Introduction to the EU
Market in Crypto-Assets Regime (MiCA)

Introduction

The Market in Crypto-Assets (MICA) regulation is a new piece of legislation that has just been approved by the European Union Economic and Financial Affairs Council (ECOFIN).  MiCA was published in the Official Journal on Friday 09th June and therefore comes into force on the 29th June 2023 with a one year implementation period in respect of stablecoins and an 18 month period for enforcement of the other aspects of the regime.

The regulation aims to create a single regulatory framework for crypto-assets in the European Union. This will help to ensure that crypto-assets that are not currently clearly within scope of existing financial services regimes are regulated in a consistent and harmonised way across the EU. It covers a wide range of assets (including stablecoins, e-money and also utility tokens) and of service providers.

Classification of Crypto-Assets

MiCA classifies in scope crypto-assets as:

• E-money tokens (EMTs): a type of exchangeable crypto-asset that purports to maintain a stable value (known as a “stablecoin”) by referencing the value of a single fiat currency – such as USDC, USDT;
• Asset-referenced tokens (ARTs): stablecoins that are not otherwise classified as EMTs, and which purport to maintain a stable value by referencing any value, right or asset class or a combination thereof, including one or more official EU currencies; and
• Other crypto-assets: this includes nearly all other crypto-assets that do not fall within the EMT and ART definitions, including utility tokens (defined as ‘a type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer’).

The position with respect to algorithmic stablecoins is that they are also within scope of MiCA (at least the MiCA Offering Rules):

Liberalisation or Suffocation?

The  Regulation purports to encourage easier access for regulated entities and certain crypto-asset offerings across the common market and make it harder to offer many crypto services without being authorised (or at the very least scrutinised) by a financial services regulator. MiCA is intended to ensure that there is not a large shadow financial system outside of the control of European and EU Governments, regulators and central banks.

From the press release accompanying the original proposed regulation:

“The ‘Regulation on Markets in Crypto Assets’ (MiCA) will boost innovation while preserving financial stability and protecting investors from risks. This will provide legal clarity and certainty for crypto-asset issuers and providers. The new rules will allow operators authorised in one Member State to provide their services across the EU (“passporting”). Safeguards include capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer. Issuers of significant asset-backed crypto-assets (so-called global ‘stablecoins’) would be subject to more stringent requirements (e.g. in terms of capital, investor rights and supervision).”

The MICA regulation covers a wide range of crypto-asset service providers (CASPs) and activities, including:

• Crypto-asset exchanges and trading venues
• Crypto-asset converters and remitters
  • these are also known as Virtual Asset Service Providers (VASPs) under FATF AML guidance
  • this category therefore includes utility token issuers receiving value for the tokens they issue 
• Stablecoin and e-money issuers
• Custodians
• Some advisory activities
• Financial intermediaries, asset managers and brokers

MICA will require all CASPs, deemed to be providing services within the EU, to obtain either:

• authorisation from a national competent authority; or
• some form of European regulatory approved process for their activities or promotions if MiCA does not require them to conduct the activity from a legal entity established within the EU (e.g. this applies to a utility token issuer).

MiCA and decentralised  crypto-assets and organisations (DAOs)

MiCA has many features to recommend it and already there has been a lot of positive responses in the crypto space to the proposals as a form of validation of the sector itself.  That said, as someone that is interested in the perpetual struggle between innovation, disruption and the status quo I am also skeptical about the ability of regulation to promote innovation. History also makes you mindful of the risks involved when regulation is sometimes [mis-]used to stifle innovation – whether intentionally or through a lack of understanding about how the market operates.

There is also a significant question mark about the ability for the old legalistic and formalistic approach (define the regulated activity, authorise the legal ‘person’ doing it etc.) to meet the opportunities and challenges of decentralised crypto-assets, organisation structures (DAO’s) and finance (DeFi).

In the DeFi world many innovators and end-users do not want to trust corporations, banks or the existing legal frameworks and financial systems and instead put their trust in code, computers and decentralised control mechanisms.

It is noteworthy that in respect of issuing crypto-assets any legal person acting as issuer will need to be a legal entity (e.g. a company, foundation or similar and not an individual) – this  leaves open for dispute at EU and national level the question as to whether a token issued directly on-chain from a smart contract (e.g. co-ordinated by a DAO) will be treated as unlawful or simply out of scope (i.e. not subject to these requirements). The question of what is sufficiently decentralised will always remain to be answered for securities law, financial services law and AML purposes.

Laws that may be relevant for a permissioned protocol and/or a protocol ‘controlled’ by one or a small group of persons are not likely to be as relevant or suitable for a more decentralised one, and vice-versa.

“This Regulation should apply to natural and legal persons and certain other undertakings and to the crypto-asset services and activities performed, provided or controlled, directly or indirectly, by them, including when part of such activities or services is performed in a decentralised manner. Where crypto-asset services are provided in a fully decentralised manner without any intermediary, they should not fall within the scope of this Regulation. This Regulation covers the rights and obligations of issuers of crypto-assets, offerors, persons seeking admission to trading of crypto-assets and crypto-asset service providers. Where crypto-assets have no identifiable issuer, they should not fall within the scope of Title II, III or IV of this Regulation. Crypto-asset service providers providing services in respect of such crypto-assets should, however, be covered by this Regulation.” (Recital 22, MiCA)

Transitional Periods for Implementation & Enforcement

Although MiCA becomes law 20 days after publication in the EU Official Journal (which publication date is likely to be in July 2023) there are a range of measures which may not be fully implemented or enforced by the central regulators and Member States for 12+ months: