The EU’s flagship Markets in Crypto-Assets (MiCA) regulation is approaching enforceability next year, as industry stakeholders signal they are in preparation mode.
In 2024, MiCA begins to become enforceable across the EU, establishing the EU as a first mover in crypto legislation. The move has even garnered praise from the likes of Coinbase, in an industry that has often been wary of government intervention.
On October 17, the EU’s financial regulator, the European Securities and Markets Authority (ESMA), sent out a letter to regulators and industry alike, calling on them to begin preparing for this transition.
“To ensure a timely and orderly transition toward MiCA, ESMA encourages market participants to make adequate preparations that will reduce the risk of disruptive business model adjustments,” the letter said.
ESMA advised that these preparations should also involve early dialogue between entities currently providing crypto-asset services in the EU and the relevant competent authorities of the jurisdictions in which they operate to inform them of their transition plans.
Firms begin journey towards compliance
"Very few firms are going to embrace regulation, but what MiCA has going for it is a high degree of legal certainty,” said Andrew Henderson, a partner at Goodwin.
For Henderson, this legal certainty generally should end up with more efficiency. “Once firms and would-be firms accept this then they should be able to work with it."
The timeline is now in motion, with rules for stablecoins applying as of June 30 next year and other rules applying from December 30 onwards.
"We are in the early days of the process. MiCA is beginning to be considered by clients that we work with,” said Henderson.
These firms, he continued, are planning to implement the compliance requirements during the course of next year. “Until then, based on our experience of similar regulations, firms will begin to grapple with the detail."
"A lot of research and analysis is happening at the moment,” said Justine Scerri Herrera, a partner at MK Fintech Partners.
Scerri Herrera said that firms are slowly starting to wake up and realise that they will not be able to continue business as usual after December 2024 unless they obtain a licence.
“They are looking at how and where they will implement the MiCA rules,” she said. “They may look at moving to other jurisdictions where it is easier to get compliant, and where there are already similar licensing regimes."
New rules, new challenges
Scerri Herrera pointed out that there will be challenges, considering this is a new regulation and framework.
“There will be challenges in getting to understand the regulation,” she explained. “For those member states that just have AML registration at the moment, it will be a jump having to deal with an entirely new legal framework.”
However, experts insist that MiCA will do good for the industry and does provide opportunities.
“It provides centralised entities in Europe with the clarity they need to establish and scale a crypto-asset business in Europe,” pointed out Isabella Chase, senior advisor at TRM Labs.
Chase explained that although the industry has to be realistic that MiCA requires a significant uplift in terms of compliance, which will be expensive for firms, once they have the right training, tools, policies and procedures in place, Europe will have a very well regulated and robust crypto-asset market.
"Most clients have been quite positive about this regulation as it will allow for cross-border services, and deliver expansion opportunities,” Johannes Wirtz, a partner at Bird & Bird, told Vixio.
A long journey ahead
Chase told Vixio that there is plenty for firms to be considering at the moment.
“A challenge with MiCA is how many new processes will be required,” she said.
“There are a few areas, like assessing the significance of e-money tokens and asset-references tokens which require some really dedicated thinking to get it right,” she added.
An ART is defined in MiCA as a type of crypto-asset that is not an electronic money token and that aims to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.
Meanwhile, an EMT is defined in MiCA as a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.
The issue that firms will face is whether to consider what they are doing as an ART, and thus something that requires authorisation via MiCA, or whether they are distributing an EMT, which needs to be authorised through the Electronic Money Directive (EMD) or under the Capital Requirements Regulation as a credit institution.
However, rules for EMTs are set out within MiCA and must be applied.
As acknowledged by representatives from the National Bank of Belgium and the European Banking Authority recently, this has already been a headache for firms with regard to whether they need to apply for a MiCA-specific licence or an EMD licence.
Chase continued that the first step for firms is to select which member state they want to get authorised in. “We saw just last week that Coinbase has selected Ireland as its MiCA authorisation base,” she said.
“Then there’s all the work you need to do with your regulator to prepare the required information for internal and external purposes,” Chase continued, adding that another issue worth keeping in mind is responding to MiCA consultations prepared by the European Banking Authority and the European Securities and Markets Authority.
“If firms haven’t taken a look at these I would advise them too. It’s your chance to have to your say.”
The countries paving the way
With the introduction of the legislation, there are countries who will have first-mover advantage within the EU.
These countries will have the opportunity to sweep up crypto firm registrations, as firms look to find regulators who are both familiar with the area and flexible too.
“Malta and France have been leading the way in terms of compliance and implementation,” said Scerri Herrera.
“This means more ease of transposition for service providers, as opposed to countries that just have AML registration,” she continued.
Malta, for example, introduced the Virtual Financial Assets Act (VFAA) in 2018.
The VFAA established a regulatory framework for crypto-assets and set out the requirements for businesses involved in initial coin offerings (ICOs) and digital asset exchanges.
Meanwhile, the French “loi Pacte” was enacted in May 2019, and introduced a comprehensive regulatory framework for digital assets.
"The transition will not be as difficult in German,” added Wirtz.
From the outset, Wirtz explained that the German Fderal Financial Supervisory Authority (BaFin) has been quite prepared, for example, by publishing guidance on MiCA and examining which tokens might be regulated and which will not.
“The regulator has been regulating crypto since 2011, which means that there is now good access to experience of crypto and blockchain."
The German Ministry of Finance also released its draft MiCA transition law to adapt the German legislation accordingly by creating a new Crypto-Markets Supervision Act last week.
And earlier this month, Lithuania’s government and regulators set out their plans for how to regulate crypto in light of the new legislation.