Introduction of the Final Text in MiCA Post-vote

Late last week, after several years in making, lawmakers from the European Union announced an agreement on the Markets in Crypto Assets (MiCA) regulation, the legal framework for "crypto-assets," which are defined as "digital representations of value or rights that may be transferred and stored electronically using distributed ledger technology or similar technology," is arguably the most extensive in the world.

MiCA mandates that actions be taken in relation to consumer protection, the environment, anti-money laundering (AML), stablecoins, and other areas by crypto-asset service providers (CASPs), who are defined by MiCA as "any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis."

We have not yet seen a final version as we begin our journey into the revolutionary MiCA era because there are still some obstacles to clear before ratification. What do we already know, even in the absence of a copy, and what might we discover later?

What does MiCA regulate?

The legal framework for "crypto-assets," which are defined as "digital representations of value or rights that may be transferred and stored electronically using distributed ledger technology or similar technology," is arguably the most extensive in the world.

MiCA mandates that actions be taken in relation to consumer protection, the environment, anti-money laundering (AML), stablecoins, and other areas by crypto-asset service providers (CASPs), who are defined by MiCA as "any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis."

The "utility token," which is designed to give users digital access to a good or service and is only recognized by its issuer, is another type of regulated crypto-asset. This class of "crypto-assets other than tokens referring to assets or electronic money tokens," as defined by MiCA, is designed to give users digital access to goods or services that are offered on a blockchain. These utility tokens provide a non-financial purpose linked to the operation of a digital platform and digital services, and they are only accepted by the token issuer. Utility tokens should be regarded as a unique class of crypto asset as a result.

To ensure transparency, protect consumers, and lessen the risk of market abuse, MiCA lays out guidelines for CASPs to abide by for each of these categories. MiCA fundamentally forbids a CASP from making crypto assets available to the general public or requesting approval to list them for trading on a trading venue unless the issuer is a legal entity and a white paper in compliance with the rule has been created, reported to the appropriate local regulatory authority, and published. The fundamental details regarding the attributes, rights and obligations, underlying technology, and project must be included in the white paper.

What does MiCA not regulate?

Although the MiCA broadly covers stablecoins and cryptocurrencies like Bitcoin and Ether, it does not apply to central bank digital currencies (CBDCs) or govern security tokens that could be considered securities or other financial products.

Non-fungible tokens (NFTs) have been largely ignored up until now, maybe awaiting inclusion in the planned sequel, MiCA 2. Although emerging technologies like decentralized finance (DeFi) and NFTs have been discussed as being incorporated in MiCA legislation, NFTs have been mainly ignored up until now.

Passportable Licensing

CASPs are required by MiCA to get regulatory authorities' consent before expanding operations across EU nations. The CASP would be able to expand operations to other EU countries without needing to obtain additional licenses once local authorities have granted a crypto business approval in accordance with EU regulations, a process known as "passporting."

What changes as there for CASPs?

A wallet custodian's capital requirement is EUR 125,000, whereas an exchange must have a capital of EUR 150,000. An exchange must also develop policies and procedures for allowing or prohibiting the trading of crypto-assets on its platform to customers who do not hold good enough education or understanding about the risk associated by owning a crypto asset. The MiCA forbids trading in privacy-enhancing cryptocurrencies like Monero and focuses on the need to reduce the risks of insider trading and market manipulation.

Three months will be the deadline for national regulatory authorities to issue the authorizations.

Consumer Protection

"Under the new rules, crypto-asset service providers will be required to meet stringent requirements in order to protect consumers' wallets and become liable if they lose investors' crypto-assets." MiCA "will also cover any type of market abuse related to any type of transaction or service, particularly market manipulation and insider dealing," according to the release.

Environmental

Crypto-asset market participants will be required to disclose information about their environmental and climate footprint.

Anti-Money Laundering

Approximately 24 hours before the MiCA agreement, EU officials passed legislation requiring an originator CASP to share customer information with the recipient CASP in every transaction, with no thresholds or exceptions. Payments to unhosted private wallets are largely excluded from the requirement, a significant departure from previous drafts. In a tweet, EU lawmaker Ondrej Kovak explained that the rule "strikes the right balance in mitigating risks for combating money laundering in the crypto sector without preventing innovation or overburdening businesses."

MiCA also extensively relies on the Financial Action Task Force (FATF) for guidance to state that "any legislation established in the sector of crypto-assets should be specialized, future-proof, and able to keep pace with innovation and technical changes... Such a law should also contribute to the goal of preventing money laundering and terrorism financing. Any definition of 'crypto-assets' should therefore adhere to the definition of 'virtual assets' set out in the Financial Action Task Force (FATF) recommendations."

Stablecoins

"MiCA will protect consumers by requesting stablecoin issuers to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits," according to the release. The issuer will offer every so-called'stablecoin' holder a claim at any time and at no cost, and the regulations controlling the functioning of the reserve will also allow for adequate minimum liquidity."

"The development of asset-referenced tokens (ARTs) based on a non-European currency, as a widely used means of payment, will be constrained to preserve our monetary sovereignty," the release states. "Issuers of ARTs will need to have a registered office in the EU to ensure the proper supervision and monitoring of offers to the public of asset-referenced tokens."

According to CoinDesk, “One of the most eye-catching measures would be a cap, which means stablecoins that aren’t tied to a single fiat currency would have to stop issuing if daily transactions exceed 200 million euros ($209 million) – intended to stop private companies usurping the role of the euro.”

NFTs

According to the release, non-fungible tokens (NFTs) will be excluded from the scope unless they fall under existing crypto-asset categories. The European Commission will be tasked with preparing a comprehensive assessment and, if necessary, creating a regime for NFTs to address the emerging risks of such a new market within the next 18 months.

However, things may not be so straightforward.

"In theory, the law prohibits NFTs, but in practice, a French finance ministry source told CoinDesk, only if they deliver on their promises." "If a non-fungible token becomes fungible, it will be subject to MiCA or other EU laws governing traditional financial instruments..."

So what can we suggest to our clients and those who are reading this article?

Even after the law is passed, CASPs will have an 18-month grace period to comply with the fund transfer requirements and other rules. Even so, the legislation relies on member state regulators to implement and enforce the law, which means that local regulators and courts may take different approaches or interpret the law differently.

In other words, MiCA is a significant step forward for the EU on crypto regulation, but it is unlikely to be the last.

If you are working in the Crypto exchange field, CAML would strongly recommend being proactive rather than reactive in regard to preparing your company for what is to come. This would firstly include the Share capital requirements, while there are no restrictions or required reserves, this is a good time to formally get it done.

Secondly, review your written AML Policies and compare yourself to what current Investment Brokerage firms are doing, i.e. establishing Education Quiz(es), Testing customers on their knowledge about trading and crypto assets, and creating additional layers of cybersecurity and consumer data protection.

Thirdly, study and start to integrate the Travel Rule, this will be by far the greatest barrier to many existing new market participants, therefore, it's worth exploring it already.

For more insights do feel free to reach out to us via office@caml.lt