On September 24, 2020 as part of its “Digital Finance Strategy Package”, the European Commission adopted:
- the Markets in Crypto-Assets Regulation (MiCA) proposal including its Annexes and an impact assessment ;
- the Pilot DLT Market Infrastructure Regulation (PDMIR) proposal; the
- the Digital Operational Resilience Regulation proposal (DORA) as supplemented by
- an EU directive which introduces targeted amendments (the Amending Directive) to existing financial services legislation to accommodate the EU’s MiCA regulatory regime.
(collectively the MiCA Regime).
This summary should be read in conjunction with our more detailed Background Briefing: Meet MiCA – The EU pushes forward its proposal for its Markets in Crypto-Assets Regulation plus a pilot regime for DLT infrastructure.
When taken together this new MiCA Regime clarifies which tokens will qualify as a “financial instrument” and thus fall under the existing financial services regulatory regime, as amended, and which tokens will qualify as “crypto-assets” and thus fall under MiCA’s specific regime for crypto-asset services (CAS). Crucially, MiCA aims to be technology, asset class and jurisdiction agnostic neutral. MiCA allows for the use of both permission-less and permission-based distributed ledger technology (DLT). Assessment of whether a digital asset will be a crypto-asset and subject to MiCA or a token that is a financial instrument subject to the existing financial services regime, notably MiFIR/MiFID II, will look at the substance over form and thus depends on the content of an instrument and not the technology behind it.
MiCA itself may be implemented as early as mid-2021 to early 2022 and aims to be fully operational by 2024. PDMIR could begin operating much earlier. The pilot/sandbox regime that is introduced by the PDMIR marks a very definitive shift in how the EU is approaching financial services rulemaking. The pilot regime is the first EU-wide sandbox of its type. DORA also marks an advance in a thematic area that has long been marked a priority for policymakers.
While MiCA still raises a number of questions, the definitive demarcation of how tokens are to be treated is likely to provide greater legal certainty and thus transform Europe’s current fragmented crypto-asset legislative and regulatory framework into possibly the world’s largest and most significant uniform regulatory framework. This would improve harmonization and legitimization of how tokens are regulated generally, the dealings with them and supervision of issuers and firms that qualify as crypto-asset service providers (CASPs). MiCA applies to persons engaged in the issuance of crypto-assets and to CASPs in the EU-27. MiCA will equally impact those persons from outside the EU, for example in the United States, soliciting, selling and promoting CAS activities to clients that are in the EU. When taken as a whole these changes aim at creating legal certainty, supporting innovation, ensuring appropriate levels of consumer and investor protection, promoting market integrity and financial stability.
MiCA also makes targeted amendments to expand and adapt the existing financial services regulatory regime to cover those tokens that will become subject to that regime. Persons subject to MiCA will be subject to a sliding scale of requirements. More onerous requirements are imposed in relation to those crypto-assets that present greater risk (such as stablecoins, notably when they are e-money).
In summary, MiCA’s text:
1. provides clarity that security tokens (and those with similar features) and activity in respect of these to be governed by the current existing financial services regime, and for those range of tokens that qualify under MiCA as one of the various subcategories of “crypto-assets” those formerly known as “payment tokens”, “utility tokens” but also “stable tokens”;
2. introduces definitions of what constitutes “crypto-asset services” (CAS) and how these are regulated (and these are set out in MiCA as being deemed equivalent to MiFID II/MiFIR obligations) and thus require an authorization for those providing the following activity:
- Custody and administration of crypto-assets on behalf of third parties;
- Operation of a trading platform for crypto-assets, within which multiple third-party buying and selling interests for crypto-assets can interact in a manner that results in a contract, either by exchanging one crypto-asset for another or a crypto-asset for fiat currency that is legal tender;
- The exchange of crypto-assets for other crypto-assets;
- The execution of orders for crypto-assets on behalf of third-parties;
- The reception and transmission of orders for crypto-assets on behalf of third parties;
- The placing (i.e., marketing of newly issued crypto-assets or crypto-assets that are already issued but that are not admitted to trading on a trading platform for crypto-assets, to specified purchasers and which does not involve an offer to the public or an offer to existing holders of the issuer’ crypto-assets;
- Providing advice on crypto-assets – which means the offering, giving or agreeing to give personalized or specific recommendations to a third party either at its request or on the initiative of the crypto-asset service provider, concerning the acquisition of or the sale of one or more crypto-assets or the use of “crypto-asset services” – i.e., all of the CAS activity above.
3. introduces new requirements for issuers of crypto-assets including with respect to whitepapers. MiCA proposes that no issuer of crypto-assets (other than for an Asset Referenced Token (ARTs) or an Electronic Money Token (EMTs) or those which are exempt) shall, in the EU, offer such crypto-assets to the public, or seek an admission of such crypto-assets to trading on a trading platform for crypto-assets, unless that issuer has satisfied certain requirements including the minimum content of the whitepaper as set out in Annex I of MiCA for all whitepapers and Annex II for ART whitepapers. Admission of a whitepaper and/or trading shall be an EU-wide admission. While ART issuers will require an authorization, exemptions from the need for ART issuers to be authorized are available for small-scale ARTs or for ARTs that are marketed, distributed and exclusively held by qualified investors. All issuers have to report monthly on the amount and valuation of an issued token and reserve assets and any events that are likely to have a significant effect on these figures have to be published on an ad-hoc basis;
4. sets out that, by way of a general requirement, crypto-asset services shall only be provided by legal persons that have a registered office in a Member State of the EU and that have been authorized as a crypto-asset service provider. This may impact a range of custodian wallet providers, crypto-asset exchanges, crypto-asset trading platforms and issuers of crypto-assets. In relation to stablecoins i.e., what MiCA terms an ARTs though, these can only be provided by a “credit institution” (i.e. a bank) under MiCA, i.e., what the EU terms a bank and this will require minimum capital requirements of EUR 5mln. If the stablecoin is however not what MiCA terms an ART or an EMT, then perhaps there is an argument to limit the regulatory capital requirements;
5. puts in place a client segregation requirement (permits omnibus accounts) for crypto-asset services providers holding crypto-assets and/or funds (read fiat) belonging to clients. Rehypothecation and/or rights of use (subject to client consent) is permitted. Client funds need to be held with a bank or a central bank on a client fund (omnibus is permitted) account. Certain conduct of business and disclosure obligations also apply to crypto-asset service providers undertaking custody and administration of crypto-assets on behalf of third-parties;
6. applies and extends existing market integrity measures with respect to prevention of market abuse, insider information, insider dealing and market manipulation;
7. stipulates a change in control framework that applies to acquisitions/dispositions of crypto-asset service providers. This is a copy and paste of existing EU rules/principles – save that administrative timelines are somewhat longer for review and processing;
8. introduces a regime for minimum capital requirements for those regulated persons providing CAS as well as a passporting regime across the EU-27;
9. sets definitive rules for the relationship between a crypto-asset issues and token holder, as well as rights and procedures for a tokenholder to complain; and
10. interacts with the PDMIR creation of a “pilot” i.e., sandbox regime for private sector participants in creating and developing infrastructure for the trading and settlement of crypto-assets, that will be reviewed five years after entry into force. This is in addition to the MiCA effectiveness review that is scheduled three years after the entry into force of the Regulation.
Authorization and supervision for all crypto-asset issuers and CASPs
MiCA requires that those entities that are in-scope of this new regime (including crypto-asset issuers) will be authorized and supervised by national competent authorities (NCAs) in the Member States in which they are based. NCAs will be required to designate a single point of contact for CASPs and MiCA relevant issuers providing cross-border business. For those regulated firms, such as credit institutions i.e., banks, generally, and MiFID investment firms that undertake “CAS-like activity”, these will not require a further authorization to undertake CAS activity. MiCA shall not apply to any person who provides CAS activity exclusively for their parent companies, for their subsidiaries or for other subsidiaries of their parent companies (MiCA Intragroup Exemption).
Additional rules for authorization and supervision of ARTs and EMTs
For those issuers of stablecoins, i.e., what MiCA terms ARTs, NCAs will consult with the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) and where the ARTs reference EU currencies (not just euro but Bulgarian lev, Croatian kuna, Czech koruna, Danish krone, Hungarian forint, Polish zloty, Romanian leu and Swedish krona) the NCA will consult the European Central Bank (ECB) and the national central bank (NCB) of issue of such currencies, who will provide a non-binding opinion on the prospective issuer’s application for authorization.
EMTs may only be offered or admitted to trading on a crypto-asset trading platform if the issuer is authorized as a credit institution i.e., a bank or an electronic money institution within the terms of the second –E-Money Directive. EMT issuers and CASPs are prevented from granting any interest to EMT holders.
For issuers of what MiCA terms as significant ARTs, issuers of ARTs will be supervised by the EBA once those ARTs have been classified as significant. EMTs, notably those that are categorized as significant, will be supervised by both the NCAs and the EBA. MiCA contains provisions empowering the European Commission to adopt a delegated act to further specify the circumstances under which, as well as thresholds above which, an issuer of ART will be considered significant. Additional obligations apply to issuers of significant ARTs, such as requirements for multiple custodians, additional own funds requirements, a liquidity management policy and interoperability as well as the orderly wind-down of activities.
While MiCA may mark a quantum leap in how crypto-assets are regulated, it may provide opportunities for some and compliance challenges for others in respect of business in the EU-27. Affected stakeholders will want to take early action, consulting counsel to first assess the impact of MiCA and any action plans to seize opportunities that MiCA introduces as well as how to remedy areas where greater compliance obligations may apply. We anticipate that if MiCA is passed, possibly by mid-2021, that the phased 18 month period (which does not apply for crypto-assets that would be EMTs or ARTs i.e., stablecoins) of introduction of its requirements will also be complemented by a raft of subsidiary legislative instruments, notably technical standards issued by EU supervisory policymakers, some of which may alter the national regimes (where they exist) even if the MiCA Regime is borrowing from the best of those regimes. Further possible institutional changes are expected, including due to complementarity of regulatory approaches and increased central bank oversight, which are subject to forthcoming consultations.
If you would like to discuss any of the items mentioned above, in particular how to forward-plan and benefit from changes that are being proposed as well as how these developments fit into the 2021 supervisory priorities of the ECB-SSM, EBA and other ESAs, or how they may affect your business more generally, please contact any of our key contacts or the wider team from our Blockchain and Distributed Ledger Technology Team or our Eurozone Hub.
- For the main legislative text the final legislative proposal is available here (a deltaview showing changes to the draft proposal (without the Annexes) is in the Appendix to this Background Briefing). The Annexes 1 to 6 to MiCA are (from the Danish government) available here.↩
- The Annexes 1 to 6 to MiCA are available here.↩
- Available here.↩
- Available here.↩
- Available here.↩
- The European Commission consulted on the possibility of an EU framework for crypto-assets in December 2019 and the feedback to that consultation is set out in part 2 of the final legislative proposal. In part MiCA builds upon the work of the European Supervisory Authorities (ESAs), in particular the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and to a lesser degree the European Insurance and Occupational Pensions Authority (EIOPA) as well as the European Central Bank (ECB) in its role at the head of the Banking Union’s Single Supervisory Mechanism (SSM). This includes notably ESMA’s advice on initial coin offerings and crypto-assets – see here as well as the EBA’s report with advice for the European Commission on crypto assets – see here as well as our analysis here. ↩
- A link to the legislative procedure file (and supporting documents) are available here.↩
- Refers to a DLT network in which anyone (subject to little limitation) can become a participant in the validation and consensus process. ↩
- Refers to a DLT network in which only the parties that meet certain requirements are entitled to participate to the validation and consensus process. ↩
- The EU defines DLT as “a means of saving information through a distributed ledger, i.e., a repeated digital copy of data available at multiple locations. DLT is built upon public-key cryptography, a cryptographic system that uses pairs of keys: public keys, which are publicly known and essential for identification, and private keys, which are kept secret and are used for authentication and encryption.”↩
- Including “top-up” authorizations for those persons already regulated under the respective existing financial markets regulatory licensing regime. ↩
- Issuers have been defined as “any legal person who offers to the public any type of crypto-assets or seeks the admission of such crypto-assets to a trading platform for crypto-assets”. ↩
- Recital 49 states that, and it is conceivable that this assessment/rationale could change, “Given the relatively small scale of crypto-asset service providers to date, the power to authorize and supervise such service providers should be conferred to national competent authorities. The authorization should be granted, refused or withdrawn by the competent authority of the Member State where the entity has its registered office. Such an authorization should indicate the crypto-asset services for which the crypto- asset service provider is authorized and should be valid for the entire Union.” ESMA is required to maintain a register for crypto-asset services providers. Consequently, it will remain to be seen whether NCA’s registers and ESMA’s EU-wide register will be sufficiently harmonized. In other areas of regulated markets, such as insurance intermediaries NCA’s registers for insurance intermediaries (where they exist) and ESMA’s central register have not been fully reconciled. This may fuel confusion rather than the transparency that this requirements aims to provide. ↩