MiCA (Markets in Crypto Assets) regulation

MiCA – regulation of the European Parliament and the Council of the European Union, introducing a uniform rule,  according to which all companies dealing with crypto assets will operate in the territory of all EU countries. It is expected that, when it comes into force, digital asset service providers (including cryptocurrencies) will be required to follow the set of rules.

Tokenization

For businesses, tokenization is most often limited to token issuance and technical procedure. Essentially, it is a replacement process: a tokenized object acquires its symbol in a digital environment (token), the movement of which symbolizes the movement of the object itself. Classical securities (checks, stocks, bonds) are built on the same idea of facilitating exchange through the transfer of a document based on a certain asset. All regulation of the crypto market boils down to “unpacking” token: regulators want to see the underlying asset itself and build a system of requirements on its basis.

What is MiCA?

The regulatory environment of blockchain in the last year is shaken by polar events: on the one hand, strict restrictions of mining and turnover in China, on the other, the recognition of Bitcoin as the official means of payment in El Salvador. In turn, the European Union is moving towards creating a new environment to regulate the crypto market. In September 2020, the European Commission published the draft Regulations on Crypto Asset Markets. MiCA is to provide a comprehensive and consistent regulatory framework for crypto-assets that are not related to financial instruments, such as Stakeblocoin (ART), e-money tokens (EMT) and utility tokens.

MiCA contains a lot of mandatory provisions: requirements for white paper, cases where the publication of white paper is not required, provisions protecting buyers of assets, etc. But at this stage (February 2023), the final version of the provision is still under discussion, supplemented, commented upon. This document must be taken into account because it is already quite a clear vector of development of the European approach to cryptocurrencies, but at this stage should not be considered without two minutes adopted.

What will regulate MiCA?

The provision introduces the following categories: a general definition of a cryptasset (a digital expression of value or rights that can be transferred and stored electronically,  using distributed registry technologies or similar technologies) and separately highlights the following forms of crypto-assets that are expected to fall into its sphere:

• The issue of ART MiCA is subject to increased requirements: only legal entities established in the EU can issue the issue (two exceptions: the issue amount is not more than EUR 5,000,000 or the offer is sent only to qualified investors), mandatory approval of the issue, other standards of white paper production, the issuer’s obligation to maintain reserves, including through investment of reserve assets only in highly liquid financial instruments with minimal market and credit risk, monthly disclosure.

• NFT (non-fungible token), non-replaceable tokens, also fall under the definition of a cryptasset under MiCA, but they are under the exception group and do not need to be published white paper.

What will MiCA NOT adjust?

• directly the blockchain itself or the distributed registry technology underlying the crypto assets;
• mining process;
• the so-called CBDC (Central Bank Digital Currency) – official government digital currencies that are currently being negotiated and/or developed independently in each country;
• financial instruments (incl. securities in the form of security tokens), securitization, electronic money and everything that falls under the scope of special regulation (MiFID II, E-Money Directive, etc.)

What is MiFID II and to what is it applied?

Financial markets and instruments are among the most controlled areas of government. This is necessary to protect market participants and ensure financial stability. In this case, regulation will be applied not only when the proposed financial instrument is classified as a «security#  or «derivative». It will apply when the very nature of the instrument fits the description of the financial instrument. These are security tokens that are most commonly used by Howey test, information attack and litigation. The Point of Convergence between Financial Regulation and the Crypto Market is The ESMA Clarification, which indicated that crypto-assets may be regulated by MiFID,  requirements to publish prospectuses and license involved firms.

For example, the pooling of capital for reinvestment becomes a frequent story for crypto projects, which from the regulatory point of view may well fall under the definition of collective investment  – an organization that pools capital raised from participants, with the aim of investing to generate total income and distribute it to investors; Such investors do not have daily discretion or control over the organization.

The proposal of such a product is supervised by the regulator and subject to disclosure and prospectus requirements (unless the project falls under the list of exemptions).

Who will supervise the execution of MiCA?

Oversight of organizations falling under MiCA will be carried out by:

• As a general rule, national authorities in EU Member States where they are located.
• For Asset Based Tokens (ART) – European Banking Authority (EBA)
• For E-Money Tokens, both national and EBA.

Who will MiCA regulate?

MiCA will affect individuals involved in the issuance and provision of crypto-assets services,  located in the EU, but equally affecting individuals outside the EU,  who, however, raise funds or provide services to EU clients. This principle of action stems from the objective of protecting EU consumers and investors.

For MiCA, two subjects become central:

1) The issuer of crypto-assets (issuer of crypto-assets) is a legal entity that offers any type of crypto-assets or seeks to admit such crypto-assets to the trading platform.

Issuers are required to:

• by form (mandatory – legal person),
• on the publication of the white paper (compile, notify the supervisory national authority, publish – except when the release falls under the exception, see more on the standards of white paper)
• conform to standards (act honestly, fairly and professionally; communicate honestly with crypto-asset holders, clearly and without misleading; prevent, identify, regulate and disclose any conflicts of interest that may arise; maintain all its access security systems and protocols in accordance with relevant EU standards.)

2) Provider of services in the sphere of crypto-assets (virtual asset service providers, VASP) – any person whose occupation or business is the provision of one or more crypto assets services to third parties on a professional basis;

The services cover the following activities:

(a) Storage and management of crypto assets on behalf of third parties;

(b) Provide a trading platform for crypto assets;

(c) Exchange of crypto-assets for fiat currency, which is a legal tender; (d) Exchange of crypto-assets for other crypto-assets;

(e) Execution of orders for transactions with crypto-assets on behalf of third parties; (f) location of crypto-assets;

(g) Receiving and transmitting orders for crypto-assets transactions on behalf of third parties; (h) Providing advice on crypto-assets.

Annex 4 to MiCA provides minimum capital requirements for VASP, divided into 3 classes:

White paper requirements

Article 5 sets out the requirements for the content of the white paper, which are described in detail in Annex 1 to the Act:

1. Detailed description of the issuer and representation of the main participants involved in the development and development of the project;
2. Detailed information about the project, the type of crypto-assets that will be offered publicly or for which a trade permit is requested, The grounds on which crypto assets will be offered publicly or why trade admission and planned use of fiat currency or other crypto assets collected through public offer is requested;
3. Details of the public offer (number of crypto-assets in the issue, issue price and subscription terms);
4. Detailed description of the rights and obligations related to crypto assets and the procedures and conditions for the exercise of those rights;
5. Information on the underlying technology and standards of the issued token;
6. Detailed description of the risks associated with the issuer, the assets themselves, the public offering and sale;

In addition, MiCA sets the inclusion of the following information:

7. «The issuer of crypto-assets bears full responsibility for the content of this «white book». This technical documentation on crypto-assets has not been reviewed or approved by the competent authority of any member state of the European Union»;
8. There is no claim for the future value of crypto-assets if the issuer of these crypto-assets cannot guarantee such future value
9. Government stats on data correctness are included;
10. At the beginning is a summary that provides basic information about the supply of crypto assets in a short and non-technical language.

The nature of white paper regulation strongly resembles securities issuance regulation and issuers’ disclosure obligations. The same applies to the list of exceptions,  when the compilation and publication of a white paper becomes optional:

(a) Crypto assets are offered free of charge (no provision of crypto assets in exchange for entered personal information);

(b) Crypto assets are automatically created through mining as a reward for maintaining DLT or confirming transactions;

(c) Crypto assets are unique and cannot be replaced by other crypto assets (unique and not fungible);

(d) Crypto-assets are offered to less than 150 natural or legal persons in each member State if such persons act on their own behalf;

(e) Within 12 months, the general consideration of the public offer of crypto-assets in the Union does not exceed 1,000,000 euros or equivalent;

(f) The public offer of crypto-assets is addressed exclusively to qualified investors, and crypto-assets can only belong to such qualified investors.

Issuers will be required to notify the national supervisory authority of the existence of WP at least 20 working days prior to publication, as well as to provide a list of EU States in which they intend to offer their crypto-assets for public sale. In this case, this notification procedure applies only to tokens not related to ART or EMT,  for which the authorization procedure is valid (the issuer shall request authorization from the competent authority). Also MiCA sets separate content requirements for white paper for ART (Appendix 2).

General information

• The EU is considering an act that will regulate the market for crypto-assets – MiCA.
• MiCA will affect all cryptocurrencies that cannot be attributed to financial instruments, CBDC, including stakeblocoins.
• It is proposed to distinguish three special categories of crypto-assets: utility, ART, EMT.
• For crypto projects that fall under the definition of a financial instrument,  it is necessary to comply with the requirements of regulation of capital markets, in particular, the provisions on disclosure of information, registration of issues, compliance with MiFID II.
• There are requirements for persons involved in the circulation of crypto-assets. – Detailed requirements for the content of the white paper.
• Separate modes created for ART and EMT.
• The situation is still under consideration, but if adopted, crypto projects will be forced to provide another large area of compliance.

Current changes in the regulation of the crypto market in the EU: the background of MiCA

Despite such rapid development and the increasing importance of the crypto market, the EU has not yet had a unified surveillance regime. Although some EU member states have created their own sets of rules to regulate cryptocurrency markets under AMLD5 6, they are very different. As a result, there is no single regulation between the EU countries, no single consumer protection.

Thus, the main objective of MiCA is to create a single set of rules in the EU for dealing with crypto assets, which covers both the provision of relevant services and the regulation of products. It also includes measures to prevent abuse in the market and consumer protection aspects with respect to clients of crypto asset providers (VASP).

To achieve these goals, MiCA should apply to all individuals, entities and other companies that issue crypto assets, publicly offer them for trading, or offer other services related to crypto assets. In principle, any public activity related to crypto assets falls under the new MiCA regime in the EU.

Cryptocurrencies that are unique and non-reciprocal, such as NTF, are excluded under MiCA. However, the discussion will continue as the NFT proposed by the large series are likely to be interchangeable and therefore, in the case of a corresponding low set threshold, the NFT may also be subject to MiCA.

Regulation of cryptocurrency markets in Europe: MICA regulations

With the introduction of the MiCA regime in the EU, essentially three types of crypto-assets will be defined. These are value-based (ART) tokens, electronic money (EMT) tokens, and cryptocurrencies,  other than tokens tied to value and electronic money.

Thus, electronic money tokens are cryptocurrencies that must have a stable value by reference to the official currency (this is the official currency of the country,  issued by the Central Bank or other monetary authority).  In contrast, value-linked tokens are those that are not electronic money tokens and have a stable value by reference to any other value,  a right or a combination thereof, including one or more currencies.

To regulate the crypto market in the EU, the MiCA Regulation sets requirements in the following areas:

• public offer;
• access to the marketplace;
• the content and form of White paper, a document similar to the sales prospectus, and its publication;
• reporting and reporting obligations to oversight bodies;
• the issuer’s redemption obligations.

In the case of value-linked tokens and electronic money tokens, there are additional requirements in the following areas:

• the capitalization of the issuer;
• reserve assets;
• management requirements for the issuer;
• expanded information obligations to supervisory authorities.

Regulation of cryptocurrency services

In addition to regulating crypto markets in Europe, MiCA regulates the provision of crypto services. Following the MiFID definitions, MiCA regulates the following services:

• Store and manage crypto assets for clients.
• Control the Crypto Platform.
• Cryptocurrency exchange for fiat/other cryptocurrency.
• Executing orders related to virtual assets for clients.
• Transferring crypto assets to others.
• Third party acceptance and transfer of orders for virtual assets.
• Providing portfolio management services.

Not surprisingly, already regulated banks, financial service providers, central securities depositories, trading-floor operators, electronic money institutions, and fund managers do not need a new cryptocurrency license, if they want to provide the above-mentioned crypto services to the extent that they have provided them with the previous license. To obtain a crypto license in the EU, they only need to inform the regulator of the country in advance. The new license requirement from MiCA article 53 applies only to companies that do not yet have a license and that only want to provide services related to crypto assets. The requirements that VASPs have to meet in order to obtain authorization are comparable to those that FSPs have to consider within WpIG.

The information to be provided includes, but is not limited to: detailed business plan, equity information, management agreement documentation, owner information, proof of suitability of directors, Description of internal controls and risk analysis. A feature of MiCA is the scheduled processing time for authorities. According to article 55 MiCA, the authority must acknowledge receipt of the application in writing within 5 working days.  The competent authority shall verify the completeness of the application within 25 days of receipt of the application. After confirmation of completeness, the authority has 40 days to make a reasoned decision on whether or not to issue a permit and another 5 days to report it.

Transitional provisions for crypto service providers

If you are interested in being licensed as a virtual asset provider, then consider that there are special transitional rules for crypto service providers that already have a license in a member state at the time MiCA comes into effect.

Under the MiCA Regulation, crypto service providers that have provided their services in accordance with applicable national law prior to MiCA’s entry into force may continue to do so within 18 months of the Regulation’s entry into force. Article 123, paragraph 3, MiCA also provides for simplified registration of crypto service providers in the EU for already active suppliers. In summary procedure.

The competent authorities should only check whether the provider of such services has fulfilled general obligations and commitments with regard to the provision of special crypto-services.

It will also play a role that the European passport, i.e. the right of VASP to provide services,  subject to registration in another EU country, will be faster than MiFID. Article 58 MiCA provides for a maximum period of 15 days, according to which the national authority of the country must send the passport information to the recipient country within 10 working days, and VASP may take action after receipt of the communication, but not later than 15 days after submission to the authority of the country of origin.

It should be mentioned that CRR credit institutions and securities institutions that are already under supervision must also apply to supplement their existing passport. The application must be submitted to the authorities of the country of residence/registration at least 40 days prior to commencement of work.

Customer-driven service only/reverse application

As we have said, the MiCA Regulation will require crypto companies to register and obtain appropriate permission from the national authorities. Many companies,  based in third countries, are asking whether the MiCA Regulation is relevant to them.  If they want to offer services to customers in the EU, they must comply with this regime,  establish a physical presence in the EU and obtain permission. The only exception is when the service is provided solely at the customer’s initiative, which is also called reverse request or passive service.

In accordance with the above mentioned registration requirement does not apply if the service is provided on the initiative of the client established or residing in the Union. What is new compared to MiFID is that MiCA already contains detailed provisions on reverse request. According to this, a third-country company can only provide a specially requested service. Other additional services are not allowed.

Conclusion

With the publication of the agreement reached during the trilateral negotiations,  the pan-European regulation of cryptocurrencies is becoming increasingly tangible. Even if MiCA is not yet fully adopted and ESMA and EBA have full authority to develop additional detailed rules, market participants are urged to consider their requirements in detail now. Therefore, companies that are already active in this business, as well as those who want to launch a crypto startup in the EU, are recommended to consider MiCA in their strategic decisions.

For more information and detailed advice, please contact Regulated United Europe (RUE). Our company advises clients on the regulation of crypto markets in Europe, and at the request of our clients can provide support in the registration of crypto companies in the EU and bring them to compliance with the new regulations.