On 24 September 2020 the European Parliament and the Counsil published a proposal of regulation concerning markets in crypto assets (and amending directive (EU) 2019/1937 concerning the protection of certain whistle blowers) (the so-called MiCA).
This proposal is part of the Digital Finance Package, a package of measures to enable and support the potential of digital finance by introducing a regulatory framework that is innovation-friendly and does not pose obstacles to the application of new technologies. This package also includes a proposal for a pilot regime on distributed ledger technology (DLT) market infrastructures, a proposal for digital operational resilience, and a proposal to clarify or amend certain related EU financial services rules.4
The proposal of regulation focuses on one of the major applications of blockchain technologies in finance: crypto-assets. Crypto-assets are digital representations of values or rights, which are transferred and stored electronically and use the distributed ledger technology or similar technology.
MiCA will – if adopted - bring quite an extensive set of provisions regulating crypto-assets. These provisions relate to uniform requirements for transparency and disclosure in relation to the issue of crypto-assets and the operation and organization of crypto-asset service providers and regarding measures to prevent market abuse.
We have summarized hereafter the main elements of the draft MiCA.
1.- General context
The draft MiCA is to be read in light of the following evolutions regarding crypto-assets.
In 2019 the EBA and ESMA assessed the applicability and suitability of the existing EU financial services regulatory framework to crypto-assets. Their conclusion (see EBA report and ESMA advice) was that some crypto-assets could fall within the scope of EU legislation, but that effectively applying it to these assets is not always straightforward. Their assessment also established that provisions in existing EU legislation may inhibit the use of distributed ledger technology. The EBA and ESMA underlined furthermore that – beyond EU legislation aimed at combating money laundering and terrorism financing, most crypto-assets fall outside the scope of EU financial services legislation. Hence they are not subject to the legislations on consumer and investor protection and market integrity, although they give rise to similar risks as those which these legislations aim to address.
The European Commission also noted market fragmentation and legal uncertainty, due to the fact that certain Member States have implemented domestic legislation to address these specific risks.
Finally, recently a new subset of crypto-assets – the so-called ‘stablecoins’ – has attracted the attention of both the public and regulators around the world since they may have a wider application than crypto-assets, which are not considered currently to pose a threat to financial stability market given the modest size of the market.
2.- Objectives and scope
The main objectives of the draft MiCA are to address the fragmentation of the legal framework applying to issuers of crypto-assets and crypto-asset service providers, to support innovation and fair competition and to ensure the proper functioning of crypto-asset markets while ensuring investor protection, market integrity and financial stability.
The draft MiCA hence foresees that it applies to persons that are engaged in the issuance of crypto-assets or provide services related to crypto-assets in the Union.
The regulation is not intended to apply to:
- financial instruments as defined in Article 4(1), point (15), of Directive 2014/65/EU;
- electronic money as defined in Article 2, point (2), of Directive 2009/110/EC, except where they qualify as electronic money tokens under the regulation; deposits as defined in Article 2(1), point (3), of Directive 2014/49/EU of the European Parliament and of the Council49;
- structured deposits as defined in Article 4(1), point (43), of Directive 2014/65/EU;
- securitisation defined in Article 2, point (1), of Regulation (EU) 2017/2402 of the European Parliament and of the Council.
It will also not apply to certain entities such as the ECB, national central banks of Member States, insurance undertakings, the European investment bank, public international organizations.
Persons who provide crypto-asset services exclusively for their parent companies, their subsidiaries or for other subsidiaries of their parent companies also fall out of scope. Certain entities (such as credit institutions, investment firms) are exempted from the application of different parts of the regulation since they are already subject to specific rules.
3.- Crypto-asset services
The draft MiCA regulates the activities of so-called “crypto-asset service providers”. They are defined as “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis”.
Crypto-asset services are defined through a limitative list of services and activities relating to any crypto-asset. The following services and activities are included:
- the custody and administration of crypto-assets on behalf of third parties;
- the operation of a trading platform for crypto-assets;
- the exchange of crypto-assets for fiat currency that is legal tender;
- the exchange of crypto-assets for other crypto-assets;
- the execution of orders for crypto-assets on behalf of third parties;
- placing of crypto-assets;
- the reception and transmission of orders for crypto-assets on behalf of third parties
- providing advice on crypto-assets.
Regarding crypto-asset service providers, the draft MiCA foresees to regulate the following aspects:
- authorization of crypto-asset providers (requirements for authorization, application, granting/refusal of authorizations, withdrawal of authorization, registration, cross-border services);
- rules of conduct;
- organizational requirements;
- safekeeping of clients crypto-assets and funds;
- compliant handling procedure;
- conflicts of interest;
- rules regarding specific services:
- custody and administration of crypto-assets on behalf of third parties,
- operation of a trading platform for crypto-assets,
- exchange of crypto-assets against fiat currency or exchange of crypto-assets against other crypto-assets,
- execution of orders for crypto-assets on behalf of third parties,
- placing of crypto-assets,
- reception and transmission of orders on behalf of third parties,
- advice on crypto-assets,
- acquisition of crypto-asset service providers.
4.- Three types of regulated crypto assets
The draft MiCA regulates three sub-categories of crypto-assets:
- utility tokens : tokens indented to provide digital access to a good or a service, available on DLT, and that is only accepted by the issuer of that token;
- asset-referenced tokens: tokens that aim at maintaining a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets
- electronic money tokens or e-money tokens: a type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender;
Depending on the sub-category of crypto-asset at hand, more or less requirements have to be fulfilled by the issuers of crypto-asset to the public or entities who seek the admission of such crypto-assets to a trading platform for crypto-assets.
In respect of the offer of “crypto-assets other than asset-referenced tokens or e-money tokens”, provisions are proposed regarding amongst others:
- the conditions to which the issuer is subject (and the exemptions);
- the obligation to publish a crypto-asset white paper and the specific rules regarding this white paper as to its content, form, notification and publication, marketing communication;
- the admission for trading on a trading platform;
- the right of withdrawal;
- obligations of the issuer and their liability;
For asset-referenced tokens, the draft MiCA foresees rules regarding:
- the authorization to offer asset-referenced tokens to the public and to seek admission to trading on a trading platform for crypto-assets (condition of authorization, application, white paper, granting (or refusal) of authorization, withdrawal of authorization), liability of issuers;
- obligations of all issuers of asset-referenced tokens (rules of conduct, white paper, marketing communication, information obligations, complain handling procedure, conflict of interests, governance, own funds requirements);
- reserve of assets;
- acquisition of issuers of asset-referenced tokens;
- specific rules regarding significant asset-referenced tokens;
- orderly wind-down.
Regarding electronic money tokens, the draft MiCA intends to regulate:
- the offering to the public and admission to trading on a trading platform for crypto-assets (authorization of the issuer, white paper, marketing communications);
- specific rules regarding significant asset-referenced tokens.
5.- Market abuse
The draft MiCA also proposes to introduce rules to prevent market abuse related to trades involving crypto-assets.
The rules apply to acts carried out by any person and that concern crypto-assets that are admitted to trading on a trading platform for crypto-assets operated by an authorized crypto-asset service provider, or for which a request for admission to trading on such a trading platform has been made.
As is the case for financial instruments, rules regarding disclosure of inside information, prohibition of insider dealing and prohibition of market manipulation are foreseen.
6.- Supervision and enforcement
Compliance with the new framework will be ensured by supervision through the national competent authorities to be assigned by the Member States and EBA. To this effect the draft MiCA describes amongst others the supervisory and investigative powers of these national authorities, the rules regarding cooperation between these national authorities, the cooperation between EBA and ESMA, and the supervisory responsibilities and powers of EBA.
The draft MiCA also provides rules regarding the administrative measures and sanctions that can be taken by the competent national authorities.
The draft MiCA, if adopted, will imply a major regulatory shift for the crypto-asset industry.
The concerned market players will need to get acquainted with the new rules and make the assessment as to whether they fall within the new framework or not.
If the new framework is applicable, their business will need to be made compliant with the new set of rules. Certain businesses might decide to quit in light of the regulatory burden.
The draft MiCA proposes to give the sector 18 months after adoption of the regulation – which is directly applicable, i.e. without transposition - to ensure compliance. This seems to be very short for a sector with is not used to this type of regulatory framework. Possibly a different timeframe will be adopted for the rules regarding asset referenced tokens and electronic money tokens.
Given the scope and implications of the new framework, ensuring compliance within the given short timeframe is a challenge. We are happy to assist you with any question regarding this comprehensive and complex framework, with assessing your business activities in light of this framework or to support you to prepare your business activities and processes for the switch to the future framework.