An Overview of Markets in Crypto-assets (MiCA)

European regulators are working on a regulatory framework for crypto assets since 2019. An outcome of this work, a draft legislation Market in Crypto Assets (MiCA), was leaked. In this article, we will highlight some of the crucial points of the draft legislation.

This legislation is extensive in its scope and covers all existing crypto assets and tokens. It will be applicable throughout the EEA (European Economic Area) without the need for the member nation’s specific legislation.

The legislation primarily focuses on stablecoins, and by reading the draft, you might think it as a response to mitigate the risk which might arise from the stablecoins like Facebook’s Libra.

The legislation will reform the EU crypto market and will also impact the other markets because of broad scope.

Objectives of MiCA

The main objective of MiCA is to provide a framework for the issuance and provision of services related to crypto-assets (such as custodial wallet providers, exchanges, and trading platforms), which are not currently captured by EU financial service legislation. MiCA sets four objectives in place:

• Provide legal certainty through a sound regulatory framework for all crypto assets.
• Support innovation and fair competition, which helps in the broader adoption of crypto assets and services.
• Enforce consumer and investor protection rules and safeguard market integrity.
• Maintain financial stability by mitigating the risk that arises from stablecoins.

Problems addressed by MiCA

EU member states currently have their state-level regulations for crypto assets. The definition of “Crypto-assets” and “Crypto service providers” are also different throughout the Union member states. Because of this, businesses face many problems, such as :

• Scaling — Businesses need to get multiple authorizations based on jurisdiction, which takes time and adds burden on the businesses.
• Access to other financial services — Many states do not allow access to other financial services such as banking because of stricter laws.
• Limit funding availability — Legal uncertainties in crypto space limits funding avenues for small businesses and startups.

Because of unclear regulations, crypto businesses need to adjust their business model throughout the union, putting additional cost and legal complexity.

Other problems, such as regulatory arbitrage, market fragmentation, fraud, cyber-attacks, and market manipulation, stifle innovation in digital asset space and discourage wider adoption.

MiCA solves this problem by providing a legal framework and establishing a single European crypto market, which reduces complexity and financial and administrative burden.

Crypto assets Categorization

The “crypto-assets” definition(mentioned below) described by MiCA correspond to the virtual asset” definition provided by the FATF. However, it recognizes three main subcategories of the crypto assets.

1. Utility tokens — Assets that provide access to digital applications, services, and resources on DLT.
2. Asset reference tokens — Assets that maintain a stable value by referencing several currencies, one or more commodities, one or several crypto-assets, or a basket of such assets. For example, DAI and other commodity tokens.
3. E-money Tokens — Assets that are based on a single fiat currency. For example, Stablecoins such as USDT, USDC.

MiCA recognizes that stablecoins can be widely adopted and pose a systemic and monetary policy risks if not regulated. Therefore, it adds a more stringent requirement for asset-reference tokens and especially for e-money tokens (Stablecoins).

Important highlights of the MiCA

Some of the crucial points of the regulations are highlighted below:

• Under this Regulation, an issuer of crypto-assets should be considered any person offering crypto-assets to third parties.
• Crypto-assets issuers need to produce a white paper when making a public offering in the EU or seeking to list the asset on trading platforms. This white paper should include general info on the issuer, project roadmap, listing related information, rights, and obligations attached to the crypto asset, tech, and related risk.
• The issuers of crypto-assets should also be required to establish a legal entity, either in the EU or in a third country. And before offering, need to notify its white paper and marketing channel to authorities of the member state where it is registered or have a branch.
• Authorities need not review whitepaper before its publication.
• If you are offering your crypto asset for free or offering it to a small number of investors and have a small threshold, then you are exempted from the obligation of publishing a white paper.
• Central banks issuing crypto assets and providing services are not subject to this Regulation.
• The Regulation adds provisions to curb cryptocurrency money laundering, fraud, and market manipulation activities in the EU market

Addition requirements from Asset Reference Tokens

• Issuers of asset-referenced tokens should be subject to more stringent requirements, compared to other issuers of crypto-assets. Before issuing an asset-referenced token in the EU, the issuer needs permission from the authorities and approval of their whitepaper.
• There will be minimal capital requirements when issuing an asset-referenced token.
• The governance structure should be clearly defined for the organizations issuing asset-referenced tokens.
• Issuers of asset-referenced tokens, and any crypto-asset service providers, should be prohibited from granting interests to users of asset-referenced tokens for the length of time such users are holding the asset-referenced tokens.

Addition requirements from E-money Tokens

• The Regulation imposes strict conditions on the issuance of the e-money tokens, including the obligation for these e-money tokens to be issued either by a credit institution or by an electronic money institution.
• E-money token holders should always be granted with a redemption right at any moment and at par value with the fiat currency that the e-money token is referencing.

Above all, MiCA also provides more explicit guidelines for crypto service providers and add restrictions to protect consumer rights and mitigate fraud and market manipulation.

MiCA promotes the institutional adoption of crypto assets

MiCA treats crypto assets as traditional financial instruments while recognizing its potential in payments and capital funding. The regulation also allows existing financial institutions such as credit institutions, investment firms, and payment institutions to provide crypto assets services with any prior authorization, incentivizing institution adoption of crypto assets.

Wrapping up

MiCA provides a much needed single market framework for crypto assets for EEA. By enabling EU-wide legislation will help businesses to offer their services throughout the EEA by passporting their services.

One of the main objectives of the legislation is to support innovation. However, requirements like establishing a legal entity and white paper approval might pose some challenges for the DeFi market. It remains to be seen how this new regime impacts the EU crypto market.

The legislation also provides a transition period and will only enter into the application after 18 months after entry into the force, except e-money provisions, which will be applicable as soon as this Regulation enters into the force.

Major Definitions under MiCA

The Regulation provides some major definitions of various terms used throughout the document.

Distributed ledger technology’ or ‘DLT’ — A class of technologies that support the distributed recording of encrypted data.

Crypto Assets — A digital representation of value or rights, which may be transferred and stored electronically, using distributed ledger or similar technology.

Asset-referenced tokens — A type of crypto-assets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of several fiat currencies, one or several commodities or one or several crypto-assets, or a combination of such assets.

Electronic money token or e-money token — A type of crypto-assets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by being denominated in (units of) a fiat currency.

Utility token — A type of crypto-assets which are intended to provide access digitally to an application, services or resources available on a distributed ledger and that are accepted only by the issuer of that token to grant access to such application, services or resources available.

Crypto-asset service provider — Any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis;

Crypto-asset service — Any of the services and activities listed below relating to any crypto-assets.

• The custody and administration of crypto-assets on behalf of third parties.
• The operation of a trading platform for crypto-assets
• The exchange of crypto-assets for fiat currency
• The exchange of crypto-assets for other crypto-assets
• The execution of orders for crypto-assets on behalf of third parties
• The placement of crypto-assets
• The reception and transmission of orders for crypto-assets on behalf of third parties
• The advice on crypto-assets
• The execution of payment transactions in asset-referenced tokens

Note

This article is based on the draft of the proposed MiCA Regulation circulating at the time of publication, a copy of which Bitquery has obtained from public sources. It does not constitute legal or regulatory advice.

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Bitquery is a set of software tools that parse, index, access, search, and use information across blockchain networks in a unified way. Our products are:

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