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After almost two years of consultations, the European Council presidency and the European Parliament have reached a provisional agreement on the Markets in Crypto-Assets Regulation (MiCA).
For the first time, the MiCA will provide a single, EU-wide regulatory framework for crypto-assets, crypto-asset issuers and crypto-asset service providers (CASPs).
In its current iteration, the MiCA covers issuers of both unbacked crypto-assets and stablecoins, and covers exchanges and other platforms where crypto-assets are bought, sold and stored.
In a press statement, the European Council said the MiCA will offer protections that are unavailable in other jurisdictions to crypto-assets investors, and will promote financial stability while nurturing innovation.
Previously, EU member states had national legislation in place for crypto-assets, but the MiCA will be the first legislation of its kind to harmonise and create regulatory certainty throughout the bloc.
“This landmark regulation will put an end to the crypto wild west and confirms the EU’s role as a standard-setter for digital topics,” the Council said.
One of the priorities of MiCA is to protect consumers from fraud and other financial crimes that are associated with crypto-assets, and to put in place rights of redress for investors.
At present, little protection exists for European holders of crypto-assets, especially if their transactions take place outside the EU.
But with the MiCA, CASPs will face new legal requirements to protect customers’ wallets, for example, and will be held liable in the event that they lose their customers’ crypto-assets.
As VIXIO has reported previously, this marks a break from the one-sided Terms of Use imposed by platforms such as Celsius, whose customers are made to bear all risk of loss when using the Celsius Custody Wallet.
The MiCA is also designed to protect investors from abuses such as market manipulation and insider trading.
For non-fungible tokens (NFTs), the Council noted that these will be excluded from the legislation unless they are deemed to fall under existing crypto-asset categories.
In 18 months’ time, the European Commission said it will prepare a comprehensive assessment of NFTs’ legal status and, if necessary, it will issue a “proportionate and horizontal” legislative proposal to create a regime for NFTs.
To avoid overlaps, the MiCA does not duplicate any of the anti-money laundering (AML) provisions set out in its newly updated transfer of funds rules agreed on June 29.
However, the MiCA does require the European Banking Authority (EBA) to maintain a public register of non-compliant CASPs, with whom other EU CASPs will be prohibited from doing business.
Additionally, CASPs whose parent companies are located in countries considered high risk for AML activities will be required to implement enhanced checks in line with the EU AML framework.
The same applies to parent companies that are located in non-cooperative jurisdictions for tax purposes as defined by the EU.
Licensing passport rights
The MiCA also contains requirements for CASPs that do business in the EU to obtain specific authorisation from a national authority, and such authorisation must be granted or denied within a period of three months.
For the largest CASPs, national authorities will be required to transmit relevant information regularly to the European Securities and Markets Authority (ESMA).
This surveillance sharing mechanism is designed to prevent regulatory arbitrage among CASPs that operate in multiple national jurisdictions.
Stablecoin scrutiny
In light of the multi-billion-dollar collapse of TerraUSD in May this year, the European Council said it was keen to introduce new regulations to protect consumers from similar stablecoin risks.
For stablecoin issuers, the MiCA requires that they build up a “sufficiently liquid reserve” that backs their stablecoin on a one-to-one basis.
All stablecoin holders must also be allowed to redeem their tokens for cash at any time and free of charge, and the rules governing the operation of the reserve will provide for an adequate minimum liquidity.
To issue a stablecoin in the EU, the issuer must have a physical presence in the EU, and must commit to supervision by the EBA. Greater restrictions will apply to those who wish to issue stablecoins that track non-European currencies.
Such provisions are similar to those laid out in Japan’s new stablecoin legislation that was passed in June this year.
Japanese stablecoin issuers are also required to guarantee holders the ability to redeem their tokens on a one-to-one basis, and issuers must be based in Japan.
Dante Disparte, chief strategy officer and head of global policy at Circle, said the MiCA has struck the right balance between ensuring innovation and protecting against stablecoin risks.
“This policy framework was not borne in a vacuum, but rather as a studied pan-European market response to the emergence of potentially systemic crypto-asset and stablecoin innovations,” he said.
“What Europe’s policy makers have called for in response to these concerns may seem onerous to MiCA’s detractors, but deeper down it offers a pathway for Europe to emerge as a competitive region for the safe, sound development of an always-on financial system.”
Disparte added that with the MiCA now becoming a reality, he hopes to make Circle’s Euro Coin (EUROC) a leading example of a compliant stablecoin under the new legislation.
Circle launched EUROC on June 30, just as the market cap of USDC, Circle’s US dollar stablecoin, surpassed $55bn for the first time.
MiCA a model for the world?
Further afield, regulators in other jurisdictions will be watching closely to monitor the reception of the MiCA and to monitor its eventual implementation.
Katie Fry-Paul, a crypto regulatory expert at law firm Taylor Wessing, said the UK in particular will be looking to tailor its own “crypto hub” ambitions based on the success or failure of the MiCA.
“Does MiCA go too far, and will it push crypto-asset service providers out of the EU?” she said. “Or does it meet the 'Goldilocks' principle, giving just the right amount of legal certainty and drawing innovative firms to the bloc?
“While it is clear that the EU's work on this subject is well-advanced, this does not mean that the UK's hopes of being the go-to jurisdiction for crypto-asset firms are dashed.
“Time spent in reconnaissance is seldom wasted, and the provisional agreement on MiCA may give the UK an opportunity to gauge industry views, and take advantage of its agility to take swift action."
