The Markets in Crypto Assets (MiCA) Regulation is recognized worldwide as a comprehensive framework for crypto assets. The primary goals of MiCA are to protect consumers engaging with crypto assets, establish regulatory harmony, and offer legal certainty to companies entering the space.
The essential trigger of the MiCA regulation was the announcement of Libra* by Facebook in 2019, which sparked a rush among policymakers to regulate private internet money. Around the same time, a European Banking Authority (EBA) report, emphasized the need for regulation due to the increasing risks associated with consumer protection and money laundering in the crypto sector.
From the business side there were calls for regulatory harmonization, since running a European cryptocurrency business had turned into a highly bureaucratic and challenging endeavor that required complying with every individual national regulatory supervisor.
MiCA refers to cryptocurrencies as Crypto assets, which are a “digital representation of a value or a right, which may be transferred and stored electronically, using distributed ledger or similar technology”. Crypto asset therefore refers to coins such as Bitcoin or Ether.
This is a sub-type of crypto assets “which is only intended to provide access to a good or a service supplied by its issuer”. For example, Filecoin.
Asset-referenced token (ART)
Is a token that aims at stabilizing its value by referencing/pegging to a basket of currencies, commodities, crypto assets or other single non-fiat currency assets.
E-money token (EMT)
A token that aims at stabilizing its value by referencing the value of one single fiat currency, for example USDC, USDT, BUSD or EUROe, which are pegged to the dollar or the euro respectively. This concept and most of its requirements stem from the existing regulatory concept of e-money in the EU.
It's important to note that non-fungible tokens (NFTs) are outside MiCA's regulatory scope. The EU is currently drafting specific regulation for them, though "large series or collections" of NFTs may still be subject to MiCA requirements. This certainly means a degree of regulatory uncertainty, which hopefully will be resolved with the NFT regulation that will be announced in the future.
In the case of Decentralized finance (DeFi), it involves the use of distributed ledger technology to provide financial services like trading, lending, and investing, bypassing the need for a central authority as seen in conventional finance. Instead, DeFi users deal directly with a cryptographic protocol. As per MiCA, such protocols are not covered under its jurisdiction.
This stance is backed by several significant EU officials. Yet, the regulation mentions that MiCA becomes relevant "when part of such activities or services is performed in a decentralised manner". In light of the repeated affirmations that MiCA does not govern DeFi, one possible interpretation is that this regulatory loophole could be used by EU regulators to pressure potential bad actors (such as protocols with false governance mechanisms or those that deceive users) into either adhering to MiCA's regulations or facing legal repercussions.
ARTs and EMTs can be considered "significant" under MiCA, requiring compliance with more stringent requirements. The criteria for this significance include the number of holders, market capitalization, daily transaction value, and interconnectedness with the financial system.
MiCA also sets forth requirements for crypto asset issuers, demanding a comprehensive white paper detailing the project, issuer, risks, technology, economic token design, and environmental impact of the token's consensus mechanism. This document must be submitted to the national supervisor.
For ART issuers, the requirements are more stringent; they must seek prior approval for their white paper and meet specific prudential, reserve management, and wind-down standards. Significant ART issuers face even higher standards, with supervision shifting from national authorities to the European Banking Authority.
EMT issuers are exclusively regulated e-money institutions (EMIs) or credit institutions. They are only required to notify the competent authority about their issuance white paper.
MiCA also outlines requirements for crypto asset service providers (CASPs), defining a CASP as a professional provider of one or more crypto asset services. Companies offering services like crypto asset custody, operation of a crypto assets trading platform, or advice on crypto assets will need a CASP license.
Besides making insider trading illegal, under MiCA it is also illegal to share false or misleading information regarding the future behaviour of an crypto asset. Crypto influencers will have to disclose their positions in the assets they promote.
Thanks to all of the above, MiCA is sure to incentive market adoption in the crypto space. It will increase harmonization, the competitiveness and market share of regulated businesses and the institutional share of activities and services provided, eliminating the main concern holding institutions back from entering the space, which is regulatory uncertainty.
* The Libra project was first announced by Facebook in June 2019. The original plan was to create a digital currency, called Libra, which would be tied to a basket of international currencies and other stable assets to minimize volatility. The idea was to provide a global digital payment system that would enable people, especially those without access to traditional banking systems, to send and receive money as easily as sending a text message. However, due to regulatory scrutiny the project was renamed Diem and pivoted to a dollar pegged cryptocurrency that is yet to be rolled out.
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