With the EU Parliament’s approval of the MiCA regulation some argue that the future of crypto became brighter. While that remains to be seen, it has undoubtedly become more legally certain, which could be the impetus driving new investment into this industry. Key provisions for those issuing and trading crypto-assets (including asset-referenced tokens and e-money tokens) cover transparency, disclosure, authorisation and supervision of transactions. Despite the emergent clarity, one question is still on the minds of the most – who does it affect?
Thankfully, MiCA distinguishes its scope of application to “who” and “what” quite clearly. MiCA will cover crypto-assets that are not regulated by existing financial services legislation. In regard to the latter, it will apply to crypto-assets (CA), asset-referenced tokens (ART), e-money tokens and utility tokens; whereas regarding the former – crypto-asset service providers (CASP), financial institutions, CA issuers and offerors. Naturally, a 376-page long regulation goes into more detail than that, but here are some notable highlights.
Duties and Obligations of Crypto Entities
The exact duties and obligations depend on the entities, crypto-assets involved and envisaged activities to be conducted within the EU, though it is clear that so-called “stablecoins” represented either by asset-referenced tokens or e-money tokens take the center stage of the regulation.
E-money Token Issuers
Issuance of e-money tokens will be restricted to credit and electronic money institutions. As these entities will have already passed a licensing process to provide their services, and as the e-money tokens are going to be equated to e-money, no further authorization process will be enforced as in the case of asset referenced tokens. The only notable obligation is going to be the publication of a “white paper” that will have to indicate among other things – the information about the underlying technology, risks and environmental impact.
Asset-referenced Token Issuers
Unlike e-money, asset-referenced token issuers will have to seek approval of their applications, including the compliance of their white papers to be evaluated by the national competent authorities together with the EBA, ESMA and the ECB, before the asset-referenced tokens can be issued. The complexity of the application and monitoring process will also depend on the asset-referenced token volumes, the crypto-asset service providers that the issuer is interacting with and whether the asset-referenced tokens are considered to be “significant” or not. In addition, crypto-asset service providers working with certain asset-referenced token issuers will be compelled to provide off-chain transaction data so that the latter could comply with MiCA’s reporting obligations.
Crypto-asset Issuers and Offerors
The requirements applicable to “non-stablecoin” crypto-asset issuers and offerors are going to be less stringent, though they will have to produce, publish and notify their “white paper” and marketing communications according to the requirements set by MiCA, including the information about the crypto-asset project, the underlying technology, crypto-asset associated risks and even the information relating to adverse environmental impact, while “air-drops” and “mining / staking rewards” may be exempt.
Crypto-asset Service Providers
In relation to crypto-asset service providers, MiCA prescribes 10 different services and an authorization process subject to the approval of local authorities. The scope of the identified services encompasses all of the crypto-asset service providers that we’re widely familiar today e.g. wallet operators, trading platforms, exchanges, swaps, transaction aggregators, payment facilitators, consultants and others who either provide multiple services or a combination of them. In regard to the specific requirements, MiCA firstly defines what these services mean within the EU’s legal context and then prescribes the relevant requirements for the provision of that service. The authorization process which has an undeniable resemblance to the licensing process of financial institutions includes the evaluation of both the crypto-asset service providers and their aptitude for providing those services.
In addition, the conditions for crypto-asset issuers, offerors and crypto-asset service providers will go beyond their activities and include prudential requirements applicable to the entities themselves. They will range from capital requirements, obligatory insurance policies, appropriate legal status and supervision affording a set standard of liability, effective place of management in the Union, including a residing director, apt management bodies with managers that have sufficient knowledge, skills and experience of the crypto activities and who are able to commit sufficient time to effectively perform their duties. This is indicative of the MiCA’s position that the business together with the crypto activities should be developed within the Union rather than being managed from third countries. This means that the obscurity provided by off-shore jurisdictions, especially relating to the beneficial ownership, corporate governance and effective management may obstruct the authorization processes of certain crypto-asset service providers, crypto-asset issuers and offerors.
Crypto-assets
Regarding the crypto-assets themselves, some will be exempted from its scope (e.g. NFTs), others will benefit from certain exceptions (e.g. utility tokens), e-money tokens will be limited to credit and electronic money institutions, while the issuance of asset-referenced tokens will be open for non-financial institutions.
Punitive Measures and Consumer Protection
Apart from the clarification of the assets, entities and authorization processes, the MiCA regulation goes further to establish a punitive system that is meant to prevent non-compliance and empower both the local authorities and the EBA to oversee the implementation of this system. According to MiCA ESMA is going to be tasked to establish a non-exhaustive register of entities that have been providing crypto-asset services in violation to the prescribed requirements. This system of oversight is not only going to help prevent money-laundering risks of unauthorized CASP activity, but also ensure a high-level of consumer protection by making the list of non-compliant CASPs publicly available.
Generally speaking, apart from creating a level playing field for all crypto participants, MiCA’s preamble that defines the so-called “spirit” of the regulation makes it clear that it was inspired as a response necessary to ensure consumer protection in the context of an emerging technology that created an opportune environment for exploiting the uninformed consumers. In this regard, the uniform set of rules prescribing the requirements for “white papers,” obligations to have effective complaint handling procedures and general restrictions on the methods of how certain crypto-asset services will have to be provided, points to the EU’s intention of reining in control in favour of its consumers.
In conclusion, it goes without saying that despite certain exceptions, MiCA is going to be a fundamental regulation controlling the majority of the crypto-related services within the Union. Some may say that the regulation is too stringent and could curb the development of the underlying technology, while others argue that the regulation doesn’t go far enough by exempting certain crypto-assets, consequently creating loopholes in the overall crypto regulation. However, hopefully most could agree that it nonetheless provides the long-awaited legal clarity which should open the floodgates for corporate and institutional investment in the emerging industry, thereby counteracting the regulation’s supposed shortcomings.
Prepared by Tautvydas Petrošius, Associate of ECOVIS Proventuslaw, and Inga Karulaitytė, partner of ECOVIS ProventusLaw
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