an official currency of a country or to one or several assets, via protocols, which provide for the increase or decrease of the supply of such cryptoassets in response to changes in demand.
- E-money tokens. These are cryptoassets that purport to maintain a stable value by referencing to the value of one official currency.
MiCA excludes any cryptoassets that look like more traditional financial products and are caught by other regimes such as MiFID, the second Electronic Money Directive (2009/110/EC) (2EMD), Capital Requirements Directive (2013/36/EU) (CRD) (deposits), Securitisation Regulation (2017/2402/EU) and Pan-European Personal Pension Product (PEPP) Regulation ((EU) 2019/1238).
Digital assets that cannot be transferred to other holders (for example, those only accepted by the issuer or the offeror and are technically impossible therefore to transfer to other holders, such as loyalty schemes) and cryptoasset services provided in a fully decentralised manner without any intermediary, are not caught. Other exemptions apply to tokens that are not stablecoins or e-money. Conversely, more onerous obligations apply to stablecoins or e-money tokens that are deemed "significant" by the EBA.
Issuers and CASPs
MiCA applies to cryptoasset issuers and intermediaries, referred to in MiCA as cryptoasset service providers (CASPs). CASPs provide to third parties, on a professional basis, services in relation to cryptoassets (such as custody and administration (crypto wallet providers), operating cryptoasset trading platforms, exchange of cryptoassets for fiat currency, execution of orders, reception and transmission of orders, and providing advice on cryptoassets).
The requirements in MiCA apply in a tiered fashion to issuers and CASPs depending on the product (for example, as noted above, significant ARTs and e-money tokens are subject to more onerous requirements; there is also a concept of significant CASP) and the activity. Broadly:
- Authorisation. Issuers of ARTs must have a registered office in the EU and will require authorisation under MiCA. CASPs are required to be authorised under MiCA unless they are already authorised under existing financial services legislation (for example, banks, investment firms and payment institutions). Cryptoasset services can only be provided in the EU by an authorised CASP that has its registered office in the EU. Similar to MiFID, a CASP authorised in one EU member state may operate across the EU under a passport.
- Other requirements. These include requirements relating to transparency and disclosure for the issuance and admission to trading of cryptoassets (for example, issuers will be required to publish an information document known as a "white paper"), organisational, conduct and prudential rules for CASPs and certain issuers, change in control and supervision arrangements. MiCA also establishes a market abuse regime for cryptoassets that are admitted to trading on a trading platform for cryptoassets, introducing requirements prohibiting certain behaviours that are likely to undermine users’ confidence in cryptoasset markets and the integrity of cryptoasset markets, including insider dealing, unlawful disclosure of inside information and market manipulation related to cryptoassets.
Areas of controversy
Several points were discussed during trialogues that were politically charged and caused much debate in the industry and the legislators. A number of these were not fully resolved as part of the political agreement and have been left for resolution as part of the technical trialogues. Such areas include the proposed "CASPs blacklist" to be maintained by ESMA for CASPs that do not comply with EU or international standards for AML/CTF and tax; CASPs liability rules; and the application dates and transitional measures. It also includes the following topics:
- NFTs. This was a hotly debated topic with the co-legislators taking different stances on whether to include NFTs within the scope of MiCA. The latest position appears to be that NFTs that are non-fungible and unique will be excluded from the scope of MiCA. If they are fungible in any way or are not fully unique, they will be captured by MICA or other applicable product regime (depending on the nature of the token). The definition of NFTs will be clarified in the finalised text. Within 18 months, the European Commission will assess the position and, if necessary, publish a legislative proposal to create a separate regime for NFTs. In the meantime, individual member states would be free to regulate them at a national level.
- ESG. How the high carbon footprint of cryptocurrencies should be reduced proved to be contentious among the EU co-legislators. A call for a ban earlier this year on proof-of-work crypto mining (which would have effectively meant a ban on cryptocurrencies, such as Bitcoin, which rely on proof-of-work consensus mechanism) ultimately did not receive sufficient support in the co-legislators. A framework compromise has been agreed, but the precise details remain to be confirmed. It is likely that the white paper will be required to include:
- an independent assessment of the likely energy consumption of the cryptoasset where the proof-of-work model is used; and
- information on sustainability indicators including in accordance with the sustainable finance Taxonomy Regulation ((EU) 2020/852).
- CASPs are likely to have to publish this information on their website for every cryptoasset in relation to which they provide services. ESMA has been tasked with developing draft technical standards on the content, methodology and presentation of information related to principal adverse environmental and climate-related impact. The European Commission will, within two years, report on the environmental impact of cryptoassets and consider the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work. The EU's sustainable finance taxonomy will likely be changed in due course (by Jan 2025) to include cryptoasset mining in the economic activities that contribute substantially to climate change mitigation.
- Supervision of significant CASPs and stablecoins. There has been some debate between the co-legislators as to the supervision of significant CASPs (the threshold for a CASP to be significant has now been set at 15 million users); in particular, whether that would be by national competent authorities (NCAs) in the relevant member state or if it would be by ESMA. Supervision is set to remain with NCAs, although ESMA will have powers to intervene to prohibit or restrict the provision of cryptoasset services by CASPs if there are threats to market integrity, investor protection or financial stability. Stablecoins will be supervised by the EBA and stablecoin issuers must be located in the EU.
What MiCA means for firms now
Once the final text becomes available, cryptoasset issuers and CASPs should waste no time in assessing what MiCA will mean for their businesses including the territorial reach of MiCA. At a high level:
- Existing EU financial institutions will be permitted to provide cryptoasset services without authorisation as CASPs if they notify NCAs before providing those services for the first time. These firms will need to understand the perimeter of MiCA and the MiCA obligations they will be subject to and adapt their existing systems and processes accordingly.
- The impact on businesses that are not currently authorised will be significant, although the onerousness of the obligations under MiCA will depend on the types of cryptoasset being issued and activities being carried on. These businesses will need to consider whether their existing activities fall within the scope of MiCA and, if necessary, seek authorisation as a CASP or an issuer of ARTs. Grandfathering arrangements should apply. A simplified authorisation process may apply to crypto businesses that are already authorised under national law to provide cryptoasset services: services: precisely what national crypto law will be relevant here (for example, is crypto registration under MLD 5 sufficient or is this a reference to digital assets regimes such as the Loi Pacte in France?) and what the simplified regime will look like remains to be seen. These firms must not underestimate the time it will take to apply MiCA to their businesses, from assessing the extent to which MiCA applies to them, to applying for authorisation and implementing MiCA requirements into their systems and processes, from scratch.
- Non-EU businesses should consider how the territorial scope of MiCA will impact on their current and future business models. Will they be able to continue operating without being based in the EU, for example, by relying on reverse solicitation?