The European Union’s New Crypto Rules (MiCA) Are Here. What’s Next?
The European Union (EU)’s Markets in Crypto Assets (MiCA) regulation is currently being proposed by EU institutions. If and when it comes into effect, it will provide a unified licensing regime for crypto asset service providers (CASPs) operating in the EU.
The EU is still finessing the details and observers offer varying estimates on when and in what manner the regulators will launch the new rules. The European Commission committed to implementing MiCA within four years of September 2020. While there is a non-zero chance (and high hopes) of MiCA becoming law sooner, even as early as this year or sometime in 2023, the Commission gave itself until 2024 to get this done.
Where is MiCA in the Legislative Process?
The short answer is, mostly complete.
The ordinary legislative procedure for most EU rules involves a proposal submitted by the European Commission to the European Parliament and European Council. Both must agree on the text for it to become law, so the text is reviewed and amended multiple times until this happens. For context, MiCA was conceptualized in the Digital Finance Package presented by the European Commission on September 24, 2020. Despite broad support, it was not until June 30, 2022 that the Council and Parliament reached a “provisional agreement” on the text.
Once the parties agree, the Council and Parliament need to formally “approve” the draft, and then individual member states need to have their parliaments sign off on it. Once that happens, MiCA will come into effect. We can expect some changes in the text, but drastic shifts are unlikely. Having every member state sign off through its legislative process will undoubtedly take time.
What do we know about MiCA?
We still do not have MiCA’s draft text, since it is still in the draft phase. What we do know is based on press releases, statements by EU members of parliament, and industry reports. Before it becomes law, compromises will be struck, deals will be made, and as with all regulatory matters, the devil will be in the details. But, and this cannot be stressed enough—MiCA will bring much needed clarity to the regulatory framework governing crypto assets, both in the EU and worldwide.
Less ambiguity and more consistency
The EU is one of the largest markets for cryptocurrency businesses, but there is no single policy to regulate CASPs. The overarching EU rules, such as the guidance for virtual asset service providers from the Financial Action Task Force (FATF) in 2019 and Fifth Anti-Money Laundering Directive (AMLD5), are ambiguous enough to allow member states freedom of interpretation and regulatory arbitrage (some countries, like Malta and Portugal, are more “crypto-friendly” than others).
MiCA and the accompanying update to the Transfer of Funds Regulation (TFR, aka the Travel Rule) will be legally binding in all member states and replace national crypto policies. This harmonization removes complexity, reduces legal uncertainty, and will likely reduce costs for cross-border operations. It should (details depending) allow CASPs to be registered in one country and operate in multiple EU countries.
Which CASPs need to get ready for MiCA?
The European Council’s press release is clear: “crypto-asset service providers (CASPs) will need an authorisation in order to operate within the EU” (emphasis added). This means that MiCA will apply to any CASP doing business in the EU, no matter their country of incorporation. Specified in the European Council’s press release are:
▪ Issuers of unbacked crypto-assets
▪ Issuers of stablecoins
▪ Trading venues
▪ Crypto wallets
Two notable categories are not in scope, including decentralized entities (DEXs and DeFi lending protocols) and NFTs (unless they fall under existing crypto-asset categories, i.e., are fractional/part of collection and potentially fungible, and trading platforms with NFT collections). Observers expect the Commission to tackle rules for DeFi over the 18 months following MiCA’s entry into force, along with NFTs.
What will MiCA require from CASPs?
Anti money laundering - Those familiar with rules for traditional financial intermediaries should find themselves in charted waters when it comes to AML provisions, including:
▪ Establishment and substantive management in the EU, with a resident director and office in the country where authorization is requested (that’s probably why this July, Crypto.com and Coinbase secured virtual asset provider registrations in Italy, Gemini in Ireland, and Binance in France, Italy, and Spain)
▪ Regular transmission of relevant information to the European Securities and Markets Authority (ESMA)
▪ Potentially, “tougher requirements” for shareholders and management of CASPs, notably with regard to their localization for “largest CASPs.”
▪ Enhanced checks in line with the EU AML framework for those whose parent company is located in a country considered high risk from AML activities or on the EU list of non-cooperative jurisdictions for tax purposes.
Consumer protection - One of the fundamental aims of MiCA is to “protect consumers against some of the risks associated with the investment in crypto-assets, and help them avoid fraudulent schemes.” In terms of consumer protection, CASPs will need to:
▪ Make an effort to protect crypto wallets from hacks or operational failure.
▪ Clearly inform customers about risks of losses associated with crypto assets.
▪ Accept liability for misleading information.
▪ Refrain from insider trading and market manipulation.
▪ Declare information on environmental and climate footprint.
Stablecoins - Thanks to the Terra/Luna debacle, issuers of stablecoins were honored with their very own section in the European Council’s press release on MiCA. They will have to:
▪ Build up a “sufficiently liquid reserve,” with a 1/1 ratio, and partly in the form of deposits
▪ Offer a claim to every stablecoin “holder” at any time, free of charge
▪ Be supervised by the European Banking Authority (EBA) and have a presence in the EU.
Setting the Trend
With the EU leading the way, expect other jurisdictions to follow suit and create regulatory frameworks and standards for the crypto industry. As more countries draft their own laws and regulations, we might see elements of MiCA make its way into foreign legislation. As was the case with GDPR, CASPs doing business in the EU, even if incorporated elsewhere, would already have to be compliant with MiCA.
“Press Release - Digital finance: agreement reached on European crypto-assets regulation (MiCA).” Council of the European Union, 30 June 2022, https://www.consilium.europa.eu/en/press/press-releases/2022/06/30/digital-finance-agreement-reached-on-european-crypto-assets-regulation-mica/
“Press Release - Digital Finance Package: Council Reaches Agreement on MiCA and DORA.” Council of the EU, 24 November 2021, https://www.consilium.europa.eu/en/press/press-releases/2021/11/24/digital-finance-package-council-reaches-agreement-on-mica-and-dora/
“Digital Finance.” Council of the European Union, 1 July 2022 (last reviewed), https://www.consilium.europa.eu/en/policies/digital-finance/
@BlockChainforEU (Block Chain for Europe). “Yesterday, EU institutions reached a political agreement on #MiCA. It will now be finalised at a technical level by the
@EU2022_CZ […]” Twitter, 1 July 2022, https://twitter.com/blockchainforeu/status/1542884627790061570?s=21&t=GBKMAJGzd2rS4NE1iOrM_A
@ernesturtasun (Ernest Urtasun). “Agreement between the EU institutions on MiCA: we will have a common harmonized EU-wide regime for crypto-asset issuers and service providers […]” Twitter, 30 June 2022, https://twitter.com/ernesturtasun/status/1542591815546707970
“Regulating Crypto: The Bid To Frame, Tame, or Game The Ecosystem.” S&P Global Ratings, 13 July 2022, https://www.spglobal.com/en/research-insights/featured/regulating-crypto.
“Breaking Down the EU’s New Cryptocurrency Regulations, Part 2: The MiCA Licensing Regime.” ChainAnalysis, 19 July 2022, https://blog.chainalysis.com/reports/eu-cryptocurrency-regulations-july-2022-part-2/.
Chipolina, Scott. “FT Cryptofiannce: Digital Asset groups rush to scoop up crypto registrations in Europe.” Financial Times, 22 July 2022, https://on.ft.com/3v7klcc.
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