The “Markets in Crypto-Assets Regulation” or “MiCA” was approved by the European Parliament on April 20, 2023, as the first and only law of its kind.
Overview of the First Comprehensive Cryptocurrency Regulatory Framework
The “Markets in Crypto-Assets Regulation” MiCA in the European Union refers to a set of rules and regulations governing the issuance of and services related to crypto-assets and stablecoins.
The MiCA regulatory framework was approved by the European Parliament on April 20, 2023, with 517 votes in favor and 38 against. Currently, MiCA is recognized as the first and only law of its kind globally, potentially paving the way for other leading jurisdictions.
This set of regulations, introduced by the European Parliament and the Council of the European Union, establishes a unified law under which all companies operating within the entire territory of the European Union that deal with crypto-assets will be governed. Once MiCA is implemented, digital asset service providers (including cryptocurrencies) are expected to comply with the set of rules.
Tokenization
For businesses, tokenization often refers to the issuance of tokens and their technical processes. Essentially, tokenization refers to an alternative process where a tokenized object acquires its symbol in a digital environment, and the movement of that symbol represents the movement of the object itself. Classic securities (checks, stocks, bonds) are created based on the same idea to facilitate exchange through the transfer of a document based on a specific asset. All cryptocurrency market regulations can be summarized as “unwrapping the token”; regulators essentially want to see the underlying asset and build a system of requirements based on it.
MiCA Regulatory Framework
The regulatory environment in the blockchain and cryptocurrency space has been shaken by polarizing events over the past two years; on one hand, severe mining and circulation restrictions in China, and on the other, the recognition of Bitcoin as an official payment tool in El Salvador. Consequently, the European Union is moving towards creating a new environment for regulating the cryptocurrency market. In September 2020, the European Commission released a draft regulation for the crypto-assets market aimed at providing a comprehensive and coherent regulatory framework for these assets, which are not related to financial instruments.
In October 2022, the European Union reached a policy agreement on the Markets in Crypto-Assets regulation. This new set of laws, introduced under the MiCA name, covers issuers and service providers to protect consumers and investors while ensuring financial stability and supporting innovation. The recently approved (April 2023) MiCA regulation is expected to make Europe an attractive region in the digital currency market.
In practice, this series of regulations imposes several requirements on crypto-based platforms, digital currency issuers, and traders concerning transparency, licensing, information disclosure, and transaction oversight. Since MiCA is the most comprehensive regulatory framework in the cryptocurrency industry to date, it can be said that the EU is a step ahead of the United States and the UK in this area, thanks to its parliamentary presence. However, it is worth noting that this set of regulations has not yet come into effect and is expected to be implemented from mid-2024 to early 2025.
As a pioneering legal text in regulating the cryptocurrency asset market, MiCA undoubtedly introduces the EU as a swift global regulator. It is also important to recognize that the cryptocurrency market is a global market with users potentially from any part of the world, spanning multiple jurisdictions.
“Similar regulatory efforts to MiCA in other jurisdictions contribute to creating a secure, robust, and essential ecosystem for global digital currency markets.” -María José Escribano, a member of the Digital Regulation Team at the International BBVA Group.
Areas Covered by MiCA Regulation
MiCA defines a crypto-asset as: “A digital representation of value or rights that may be electronically stored and transferable using distributed ledger technology or similar technology.” Essentially, the MiCA regulations distinguish between “cryptocurrencies” on one hand and “tokens” on the other. MiCA also sets requirements for issuers of crypto-assets and Crypto-asset Service Providers (CASPs).
According to the regulations, issuers of crypto-assets must provide complete and transparent information about their cryptocurrency, adhere to disclosure and transparency rules, be registered, and implement security measures and compliance with anti-money laundering practices.
Classification of Crypto-Assets under MiCA
The MiCA regulation, which provides a regulatory framework for digital currencies based on “Distributed Ledger Technology” (DLT), categorizes these crypto-assets as follows:
Asset-Referenced Tokens (ART): These are types of crypto-assets that claim to maintain a stable value through their linkage to fiat currencies, other goods, or a combination thereof. This category includes not only stablecoins that are pegged one-to-one to the value of one dollar but also other cryptocurrencies whose prices are pegged one-to-one to the value of physical gold or a combination of such assets.
According to MiCA, the issuance of asset-backed tokens is subject to certain requirements, including the following:
- Only legal entities established in the EU can issue these types of assets (with two exceptions: if the issuance amount does not exceed €5,000,000 or if the offer is made only to certain qualified investors).
- Compliance with whitepaper standards.
- The issuer must commit to maintaining the backing asset. This includes securing the asset by investing it in highly liquid financial instruments with minimal market and credit risk.
- Monthly information disclosure.
Electronic Money Tokens (EMTs): These are a type of digital currency that maintains a stable value one-to-one with fiat currency, which is legal tender. The difference between ART and EMT tokens lies in the underlying asset supporting the token’s value. ART tokens use non-cash assets or a basket of currencies, while EMTs use a single currency, bringing them closer to the concept of electronic money.
Crypto-assets that are not considered ART or EMT: These include “utility tokens” designed to provide digital access to a good or service within a DLT environment and are only accepted by the issuer of that token. For example, “Non-Fungible Tokens” (NFTs) also fall under the definition of crypto-assets provided by MiCA, but these tokens are in an exception group and are not required to publish a whitepaper.
Whitepaper Requirements and Standards under MiCA
According to MiCA regulations, a whitepaper is a document providing detailed information about the digital currency and its issuer. The whitepaper must include information about the issuer, the purpose of the digital currency, the technology behind it, the risks associated with investing in the digital currency, and any other relevant information that investors need to be aware of. Article 5 of the MiCA regulation specifies the whitepaper requirements for digital currency issuance as follows:
- The issuer must provide a detailed description of the issuer and key participants involved in the project’s development.
- The whitepaper must include detailed information about the project, the type of coin (token) being offered publicly or for which a trading license is requested, the reasons for the public offering, and why the adoption of fiat currency or other cryptocurrencies is sought through the public offering of the project.
- Details of the public offering, including the number of coins (tokens) available in the initial sale, the issuance price, and subscription conditions, must be described in the whitepaper.
- A detailed description of the rights and obligations related to the project’s cryptocurrency, as well as the procedures and conditions for enforcing these rights, must be provided.
- Information about the underlying technology and standards of the issued coin (token) must be disclosed in the whitepaper.
- The whitepaper must provide a detailed explanation of the risks related to the issuer, the assets themselves, the public offering, and the sale.
In addition to these general requirements, MiCA specifies that the whitepaper must be written in clear and understandable language for investors. The whitepaper must also be accurate and up-to-date, reflecting any changes or updates that occur with the digital currency or its issuer. MiCA also requires that the whitepaper be made available to investors before investing in the digital currency. This means the whitepaper should be easily accessible and prominently posted on the issuer’s website or other relevant platforms.
Finally, MiCA specifies that the whitepaper must be reviewed and approved by the relevant authorities before being provided to investors. This requirement ensures that the whitepaper meets all necessary criteria and provides investors with accurate and reliable information about the digital currency and its issuer. In summary, MiCA imposes requirements on whitepapers issued by digital currency providers to be transparent, concise, accurate, up-to-date, accessible, and approved by the relevant authorities. It is important to note that under MiCA, the issuer of crypto-assets is fully responsible for the content of the whitepaper, and users should be aware that technical documentation regarding crypto-assets has not been reviewed or approved by the competent authorities of any EU member state. Additionally, if the issuer of a crypto-asset cannot guarantee such future value, there is no claim for the future value of the coin (token).
Exceptions to the Requirement for Whitepaper Publication under MiCA
The nature of whitepaper regulations in MiCA is very similar to securities issuance regulations and disclosure obligations for issuers on stock exchanges. In this case, there are also exceptions where the preparation and publication of the whitepaper are optional. The list of exceptions is as follows:
(1) Crypto-assets that are provided for free (however, this does not include cryptocurrencies given for free but in exchange for providing certain personal information. It only applies to completely free cryptocurrencies).
(2) Crypto-assets created automatically through the mining process as a reward for maintaining the DLT or validating transactions.
(3) Unique crypto-assets that cannot be substituted with other crypto-assets.
(4) Crypto-assets offered to fewer than 150 natural or legal persons requesting investment from these individuals in each EU member state.
(5) When the total proposed amount in the EU, calculated for 12 months, is less than €1 million or its equivalent.
(6) Public sale offers of crypto-assets exclusively for qualified investors, where the cryptocurrency can only be allocated to these qualified investors.
In general, under MiCA, issuers of any cryptocurrency project must notify national regulatory authorities of their whitepaper at least 20 business days before the cryptocurrency’s release and list the EU countries where they plan to offer the cryptocurrency for public sale. MiCA, however, sets separate content requirements for the first two categories of cryptocurrencies, ART and EMT, and issuers must formally request authorization from the relevant authorities.
Crypto-assets Not Covered by MiCA
The framework established by MiCA excludes or places in an exceptional category several new types of cryptocurrencies within the digital currency industry, such as DeFi (Decentralized Finance), non-fungible tokens (NFTs), and Central Bank Digital Currencies (CBDCs). According to the European Central Bank’s definition, DeFi represents a new approach to providing financial services that bypasses traditional centralized intermediaries in favor of relying on automated protocols.
“MiCA excludes several components of the cryptocurrency world. DeFi is one of them, but non-fungible tokens, security tokens, and even digital asset financing are also included as ‘exceptions’.”
In practice, according to this set of regulations, these components either currently have their specific regulations aligned with their nature or possess such unique characteristics that legislators need to conduct further analysis to design a legal framework that appropriately addresses the associated risks. Maria also believes that MiCA is a step forward in aiming for robust consumer protection, minimizing the risks these markets might pose to financial stability.
Overall, the MiCA regulations do not cover the following:
- The blockchain technology itself or distributed ledger technology as the underlying basis for crypto-assets.
- The mining process.
- Central Bank Digital Currencies (CBDCs); official state digital currencies that are currently being negotiated or developed independently in each country.
- Financial instruments (including securities in the form of security tokens), securities, electronic money, and anything falling under specific regulations such as MiFID II (Markets in Financial Instruments Directive), the Electronic Money Directive, etc.
Regulations on Digital Currency Services under MiCA
In addition to regulating and legislating cryptocurrency markets in Europe, MiCA also regulates the provision of services within this sector. According to MiFID definitions, the MiCA regulations cover the following services for regulation:
- Platforms offering custody and management services for crypto-assets to their clients.
- Cryptocurrency exchanges that provide the ability to exchange fiat currencies with cryptocurrencies.
- Platforms providing execution services for client orders related to crypto-assets.
- Services arising from the transfer of crypto-assets to others.
- Platforms offering portfolio management services consisting of crypto-assets.
It is important to note that according to MiCA, banks, financial service providers, central securities depositories, trading venue operators, electronic money institutions, and fund managers do not need a new license to provide the aforementioned crypto services to the extent they wish. Their existing licenses for current services are sufficient. To operate in the European Union, they only need to notify their national regulators in advance.
According to Article 53 of MiCA, the requirement for obtaining a new license to provide the aforementioned services only applies to companies that do not already have a specific license and only wish to offer services related to crypto-assets. The information that must be provided to obtain a license for these services includes details such as a comprehensive business plan, shareholder information, management contract documents, ownership details, proof of the suitability of managers, internal controls, and risk analysis.
Another significant feature of MiCA is the planned processing time for authorities in issuing licenses. According to Article 55 of MiCA, the authority must acknowledge receipt of a license application in writing within 5 business days. Additionally, the competent authority must review the completeness of the application within 25 days of receipt. After confirming completeness, the authority has 40 days to make a reasoned decision on issuing or not issuing the license, with an additional 5 days to report its decision.
Oversight of MiCA Implementation
Oversight of the implementation of each part of the MiCA regulations is assigned to specific organizations. However, as a general rule, each national authority in the EU member states where they are based must oversee the enforcement of these laws. The supervisory organizations in each country are:
- For asset-backed tokens, the European Banking Authority (EBA).
- For electronic money tokens, both national authorities and the EBA.
Why is MiCA Important?
Experts in cryptocurrency regulation believe that the MiCA regulations provide strong regulatory assurance and enhanced consumer protections while supporting innovation in the crypto market. Specifically, MiCA establishes mechanisms to ensure that stablecoins are truly stable, demands greater transparency in the market, prevents excessive risk-taking by market participants, and ensures that asset-backed tokens are genuinely protected.
The MiCA framework also aims to reduce the environmental impact of cryptocurrencies. The mechanism for some cryptocurrencies involves using powerful equipment for transaction validation and adding new units to the blockchain, which consumes significant amounts of energy, potentially derived from fossil fuels like coal. This industry also requires a substantial volume of computer components, leading to electronic waste.
MiCA is designed as part of a broader regulatory effort that includes initiatives like the Digital Operational Resilience Act (DORA), the DLT Pilot Regime, and the Transfer of Funds Regulation (TFR). DORA sets standards for developing and maintaining security measures in financial organizations and third parties providing related services, such as cloud computing or data analytics.
The DLT Pilot Regime aims to implement a market infrastructure for issuing, trading, and settling security tokens using DLT technology and amends the definition of “financial instruments” under MiFID II to include DLT-based instruments. Finally, the TFR regulations apply to the transfer of crypto-assets and ensure financial transparency in digital asset exchanges.
Summary
Based on the information discussed in this article, it can be said that MiCA is the most comprehensive regulatory framework for digital assets globally to date. These regulations impose various requirements on cryptocurrency platforms, token issuers, and traders regarding transparency, disclosure, licensing, and transaction oversight. As a result, MiCA introduces new laws prohibiting any abuse in the cryptocurrency market related to any type of transaction or crypto-asset service, including illegal disclosure of insider information, insider trading, and actions likely to disrupt or manipulate digital currencies.
