Legal Overview The Markets in Crypto-Assets Regulation

The Markets in Crypto-Assets Regulation

The EU Commission unveiled its Digital Finance Package, which included several legislative proposals aimed at modernizing the EU financial regulatory framework. A key component of this package is the Markets in Crypto-Assets Regulation (MiCA), marking the EU’s first harmonized regulatory approach to crypto-assets. With MiCA officially adopted and published in June of the previous year, the industry is now in a transitional period to comply with the new regulations before the go-live dates.The regulation will be applied in two phases: the rules for stablecoins (both asset-referenced and e-money tokens) will come into effect on June 30, 2024, while the provisions for crypto-asset service providers (CASPs) will be enforced from December 30, 2024. This article explores the current status of MiCA’s implementation, including the progress of level 2 and level 3 acts, and outlines the final steps required for operationalization.

MiCA aims to provide a comprehensive regulatory framework for crypto-assets across the EU by introducing a common taxonomy, regulatory rules for issuers, and an authorization framework for CASPs.

Taxonomy of Crypto-Assets

MiCA introduces a clear taxonomy categorizing crypto-assets into three distinct groups, each subject to its own set of regulatory requirements. Asset-referenced tokens are crypto-assets that aim to maintain a stable value by referencing another value or right, such as commodities or other crypto-assets. E-money tokens are designed to maintain a stable value by referencing a single official currency (e.g., EUR, GBP, USD). Other crypto-assets include all other crypto-assets, such as cryptocurrencies (e.g., Bitcoin, Ether) and various types of investment and utility tokens, provided they do not qualify as transferable securities under existing EU regulations. Assets that fall under existing EU financial regulations, such as transferable securities, e-money, or securitizations, are excluded from MiCA. Additionally, central bank digital currencies (CBDCs) and digital currencies issued by international organizations are not covered by this regulation.

Public Offering of Crypto-Assets

MiCA establishes a detailed regulatory framework for the public offering of crypto-assets within the EU. Offerors are required to adhere to transparency, disclosure, and notification requirements to ensure investors receive adequate information prior to making investment decisions. Specific rules are also in place for asset-referenced and e-money tokens, including rigorous authorization standards tailored for stablecoins.

Authorization Framework for CASPs

Reflecting principles from existing EU financial regulations like MiFID II, MiCA introduces an authorization framework for CASPs, such as crypto-exchanges and wallet providers. CASPs must obtain authorization from the national competent authority (NCA) in their home Member State. This single license allows CASPs to operate across the EU under the “passporting” mechanism, which facilitates either establishment or cross-border service provision.

Current Status of Delegated Acts

The implementation of MiCA relies heavily on the development of level 2 and level 3 acts, which provide the detailed organizational and technical specifications necessary for compliance. The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) are responsible for drafting these acts. ESMA has released several consultation packages to clarify critical aspects of MiCA.

ESMA's Consultation Packages

ESMA has released several consultation packages to clarify critical aspects of MiCA. The first consultation package, with drafts published in July 2023, saw consultations close on September 20, 2023, and the final report is expected by March 25, 2024. The second consultation package, released in October 2023, had consultations ending on December 14, 2023, with the final report to be submitted to the EU Commission by June 30, 2024. The third consultation package, published on March 25, 2024, with consultations open until June 25, 2024, will have its final report due by December 30, 2024. These consultations have addressed key issues, including the differentiation between regulated financial instruments and crypto-assets, reverse solicitation, organizational requirements for CASPs, and technical standards for crypto-asset white papers.

EBA's Work

The EBA has also been active, publishing draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) related to the stablecoin framework. On February 22, 2024, the EU Commission adopted four Delegated Regulations based on the first EBA consultation package. These regulations will soon undergo review by the European Parliament and the Council.

Preparation for Compliance

As the MiCA go-live dates approach, entities must prepare to meet the new regulatory requirements. The preparation process varies depending on the entity’s regulatory status.

Authorized Financial Institutions

For regulated institutions such as MiFID II investment firms, credit institutions, and e-money institutions, transitioning to offer crypto-asset services is relatively straightforward. These institutions can use an equivalence regime, allowing them to provide crypto-asset services similar to those covered under their existing licenses without requiring a separate MiCA license. They must notify their NCAs of their intention to offer these services.

Authorized CASPs Under National Law

CASPs that are already authorized under national frameworks may benefit from simplified procedures for MiCA authorization. Some Member States, like Germany, have introduced transitional measures, such as the Finanzmarkt digital isierungsgesetz (FinmadiG), which extends operational licenses under national law until December 31, 2025, and provides a fast-track procedure for MiCA compliance.

Non-Regulated Entities

New entrants to the crypto-space face the most significant challenges. They should focus on the following areas to ensure successful compliance: developing a detailed business and expansion strategy, including the selection of a Member State for EU operations; establishing an internal structure that meets regulatory requirements; recruiting qualified personnel for management and key control functions; ensuring transparency in ownership to facilitate the approval process; implementing robust risk management, compliance, and anti-money laundering (AML) frameworks; and developing and maintaining comprehensive internal policies aligned with MiCA requirements.

Conclusion

The MiCA Regulation represents a significant advancement in the EU's approach to regulating crypto-assets. As the deadlines approach, entities across the crypto-ecosystem must proactively engage with the evolving regulatory landscape. By understanding and preparing for MiCA’s detailed requirements, businesses can navigate the transition effectively and leverage the opportunities presented by this new regulatory framework.