The Council of the European Union adopted the Regulation on Markets in Crypto-Assets (MiCA) on 16 May 2023, after a legislative process lasting more than two-and-a-half years. MiCA introduces a harmonized framework in the 27-member bloc of nations for regulating most forms of cryptocurrencies.

The Scope of MiCA

What is a crypto-asset? 

A crypto-asset is “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology”.

What crypto-assets does MiCA regulate?

MiCA regulates all types of crypto-assets, except those that are specifically excluded (see below).

For regulatory purposes, MiCA divides crypto-assets into three classes:

• ‘electronic money tokens’ or ‘e‑money tokens’, which purport to maintain a stable value by referencing the value of one official currency (aka fiat currency);
• ‘asset-referenced tokens’, which purport to maintain a stable value by referencing one or more values or rights, including one or more official currencies, but that is not an e‑money token;
• other crypto-assets, including utility tokens. A ‘utility token’ is a crypto-asset that is only intended to provide access to a good or service supplied by its issuer. For ease of reference, we will refer to all these other crypto-assets as ‘basic tokens’, although MiCA does not assign them an official name.

What crypto-assets are not regulated by MiCA?

MiCA does not regulate crypto-assets that are unique and non-fungible or that fall within the scope of other EU legislation, such as those that qualify as financial instruments.

What activities does MiCA regulate?

MiCA regulates three classes of activities:

• the issuance, offer to the public and admission to trading on a trading platform (aka ‘listing’) of crypto-assets;
• crypto-asset services; and
• market misconduct, such as insider dealing and market manipulation.

A ‘crypto-asset service’ is any of the following relating to any crypto-asset:

• providing custody and administration of crypto-assets for clients;
• operating a trading platform for crypto-assets;
• exchanging crypto-assets for funds;
• exchanging crypto-assets for other crypto-assets;
• executing orders for crypto-assets for clients;
• placing of crypto-assets;
• receiving and transmitting orders for crypto-assets for clients;
• providing advice on crypto-assets;
• providing portfolio management on crypto-assets; and
• providing transfer services for crypto-assets for clients.

Regulation of Issuance, Offers to the Public and Admission to Trading of Crypto-Assets

Who can issue basic tokens? 

Apart from qualifying small offers, only a legal person which notifies and publishes a compliant white paper and complies with business conduct regulations (such as acting honestly, fairly and professionally) may issue a basic token or admit it for trading.

Who can issue asset-referenced tokens? 

Except in certain cases, only (a) a legal person established in the EU and authorised in its home EU country, or a qualifying credit institution or (b) a person acting with the written consent of the person in (a) may offer an asset-referenced token to the public or admit it for trading.

There are restrictions on the issuance of asset-reference tokens. For example, the reserves underlying asset-referenced tokens must be managed to cover risks related to the referenced assets and to address liquidity risks related to redemption rights.

Who can issue e-money tokens? 

Only authorised credit institutions and electronic money institutions registered in the EU that notify and publish a compliant white paper can issue e‑money tokens.  

Regulation of Crypto-Asset Service Providers

Who can provide crypto-asset services under MiCA?

Crypto-asset service providers (CASPs) must be (a) a legal person authorised under MiCA or (b) a person authorised under certain other financial regulatory regimes, such as for credit institutions, investment firms or electronic money institutions, provided they have notified the relevant competent authority before they start providing those services.

How does MiCA regulate CASPs?

CASPs must, among others:

• act honestly, fairly and professionally in the best interests of their clients and prospective clients;
• provide information to their clients that is fair, clear and not misleading;
• warn their clients of risks associated with crypto-assets;
• be clear on pricing, costs and fees;
• maintain a minimum permanent capital;
• adopt policies, procedures and controls to assure compliance with MiCA;
• employ qualified managers and employees of good repute;
• safeguard client funds; and
• identify, manage and disclose conflicts of interest.

Phased Implementation

When does MiCA become effective?

MiCA enters into force 20 days after its publication in the Official Journal of the European Union, which is expected in late May or early June 2023. Provisions relating to asset-referenced tokens and e‑money tokens apply 12 months after MiCA enters into force. The remainder of MiCA applies 18 months after MiCA enters into force.

Are there transitional provisions for current issuers and providers of crypto-asset services?

Yes.

• Offers of crypto-assets that end before the relevant provisions of MiCA apply (relevant date) will not be subject to those provisions.
• Operators of trading platforms have 36 months after the relevant date to notify and publish white papers in respect of basic tokens admitted to trading before the relevant date.
• CASPs that lawfully provided services before the relevant date may continue to provide those services until the earlier of 18 months after the relevant date or the date they are granted or refused authorisation.
• Issuers of asset-referenced tokens before the relevant date may continue with issuance until they are granted or refused authorisation if they applied within 1 month after the relevant date.

Key Takeaway

MiCA is a significant, if harmonised, expansion of regulation of the crypto industry in the European Union – the world’s third largest economy. As with all major new legislative schemes, there will be opportunities and challenges for existing and new market players. Issuers, offerors, service providers and others interested in the EU’s crypto market must understand MiCA and factor compliance with it into their future plans.

For More Information

OrionW regularly advises clients on matters involving the regulation of digital assets.  For more information about cryptocurrency regulation, or if you have questions about this article, please contact us at fintech@orionw.com.

Disclaimer: This article is for general information only and does not constitute legal advice.