Decrypting the proposed EU Regulation on Markets in Crypto-Assets15 April 2021
On 24 September 2020, the European Commission published a proposal for a Regulation on Markets in Crypto-Assets (“MiCA”). This piece of legislation is only a part of a larger Digital finance package, including, amongst others, legislative proposals for a Digital Operational Resilience Act (“DORA”) and a Distributed Ledger Technology (“DLT”) Pilot Regime.
MiCA is quite extensive in its scope, covering all crypto-assets in the EEA, bar those that are already regulated by specific laws. Yet, at its core, the regulation aims to remove some of the obstacles in applying these new technologies, whilst also limiting money laundering, fraud and market manipulation activities in the EU’s cryptocurrencies market.
In a nutshell, the regulation sets minimum disclosure requirements for issuing crypto-assets, as well as defines the latter. On top of that, MiCA establishes further requirements for crypto-asset service providers and brings additional consumer protection rules.
Breaking down the various meanings of “crypto-assets”
Crypto-assets are quite broadly defined in the proposed regulation: “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. However, the regulation does not encompass crypto-assets that are currently covered by other EU financial laws, e.g., the ones that qualify as financial instruments or electronic money (other than e-money tokens) – which will continue to be governed by their appropriate directives/regulations. Instead, MiCA intends to close the loopholes in the existing regulatory framework, by covering crypto-assets in general, as well as by introducing three specific categories of crypto-assets:
► asset-referenced tokens (g., DAI) – these are utilised as a means of exchange, considering their stable value which is maintained by referring to the value of several fiat currencies that are legal tender, one or several commodities/crypto-assets, or a combination of such assets;
► e-money tokens (g., USD Coin) – these crypto-assets are also used as a means of exchange, but they aim to maintain a stable value by referring to the value of a single fiat currency that is legal tender;
► utility tokens (g., Basic Attention Token, Filecoin token) – these are intended to provide digital access to a good/service, available on a distributed ledger, and are only accepted by the issuer of that token to grant access to the respective good/service.
The first two categories of crypto-assets basically hint at stablecoins, the key differentiating factor being if they are linked (i) to a single fiat currency (e.g., Euro, USD, GBP, etc.) – e-money tokens, or (ii) to several fiat currencies, commodities (e.g., gold, silver, etc.) or even other crypto-assets – asset-referenced tokens.
What’s more, these crypto-assets may be further classified, depending on their impact, into significant asset-referenced tokens (e.g., Diem – formerly Libra) or significant e-money tokens (e.g., Tether USD or the expected “Diem Euro”). Of course, with significant assets come significant requirements for their issuers. Not surprisingly, the role of assessing whether these crypto-assets are significant or not will be conferred to the European Banking Authority (“EBA”), who will have to evaluate if at least three of the following criteria are met:
► the size of the customer base;
► the value or the market capitalisation of the tokens;
► the number and value of transactions in the respective tokens;
► the size of the reserve of assets of the issuer of tokens;
► the significance of the cross-border activities of the issuer of such tokens;
► the interconnectedness with the financial system.
A staple element in this whole conundrum is that the broad definition of crypto-assets does not confine itself to the above subclassifications, but rather embraces them, together with all other types of crypto-assets that are not currently regulated, e.g., Bitcoin, Ether, Litecoin, Stellar, etc. This is why crypto-assets themselves may be regarded as a “catch-all” category or, simply put, a sort of residual “piggybank” for some of the digital coins of the future.
Under MiCA, any person offering crypto-assets to third parties will be regarded as an issuer of crypto-assets. However, the regulation will not apply to central banks that issue crypto-assets or provide similar services.
Before making a public offering in the EU, generally, all crypto-asset issuers will have to prepare and publish a white paper, which shall include general information regarding the issuer, the project’s roadmap, the rights and obligations accompanying the crypto-asset, associated risks, etc. This white paper must be further notified to the national competent authorities (“NCAs”), and in case of asset-referenced tokens, it also needs to be approved by them, unless these assets are significant, in which case the EBA will handle the white paper. As anticipated earlier, the EBA will be responsible for the supervision and approval of both asset-referenced and e-money tokens which are deemed to be significant, MiCA providing that colleges of national supervisors be established to help the EBA in this regard.
However, there are some exceptions from the requirements of having a white paper in what concerns the issuers of crypto-assets other than asset-referenced or e-money tokens if:
► the crypto-assets are offered for free;
► the crypto-assets are created automatically via mining, as a reward for the maintenance of the distributed ledger or for the validation of transactions;
► the crypto-assets are unique and cannot be exchanged for other crypto-assets;
► the crypto-assets are offered to fewer than 150 natural/legal persons per Member State, should these persons act on their own account;
► over a period of 12 months, the total consideration of the public offer does not exceed EUR 1,000,000 or the equivalent amount in another currency or in crypto-assets; or
► the public offer is only addressed to qualified investors and only they can hold the crypto-assets.
Furthermore, MiCA will require all crypto-asset issuers to be incorporated as legal entities. Those who will issue asset-referenced tokens need to be established in the EU and be authorised by the NCA of their home Member State. On the other hand, the issuers of e-money tokens must be either an authorised credit institution or an electronic money institution in compliance with all the applicable EU legislation.
There are other specific provisions for issuers of asset-referenced tokens and e-money tokens, especially for the former, which have more strict requirements. For asset-referenced tokens, the regulation includes rules regarding conflicts of interest, governance and minimal capital, along with rules on the custody of the reserve assets, and provisions for the stabilisation mechanism and the reserve of assets backing this type of tokens. In particular, issuers of asset-referenced tokens will be obliged to safeguard the security, integrity and confidentiality of information. In what concerns e-money tokens, their holders should always have redemption right at any moment and at par value with the fiat currency that the e-money token is referencing. Issuers of both asset-referenced and e-money tokens will be prohibited from granting interests or any other benefit to users of such tokens for the length of time they are holding the tokens. This is to ensure that the tokens are mainly used as a means of exchange, rather than as a store of value.
Providing services related to crypto-assets
Crypto-asset service providers are legal persons that engage in activities such as brokerage, exchange, trading, custody or giving advice on crypto-assets. With the exception of credit institutions and investment firms, all other crypto-asset service providers are required to obtain specific authorisation from an NCA in an EU/EEA Member State prior to providing such services, as well as have a registered office in that state.
Further requirements target, amongst others, minimum capital, the security of the IT infrastructure, conflicts of interest, the corporate governance structure and the management board of these service providers.
It is important to note that some Member States are already quite ahead of the curve in what concerns regulating this field. Liechtenstein and Malta, alongside France, Germany and Estonia may be regarded as pioneers in the “crypto-verse”, having put in place procedures for acquiring licenses. Other countries, such as Luxembourg, whilst not having specific laws regulating cryptocurrencies yet, have developed incentives to support the growth of the crypto industry. The aforementioned Member States may decide to further ease the procedures required by MiCA, so that the existing licences be easily and rapidly “upgraded” to the standards set by the proposed regulation. By doing this, the markets therein may gain a significant advantage compared to the rest of the Member States, which would barely start to dip their toe into the swirling waters of crypto-assets.
MiCA also sets out rules to ensure consumer protection. For example, prospective buyers of crypto-assets will be informed about the associated characteristics, functions and risks via the white paper. Additionally, consumers who are buying crypto-assets, other than asset-referenced or e-money tokens, directly from the issuer or from a crypto-asset service provider, will be provided with a right of withdrawal during a limited period of time after their acquisition.
More notably, issuers of asset-referenced tokens and crypto-asset service providers need to put in place a clear procedure for handling complaints received from their clients. The latter shall be able to file such complaints free of charge and have their problems investigated in a timely and fair manner, as well as be provided with the outcome of the investigations within a reasonable period of time.
Lastly, any exclusion of civil liability will be deprived of any legal effect, this rule covering issuers of all crypto-assets.
The European Central Bank’s reaction
On 19 February 2021, the European Central Bank (“ECB”) published its opinion on the current version of the proposed regulation. Whilst being generally in favour of MiCA, the ECB advocates for a considerable number of changes and refinements in the rather hefty 42-pages document. In the following, we shall cover some of the ECB’s suggestions.
First and foremost, the ECB recommends that a clear distinction be made between its powers and the responsibilities awarded to the EBA in the proposed regulation. Likewise, the EBC considers that the current MiCA proposal, which features the power to issue only non-binding opinions on applications of prospective issuers of asset-referenced tokens, is rather excessive, pointing out that the ECB, together with other non-euro national central banks, have responsibilities in conducting “oversight of clearing and payments systems as part of its [theirs] mandate”, given that “one of the basic tasks to be carried out through … [the ECB] is to ‘promote the smooth operation of payment systems”. The ECB seems to further double down on these views through another proposition, i.e., adding the following wording after some references to the EBA in the regulation’s recitals and articles, the intention here being to give non-euro central banks control rights similar to those allocated by MiCA to the EBA: “after consultation of the ECB and the relevant central banks of Member States whose currency is not the euro”.
Secondly, the ECB is against the current catch-all definition of crypto-assets, claiming that a better one should be envisaged, “in order to avoid diverging interpretations at national level on what may or may not constitute a crypto-asset under the proposed regulation, to help support the provision of crypto-asset services on a cross-border basis and to establish a truly harmonized set of rules for crypto-assets”.
Furthermore, the ECB endorses the restriction on crypto-assets that generate interest, probably due to the risks this would pose to the banking sector and to other monetary policies, e.g., should crypto-assets have interest attached, they would become more desirable and have an impact on traditional bank deposits, thus driving some people to substitute the latter for crypto-assets. Interestingly enough, the ECB is also contemplating having a central bank digital currency (“CBDC”), the so-called “digital euro” which would complement cash, rather than replace it. Still, whilst this initiative is still in very early stages, this type of currency would not fall under the provisions of MiCA.
A potential trojan horse
The current version of MiCA comes with both pros and cons.
On the plus side, this piece of legislation is designed as a regulation, thus being binding and directly applicable across the EU/EEA. It promotes the development of crypto-assets by having a legal framework that supports innovation and fair competition, as well as safeguards consumer’s rights and preserves market integrity. Moreover, MiCA enables European businesses to have full access to the internal market, providing legal certainty and levelling the playing field for every crypto-asset service provider.
However, the regulation is still far from perfect, having some shortcomings that need to be touched, such as the following:
► the wording of the definitions covering asset-referenced and e-money tokens is cumbersome and rather inaccurate since both of them are “referring to the value of”, inter alia, fiat currencies, without taking into consideration that some crypto-assets refer to the value of a fiat currency, but have their reserve assets consist of other fiat currencies, commodities or crypto-assets. This is the case for DAI, which refers to the value of USD (at first glance, making DAI resemble e-money tokens), but its reserve assets are issued based on Ether (which points to a characteristic specific to asset-referenced tokens);
► it is unclear how the regulation interacts with MiFID II in cases where crypto-assets include traits specific to financial instruments;
► the thresholds for whether an asset-referenced or e-money token is significant are unrealistic in the current version of the regulation, given that virtually all relevant stablecoins would easily surpass those limits and be qualified as significant crypto-assets. The consequences of this might prove to be preposterous for the issuers of such coins, since they would suddenly be obliged to observe additional requirements, g., owning capital funds of at least 3% of the average amount of the reserve assets;
► prohibiting interests associated with asset-referenced and e-money tokens might undermine the competitiveness of both issuers and service providers of crypto-assets located in the EU, compared to those in other jurisdictions that allow such interests;
► since only legal entities can issue crypto-assets, it is unclear how tokens generated (i) via an open blockchain network, such as Bitcoin, or (ii) through an application, such as a smart contract, may be construed;
► the regulation may have an adverse effect on the newer market players, creating significant barriers to entry into the market, inasmuch as some requirements (g., white paper, compliance costs) would hinder their development, rather than bolster it.
Codebreaking the future
MiCA is a very ambitious effort, although it is paramount that it strikes a good balance between regulatory expectations and the realities of the market. Given the current status of the proposal, along with the transition period of 18 months, there will be several years until the rules therein apply.
In the past few years, European legislators have been striving to regulate different fields of technology, one of the objectives being to bolster the competitiveness of the EU market, by attracting talent and investments, as well as by keeping them in the single market. Unfortunately, one could argue that ship has sailed in terms of AI or cloud computing, given that most of the relevant actors are located outside the EU.
Nevertheless, should the current weaknesses be dealt with accordingly, there are little reasons to believe that MiCA will not emulate the impact of the GDPR in what concerns cryptocurrencies in the EU, thus bringing the old continent into the new age as the leading watchdog in the world not only on privacy matters but also on all things crypto.
 Directive 2014/65/EU (the MiFID II), Regulation (EU) 2017/1129 (the Prospectus Regulation), Directive 2004/109/EC (the Transparency Directive), Regulation (EU) 909/2014 (the CSDR), Directive (EU) 2015/2366 (the Electronic Payment Directive), etc.
 Nevertheless, crypto-assets will not be regarded as being offered for free (i) should the purchasers be required to provide personal data to the issuer in exchange, or (ii) if the issuer receives any third-party fees, commissions, monetary or non-monetary benefits in exchange for those crypto-assets.
 The regulation sets out that an electronic money institution shall be authorised to also issue e-money tokens, and that these tokens will be regarded as electronic money, as defined in Directive 2009/110/EC.
 Authorised under Directive 2013/36/EU (the Capital Requirements Directive).
 Abiding all other requirements set out in the MiFID II.
 The ECB is the head of the Single Supervisory Mechanism, which is one of the two key pillars of the banking union.
 As stated in a recent blog post on the ECB’s website, the ECB is “still exploring the possibility and considering it conceptually”. For more information on this, visit https://www.ecb.europa.eu/press/blog/date/2021/html/ecb.blog210325~e22188c522.en.html.
 For example, as of 5 April 2021, with its reserve assets of approximately USD 43 billion, Tether would be required to own almost USD 1.3 billion of its funding. Considering the positive trend of cryptocurrencies in the past few months, this amount will only keep on rising.