A version of MiCA with some minor alterations is likely to become law within one to two years, and when it does, it will profoundly change the international digital assets marketplace.
With requirements on digital asset companies that mirror those already placed on traditional finance, MiCA will be another important step toward regulatory parity and will accelerate the entry of institutional investors into the digital assets space as well as legitimising it in the eyes of other businesses and the public.
In this post, we’ll look at what MiCA is, and what obligations it places on key players in the digital assets ecosystem, as well as its likely effects outside Europe.
What is MiCA?
MiCA stands for “Market in Crypto-Assets”, the EU’s regulatory framework for the digital assets market within the bloc. Once it’s in force, MiCA will be law in all EU member states and will structure the digital assets market in Europe. It will probably also achieve the ambition of its authors and structure the digital assets market more generally and globally.
MiCA doesn’t cover security tokens — tokens that behave like traditional securities are already regulated. But all other types of tokens are covered.
MiCA creates these new categories:
- A “catch-all” category for all “crypto assets”
- Utility Token — such as Filecoin or Basic Attention Token
- Art-Referenced Token (ART) — such as Libra Basket Coin
- E-Money Token (EMT) — such as USDC, Libra Euro
Authorization under MiCA
To be authorized under MiCA, businesses must be legal persons (natural persons or registered corporations) that have a registered office in an EU member state and an authorization from the relevant national authorities as digital asset service providers in accordance with MiCA.
In some European countries there is already a national licensing scheme; in such countries, such as Germany, there will be a simplified pathway under MiCA to upgrade existing licenses.
Authorization from a single EU member state will be valid across the bloc, using the “passporting” mechanism familiar from other EU legislation.
However, MiCA provides this passporting only within the EU; there is no system for linking in-bloc regulations up with the wider world. Any digital assets company that wants to do business in the EU must be fully authorized, including having a legal-person presence in a member state. The only exception to this is a highly restrictive reverse solicitation provision.
Authorization requirements are relatively stringent, including a program of operations, a description of internal control mechanisms, a business continuity plan and risk assessment procedure, and proof of the relevant prudential safeguards.
Once submitted, national authorities will have 25 days to assess whether the application is complete, and then three months to consider it and to grant or refuse authorization.
Authorized businesses will be listed on a central register maintained by the European Securities and Markets Authority (ESMA).
What requirements must authorized businesses meet under MiCA?
There will be regulatory requirements relating to initial capital reserves, IT infrastructure security, corporate governance structure, and the suitability of the management board. Digital assets companies will be obliged to act honestly, fairly and professionally in their clients’ interests, much as traditional financial institutions and businesses are.
This will include publishing their prices, and establishing prudential safeguards composed of their own funds and an insurance policy. This obligation will also be laid on investment firms providing digital assets services, though these are also subject to EU 2019/2033’s requirements and the interaction between the two pieces of legislation has not yet been clarified.
Insurance policies for MiCA-authorized companies will be required to include loss of documents, acts, errors and omissions leading to breach of duty to act fairly, honestly and professionally, and gross negligence.
Service providers will also be required to have resilient, secure IT infrastructure, including internal control mechanisms and risk assessment procedures compliant with DORA. Digital assets companies will be obliged to have record-keeping and complaints-handling and conflict of interest procedures. They will also be required to have market abuse monitoring and detection systems designed to detect and report when “there may exist circumstances that indicate that any market abuse has been committed, is being committed or is likely to be committed”. MiCA also sets out rules on outsourcing these services.
MiCA for issuers
Any business that issues a digital asset category covered by MiCA (meaning anything but securities tokens) will have to publish a white paper and submit it to their respective national financial supervisory authority, no later than 20 days before their token is issued. The supervisory authority can prohibit the token. If it doesn’t, the token can be issued throughout the EU. There are further provisions that deal with stablecoins, which are discussed in the MiCA for stablecoins section below.
MiCA for service providers
Businesses that offer digital assets-based services such as custody, brokerage, trading or investment advice will need prior approval from national supervisory authorities. The exception is existing credit institutions and firms licensed under MiFID (Markets in Financial Instruments Directive) II.
There are also rules against market manipulation and insider trading on digital asset trading platforms. For example, it’s currently quite common for “whales” to move markets when they buy and sell, thanks to the relative heft of their holdings. But this type of activity is illegal in traditional financial markets, and once MiCA comes into force it will be illegal on European exchanges.
MiCA for Stablecoins
MiCA establishes two new categories of digital assets, ART and EMT. Both are types of stablecoin, but the legislation treats them in different ways.
EMTs, or E-Money Tokens, are pegged to a single fiat currency, like the Euro or US dollar.
ARTs, or Art-Referenced Tokens, are pegged to the value of a wider portfolio of real-world assets or to an asset other than a single fiat currency. They can be pegged to a basket of fiat currencies, to other digital assets, to gold or to any other asset or assets.
In addition to recognizing these two different types of stablecoin, MiCA has a different regulatory regime if the token is considered “significant”, such as if a broad usage or high emission volume is expected.
MiCA for custodians
Authorized custodians will be required to enter into written agreements with their clients, specifying duties and responsibilities and keeping a register of positions opened in each client’s name. They will also be required to establish a custody policy and facilitate the exercise of rights attached to the digital assets they custody, as well as providing both regular and on-request reporting to clients. Client and own holdings must be separated, and custodians will be liable to clients for loss of their digital assets arising from malfunctions and hacks up to the market value of the assets at the time of loss.
MiCA for trading platforms
Trading platforms will be required to adopt operating rules for the platform, in accordance with the requirements of MiCA. They will not be permitted to deal on their trading platform on their own account, and will be obliged to institute systems, procedures and arrangements to ensure the operating resilience of their platforms. They will also be subject to pre- and post-trade transparency provisions mirroring those of MiFID and to establish transparent, fair and non-discriminatory fee structures.
MiCA for exchanges
Exchanges will have to establish a non-discriminatory commercial policy, indicating which clients they accept and the conditions clients must meet to be accepted. They must also publish firm prices or the methods they use to determine prices, execute orders on receipt and publish order and transaction details.
What does MiCA mean for digital assets markets in the EU?
Sensible regulation is always welcome. For several years, the digital assets space has existed in a kind of limbo, with a constantly-changing mosaic of regulation and legislation making long-term planning and stability difficult. The EU’s move to create bloc-wide legislation that protects digital asset investors, issuers and exchanges is a great step forward. It’s also a reflection of the EU legislature’s ambition to lead the way in digital assets adoption and regulation.
By providing a stable and supportive environment for the development of the digital assets economy, the EU could be opening a whole new chapter in its development. At the very least, it’s providing a Western-hemisphere base for digital assets companies where the view ahead is relatively clear and there is scope for growth and innovation.
However, MiCA hasn’t become law yet. It’s currently under legislative review, a process expected to take about 18 months and to culminate in MiCA’s publication in the EU Official Journal in Q4 2021. If this timetable holds we can expect MiCA to come into force in Q2 2023.