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MiCA: Markets in Crypto-Assets

The MiCA – Markets in Crypto Assets Directive – text has been agreed upon in the trialogue process between the EU Parliament, EU Council and EU Commission.

The Regulation sets out relevant obligations for:

  • Crypto assets issuers, offerors and persons admitting to trading crypto-assets
  • Crypto assets service providers (CASPs)

The Regulation introduces the following classification of covered assets:

  • E-money tokens
  • Asset reference tokens (ARTs)
  • Crypto assets other than e-money tokens and asset reference tokens

The Regulation also defines what crypto asset activities make an entity a ‘crypto asset service provider’ (CASP).

The obligations imposed on the issuers and crypto asset service providers differ depending on:

  • The type of assets issued (for issuers/offerors)
  • Whether the asset is considered ‘significant’ (see below for explanation)
  • Type of crypto asset service provider (for CASPs)
  • Whether the CASP is ‘significant’ (see below for explanation)

What is the key benefit of MICA for asset issuers and CASPs?

Apart from the certainty of what legal requirements apply to covered business, the KYE benefit of MICA is the so-called ‘passporting rule’. What that means in practice, is that an entity complying with the regulation and being authorized in one EU member state (for those activities where authorization is required) is permitted to provide services in the whole EU.

Without this regulation in place, crypto asset businesses/issuers would technically need to obtain approval/authorization in each member state they would want to do business in.

What obligations does MICA impose on covered entities/businesses?

For issuers of all covered assets:  

  • The obligation to issue a ‘white paper’ describing the assets offering, the persons involved and providing a set of relevant disclosures and disclaimers
  • Requirements around the marketing of crypto assets
  • Liability for the information included in the white paper
  • Market conduct and prohibition of market manipulation requirements

In addition, the following requirements for issuers of ARTs and e-money tokens:

  • Requirements around keeping ‘own funds’ and ‘reserve assets’ (for ARTs)
  • Requirement to meet the E-Money Directive (directive 2009/110/EC) parts relating to initial capital and own funds (for e-money tokens)
  • Prohibition of granting interest on the assets (for ARTs and e-money tokens)
  • Requirements for recovery and redemptions plans (for ARTs and e-money tokens)
  • Requirements around granting the holders redemption rights on the underlying assets plans (for ARTs and e-money tokens)

And the following requirements applicable to all issuers and CASPs:

  • Requirement to obtain relevant authorization (for CASPs, ARTs and e-money tokens)
  • Governance and operational requirements
  • Requirements around safekeeping of clients’ funds
  • Complaint handling requirements

For CASPs, there are also specific requirements around

  • Outsourcing

Additionally for CASPs, MiCA sets requirements for conducting specific activities (custody, transfer, exchange etc).

Who needs to comply with the regulation?

MICA imposes obligations on:

  • Persons issuing crypto assets or offering crypto assets to the public
  • Crypto assets service providers (CASP)

Crypto asset service provider is defined as an entity providing one of the below services:

  • 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 funds;
  • 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;
  • Providing transfer services for crypto-assets on behalf of third parties;
  • The reception and transmission of orders for crypto-assets on behalf of third parties;
  • Providing advice on crypto-assets;
  • Providing portfolio management on crypto-assets;

If the above services are performed in a fully centralized way, they are outside of the scope of MICA. However, if ‘part of such activity or services is performed in a decentralized way’, MICA applies. In other words, DeFi services are out of scope when they are fully decentralized and none of the activities is performed in a centralized manner.

What assets are in scope?

MICA defines 3 types of crypto assets in scope:

  • E-money tokens – i.e. assets whose value is pegged to a fiat currency (e.g. USD, EUR etc)
  • Asset reference tokens (ARTs) – i.e. assets whose value is pegged to more than one fiat currency or any other assets/ a combination of different assets (e.g. other crypto assets or commodities)
  • Crypto assets other than e-money tokens and asset reference tokens – i.e. crypto assets that do not qualify as e-money tokens or ARTs and do not fall under the assets out of scope of MICA

What assets are out of scope?

The following assets are not in scope of MiCA:

  • Assets that meet the requirements of already defined instruments, e.g. meet the definition of financial instrument
  • Non-fungible tokens (note: MiCA defines features that a token must have to be considered as non-fungible, so the determination should be done based on the token features not on the sole designation of the token as ‘NFT’ by the issuer)
  • Loyalty tokens (but utility tokens are in scope)

What is a ‘white paper’ and what should it include?

A white paper is a document that the issuers (or offerors or persons seeking admission to trading) should prepare prior to the issuance of the token. MiCA defines specific elements that the paper should include and more technical standards will be released in due course by relevant authorities. In general, the paper should cover:

  • Information about Issuer/ Offeror
  • Information about the party preparing the paper (if other than issuer/ offeror)
  • Information about the project
  • Offer to the public
  • Information about crypto assets
  • Rights and obligations assigned to crypto assets
  • Explanation of underlying technology
  • Description of risks
  • Climate impact of consensus mechanism used in the asset

Depending on the type of asset, there are requirements to either notify the competent authorities of the paper or submit it for approval in the authorization process. Regardless of this, the paper should be available online/ to the public at all times and any material changes must be notified to the authorities.  

What is the requirement for ‘own funds’ and ‘reserve assets’ and to who does it apply to?

The requirement for ‘own funds’ and ‘reserve assets’ refers to asset reference tokens issuers. The regulations set:

  • Thresholds for each of these (i.e. how much funds the issuers must keep as ‘own funds’ and ‘reserve assets’)
  • The possibility of competent authorities to increase those thresholds
  • How and where the funds should be kept

The requirement for own funds sets the amount of own capital that the issuer should have at all times. The threshold is set to be the highest of the following:

– EUR 350 000 OR

– 2% of the average amount of the reserve assets OR

– a quarter of the fixed overheads of the preceding year

The threshold for ART reserve funds will be set in the technical standards to be developed by the EBA in cooperation with ESMA and the ECB.

Note: there are similar requirements for e-money token issuers- although not covered directly in MICA, they are covered by a separate document- E-Money Directive- that e-money issuers must comply with as imposed by MICA.

When an asset may be classified as ‘significant’ and what implications does it have?

The EBA can determine that an e-money token or ART is ‘significant’ in case at least 3 conditions out of the specific list of conditions are met. The list of conditions included in Chapter 5, Article 39 relates to:

  • Number of holders
  • Value of assets issued
  • Number and value of transactions
  • Significance of the token in international scale and the interconnectedness with the financial system

MICA stipulates more stringent additional requirements for ‘significant’ tokens relating to:

  • Risk management
  • Liquidity management
  • Stress testing

What are the key dates in MICA implementation?

The text will be subject to the final voting in the European Parliament and subsequently approved by the Council.

Following this, it awaits translation into the EU languages. This Regulation enters into force on the twentieth day following its publication in the Official Journal of the European Union. The businesses and persons covered by MiCA will generally have 18 months from the publication date to comply; however, some provisions will have 12 months deadline to comply.

Additionally, MiCA tasks EBA and ESMA with issuing a number of guidance papers and technical standards with regard to specific provisions of MiCA- these are to be published within 12  to 18 months of MiCA publication depending on the paper.

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