The global landscape of regulation for crypto assets is diverse, and while it is becoming increasingly complex, many regulators still choose to wait and see how this area develops and what others will do. For now, all eyes are on the European Union and its bespoke approach to regulating crypto assets.
As part of a comprehensive digital financial package announced in September 2020, the European Commission (EC) has published a regulatory proposal entitled Markets in Crypto Assets (MiCA). The proposal is currently going through the legislative process and is the subject of intense debate. This important regulatory move was accelerated by concerns about the increasingly fragmented national regulatory landscape for crypto assets within the EU.
The other major trigger for government control was the rise in stable coins. Stablecoins have been around for a few years – with the first stablecoin, Tether (USDT) dating back to 2014 – but little regulatory came up until June 2019 when Facebook’s Libra project (later renamed Diem) was announced Attention. This was a wake-up call for many authorities when they realized that global stablecoins can quickly reach large volumes due to strong network effects and that this could have systemic effects on the financial sector.
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Crypto assets under MiCA
The European Commission has recorded and regulated all crypto assets that are not covered by existing EU financial services and proposed a tailor-made, comprehensive and mandatory system for crypto assets under the MiCA. The regulation will apply directly across the EU without having to be transposed into national law and will replace all national framework conditions. The aim is to offer industry and market participants legal certainty and to facilitate legal harmonization.
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The MiCA sets out a set of uniform guiding principles for crypto assets that are already more generally applicable in the financial markets, including transparency and disclosure, approval and monitoring, determining operational, organizational and governance measures, consumer protection and preventing market abuse.
MiCA provides much-needed definitions and classifications of crypto assets. This is a welcome development that can help consolidate different definitions and taxonomies used in different European countries and by different market participants. In order to capture the entire universe of crypto assets (with the exception of crypto assets, which are already covered by the financial regulations), a crypto asset is very broadly defined under MiCA as a digital representation of values or rights that are created with the help of the distributed ledger -Technology or electronically transmitted and stored similar technology. This means that any asset added to a blockchain may fall under the regulatory requirements of the MiCA, regardless of its nature and economic function. We will have to wait for the final version of the regulation to see whether derogations from this broad scope will be introduced in the negotiation process.
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Categories of crypto assets under MiCA
MiCA identifies three regulatory categories of crypto assets:
- E-money tokens used as a medium of exchange aimed at achieving stable value by referring to the value of a single fiat currency that is legal tender, such as. B. the euro or the US dollar. This would include stable coins like USD Coin (USDC) and a unified currency-linked diem (Libra 2.0).
- Asset-related tokens that purport to maintain a stable value by referring to multiple fiat currencies that are legal tender, one or more commodities, one or more crypto assets, or a combination of such assets. This would include the originally proposed and currently no longer tracked version of the Libra (Libra 1.0).
- Finally, the third category of crypto assets is a collective term for all other crypto assets. It would cover utility tokens and algorithmic stablecoins, but possibly Bitcoin (BTC) and other similar tokens as well.
MiCA provides a range of comprehensive regulatory requirements for issuers, including different licensing and operational requirements, depending on the type of crypto-assets involved. The issuers of tokens related to assets and e-money tokens must be authorized and established in the EU.
This is certainly good news for issuers who are already based in and active in the EU, but it creates an additional compliance burden for issuers outside the EU. Issuers of asset-referenced tokens are subject to certain capital, governance and business conduct requirements, and issuers of e-money tokens must also be licensed as a credit or e-money institution and additionally meet the operational requirements of the e-money legal system . E-money tokens must be issued and redeemed at face value, and holders must be made a direct claim against the issuer.
The issuers are required to prepare a white paper containing important information about the project including its main characteristics, rights and obligations. Only certain projects and offers of low value can be exempted from this potentially expensive requirement. In order to counter the risks of larger projects (such as global stablecoins), MiCA offers an additional, stricter set of rules for “significant” asset-related tokens and e-money tokens. Such “significant” tokens, which are classified as such by the European Banking Authority (EBA) on the basis of the criteria listed in the MiCA, have stricter requirements for the supervision of capital, investors and EBA, which cover governance, conflicts of interest, etc. Reserve assets, custody and white paper commitments.
Crypto asset service provider
MiCA also defines a legal framework for the authorization and operating conditions of Crypto Asset Service Providers (CASPs). Each CASP must be a legal person registered in the EU and be authorized to operate. The compliance requirements are similar to those of the financial regulations and include regulatory safeguards, organizational requirements and specific rules for the safekeeping of client funds.
The list of regulated crypto asset services also reflects the financial regulations and includes the custody and management of crypto assets, the operation of a trading platform, the exchange of crypto assets for fiat currencies and other crypto assets, the receipt, the Transfer and execution of orders as well as the placing of orders for crypto assets and finally advice on crypto assets.
As with any regulatory proposal, the MiCA goes through every cog in the EU legislative machine. Hopefully, this process will help streamline MiCA regulations, eliminate friction, resolve problems and achieve optimal regulation that meets the needs and expectations of all parties involved. After the MiCA comes into force, the application of the regulation will be delayed by 18 months, with the exception of e-money tokens and asset-related tokens, for which the regulation applies immediately.
The MiCA will set a precedent for other countries to learn from and either follow or excel for a competitive advantage. It is an ambitious regulatory project. Calibrating such a comprehensive legal framework to manage rapidly evolving innovations requires a careful approach – mandated enough to ensure legal certainty but flexible enough to accommodate future developments.
It also requires a careful balance between four main objectives on the basis of which MiCA was developed: legal certainty, support for innovation, consumer and investor protection, and market integrity. Mistakes will have an EU-wide impact and will be difficult to reverse. However, correctness will be an EU-wide success and a great opportunity for the region.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article is for general informational purposes and is not intended as legal advice and should not be construed as legal advice.
Agata Ferreira is Assistant Professor at Warsaw University of Technology and Visiting Professor at a number of other academic institutions. She studied law in four different jurisdictions under the common law and civil law systems. Agata worked in the UK financial sector as an attorney for a leading law firm and investment bank for over a decade. She is a member of an expert group at the EU Blockchain Observatory and Forum and a member of an advisory board for Blockchain for Europe.
The opinions expressed are those of the author alone and do not necessarily reflect the views of the university or its affiliates.