EU law on crypto-actives – MiCA regulation
In the last week of June, the Presidency of the Council of the European Union and the European Parliament reached a preliminary agreement on a draft Regulation on Markets in Crypto-assets and amending Directive (EU) 2019/1937 (MiCA).
The MiCA is intended to be the first attempt to comprehensively regulate crypto-assets and their use in trading. The draft MiCA was published by the European Commission as one of the components of the so-called Digital Finance Package (DFP). In addition to the draft MiCA Regulation discussed here, the DFP also includes: the Digital Finance Strategy, the draft Digital Operational Resilience Act (DORA) and the draft Distributed Ledger Technology (DLT) Regulation1.
According to the European Commission, which authored the draft legislation, the DFP seeks to fill existing gaps in EU law to prevent the existing legal framework from hindering the use of new digital financial instruments, and simultaneously to ensure that such new technologies and products fall within the scope of financial regulations and operational risk management solutions which apply to entities operating within the EU. The Commission aims to support innovation and the dissemination of new technologies while also protecting consumers and investors.
The current draft MiCA states that its primary aim and focus is to create a regulatory framework for issuing crypto-assets, including: creating information requirements which bind issuers; licensing crypto-asset service providers; regulating the organization and actions of token issuers and crypto-asset service providers; consumer protection; and adopting measures to prevent abuse in the crypto-assets market.
Definition of crypto-assets
The draft legislation indicates that MiCA will use an autonomous definition of crypto-assets, understood as a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology. Crypto-assets, understood in this way, will be divided into three basic categories:
- Asset-linked tokens – crypto-assets that are not an electronic money token and that purport to maintain a stable value due to being linked to any other value or right or combination thereof, including one or several official currencies of a country;
- Tokens that are electronic money or e-money – crypto-assets that are used primarily as a means of exchange and that are intended to maintain stable value by referencing to the value of an official currency of a country;
- Utility tokens – a type of crypto-asset intended only to provide digital access to a particular good or service (is used for purposes other than for the payment or exchange of external goods or services), which is available via distributed ledger technology and accepted only by the issuer of that token.
The MiCA draft envisages that different requirements will apply to issuing each of these types of tokens, with the greatest regulation applying to the public issuance of asset-linked tokens. First and foremost, anyone planning such an issuance must, according to Article 15 of the draft MiCA, be authorized to make offerings or be entitled to make such assets available for trading on a crypto-asset trading platform involving such tokens. Although the necessary authorization will be granted by the competent supervisory authority in the relevant member state, it is assumed that the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB) will also be involved in the decision-making process. Accordingly, obtaining such a permit may be very time-consuming in practice. Furthermore, the draft also envisages an obligation for an issuer to publish an information document about the relevant crypto-asset.
The regulatory burdens created by the draft MiCA when issuing e-money tokens are a mid-way option. Article 43 of the draft permits e-money tokens to be issued solely by an entity which:
(a) is authorized as a credit institution or as an “electronic money institution” within the meaning of Article 2(1) of Directive 2009/110/EC;
(b) complies with the requirements applicable to electronic money institutions, contained in Titles II and III of Directive 2009/110/EC;
(c) has published a crypto-asset information document and notified the competent authority of this.
This means that the MiCA does not seek to create a separate path for authorizing entities wishing to issue e-money tokens, as entities will already be authorized if they obtained a permit to operate as an electronic money institution, issued under separate regulations (e.g. under Article 132a et seq. of the Payment Services Act). Other rules applying to the issuance of e-money tokens regulate the preparation and publication of the informational document and the right of token holders to redeem the monetary value of their tokens at any time, for face value in cash or by bank transfer.
Both e-money tokens and asset-linked tokens may qualify as a significant asset-referenced tokens, provided that they meet the requirements laid down in the MiCA. By way of exception, the issuers of such tokens will be directly supervised by the ESMA, in the case of asset-linked tokens, or by the European Banking Authority (EBA), in the case of e-money tokens.
The draft MiCA places the fewest requirements on issuing utility tokens. An issuer of such tokens is obliged to fulfil certain formal requirements and to prepare, notify the relevant supervisory authority and publish an information document regarding the issued crypto-assets. This document need not be approved in advance by the supervisory authority, but the authority will be entitled in appropriate cases to require that changes are made to the document or to alter the process for issuing or offering such crypto-assets.
As mentioned above, a key duty of issuers will be to issue an information document (a whitepaper) including information about: the issuer, the project, the crypto-assets to be offered to the public and a detailed description of the risks associated with issuing crypto-assets. The current MiCA draft requires that information provided in a whitepaper on issuing utility tokens must be fair, clear and not misleading.
As seen in the April trilogues, European authorities involved in the legislative process are seeking to expand the definition of a crypto-asset issuer by indicating that it can be not only a legal entity, but also a natural person or undertaking.
“Crypto-assets services” will require authorization. This applies to any service or activity which is related to any crypto-assets and which involves:
1., the custody and administration of crypto-assets on behalf of third parties;
2. the operation of a trading platform for crypto-assets;
3. the exchange of crypto-assets for fiat currency that is legal tender;
4. the exchange of crypto-assets for other crypto-assets;
5. the execution of orders for crypto-assets on behalf of third parties;
6. placing of crypto-assets;
7. the reception and transmission of orders for crypto-assets on behalf of third parties
8. providing advice on crypto-assets;
According to the latest trilogs, the above services that make up the crypto-asset service will likely still be expanded in the final version of the draft MiCA, such as a crypto-asset transfer service or providing portfolio management on crypto-assets.
Any entity providing one or more of these services on a professional basis requires authorization. Accordingly, the draft MiCA is of crucial importance for crypto-asset trading platforms. Such authorization may only be granted to a legal entity with its registered office within an EU member state, upon fulfilling certain requirements, such as: possessing certain internal documentation; implementing appropriate internal systems and procedures; ensuring that the managers of the issuer’s management body have the necessary competence, knowledge, skills and experience; and possessing an adequate level of equity capital.
EU legislative procedures require that the draft MiCA must be approved by the EU Council and the European Parliament before it can be formally adopted. It is expected that it will start to be applied in practice within 18 months of its entry into force, which will happen 20 days after it is published in the Official Journal of the European Union.