January 26, 2024

The EU Markets in Crypto-Assets (MiCA) Regulation Explained


The Markets in Crypto-Assets Act, or MiCA, a landmark regulatory framework in the EU, is now a reality. The European Parliament cast its definitive vote on April 20, 2023, and the Act was subsequently ratified by the Economic and Financial Affairs Council of the EU on May 16, 2023. This acceptance marks the successful conclusion of the legislative process, signifying that the Act has been officially adopted and now is anticipated to enter into force on the 20th day following its publication in the Official Journal of the European Union.

MiCA establishes a unique regulatory environment in the EU for crypto businesses, offering greater clarity on the overarching rules for industry players. It's designed to deliver transparency, uniformity, and security in the realm of digital assets.

This article will provide a comprehensive overview of the now-effective MiCA Act, delving into its key aspects, such as:

  • What is MiCA?
  • Who and what does MiCA apply to?
  • What are the key points of the MiCA Regulation?
  • When will MiCA become effective?

To learn more, you can view the full text of the EU MiCA legislation.

All the information in this article is provided for informational purposes only and should not be considered as investment, tax or legal advice.

This article is brought to you by the Legal Nodes team. We're helping businesses build global legal structures and navigate regulations. Speak to us to learn how we can help you with MiCA compliance.

What is Markets in Crypto-Assets (MiCA) Regulation? 

Markets in Crypto-Assets Regulation is a draft legislation that aims to create an all-encompassing legal framework for the regulation of crypto assets in the EU. Essentially, MiCA is taking some of the best practices already found in financial market regulations and applying them to the crypto industry. 

The key objectives of MiCA are: 

  • To replace individual regulations found within several EU nations with one unifying and comprehensive framework
  • To set clearer rules for crypto-asset service providers and token issuers
  • To provide more certainty in the regulation of crypto assets where it is not covered by the existing financial regulations

Who and what will MiCA apply to? 

Businesses covered by MiCA, or crypto-asset service providers (CASPs), include: 

  • Custodial wallets
  • Exchanges for crypto to crypto transactions or crypto to fiat transactions
  • Crypto-trading platforms
  • Crypto-asset advising firms and crypto-portfolio managers

In terms of assets applicability, MiCA covers three types of assets:

  • Asset-referenced tokens (including stablecoins backed by commodities, or one or several currencies) 
  • E-money tokens (stablecoins backed by a single fiat currency)
  • Other tokens, including utility tokens 

MiCA will only apply to NFTs (non-fungible tokens) if the NFT has characteristics that make it similar to one of the assets that MiCA definitely applies to. For example, MiCA rules might apply to an NFT that is like a utility token or a financial instrument. When working on NFT’s token legal design, it will also be important to remember that simply assigning a unique identifier to a token is not an indicator of non-fungibility. Under MiCA, non-fungible tokens issued in large series could be considered fungible and therefore require an authorization. Most likely, this will influence projects that fractionalize NFTs. 

Will MiCA apply to DeFi apps? No, MiCA won’t apply to dApps, as they operate without intermediaries. Because DeFi is a type of dApps, MiCa will also not apply to them. Read more about the best practices for legal structuring a dApp here.

What are the key points of MiCA Regulation?

How does MiCA set itself apart from existing crypto regulations? What are the critical new rules that MiCA will introduce? How are these changes going to impact existing and planned Web3 projects? Here’s what Web3 lawyers and project founders need to know.

Projects operating in the EU will need fewer licenses

With MiCA, individual national Web3 permit regimes will no longer exist. Instead, MiCA introduces one authorization system to be used by all EU countries. CASPs that have been authorized in the countries they are registered in will now be able to provide their services to all EU nations. Typically, national licenses only permit operations in the country they are issued, so MiCA Regulation will allow regional Web3 businesses to operate in larger markets on fewer licenses. 

CASPs will have more obligations and disclosures

Some of the new requirements for CASPs under MiCA will include (but are not limited to): 

  • Having an office in an EU country and having at least one director-resident of the EU country 
  • Implementing anti-money laundering (AML), continuity of services, and data security policies and procedures
  • Following rules on marketing communication
  • Adopting certain practices for preventing market abuse and handling complaints correctly (this is aimed at avoiding more cases like Terra Luna and FTX). An example of a new practice is that CASPs will need to warn both their clients and their users about risks of transactions they make
  • Acting honestly, fairly and professionally
  • Publicly sharing pricing, cost, and fee policies along with information on the environmental impact of the crypto-asset activities.

More rules for token issuance processes

Web3 founders planning to issue tokens will be required to publish a whitepaper and have a legal entity that issues tokens and operates them in accordance with the whitepaper. That means decentralized TGEs (Token Generation Events) with non-custodial treasuries or IEOs/IDOs (Initial Exchange Offerings and Initial Dex Offerings) with anonymous issuers won’t be possible. However, smaller token offerings may be exempt from this requirement. If a token doesn’t have an issuer, such as BTC, the whitepaper prepared by the exchange must warn users of the potential risks of the token and the exchange will bear all the responsibility for this token. To help issuers and exchanges, MiCA outlines what the whitepapers should look like, clarifying existing rules that were somewhat vague and unclear.

Algorithmic stablecoins are banned and asset-backed stablecoins must comply with strict rules

Say goodbye to algorithmic stablecoins (at least, in the EU)! Along with banning algorithmic stablecoins, MiCA will also require fiat-backed stablecoins to be backed by a liquid reserve that has a 1:1 ratio. 

Other requirements for stablecoin issuers will include but not be limited to: 

  • Implementing certain procedures to safeguard the backing assets and reserve assets
  • Establishing complaints-handling procedures and procedures for preventing market abuse and insider trading
  • Establishing and maintaining a reserve of assets insulated from other assets which shall be held in custody by a third party.

When will MiCA become effective? 

The Markets in Crypto-Assets Act (MiCA) has a clear roadmap ahead following its adoption. Here's a concise timeline to help clarify when various elements of the MiCA regulation will take effect:

  • MiCA is expected to officially enter into force 20 days post its publication in the Official Journal of the European Union, which will occur around June 2023.
  • By June 2024 (20 days post acceptance, plus 12 months), the European Securities and Markets Authority (ESMA), in collaboration with the European Banking Authority (EBA), is expected to have prepared draft Delegated Acts. Around this same time, Titles III and IV of the MiCA regulation, which cover asset-referenced and e-money tokens, are set to begin application.
  • Finally, by December 2024 (20 days post acceptance, plus 18 months), the rest of the MiCA rules should be in full effect. Therefore, by the close of 2024, all components of the MiCA regulation should be actively governing crypto-business operations within the EU.

MiCA will have big impacts and Web3 businesses should prepare for this regulation 

MiCA is going to provide a long-awaited regulatory framework for crypto companies operating in the EU, which is a good thing for many crypto businesses, and will mean more work to ensure everyone stays compliant with the law. Moreover, upon successful implementation, MiCA will likely serve as a good example for other regulators across the globe who are considering the introduction or adaptation of existing laws to fit crypto market needs. Hopefully, MiCA will promote a new trend of a much less fragmented regulatory landscape for crypto and web3 projects around the world. 

If you want your project to comply with MiCA, start early by understanding MiCA’s scope, whether and how it might impact your business and plan accordingly to remain compliant. At Legal Nodes we are following this topic closely and will be providing more insights and predictions on how we expect MiCA to impact the crypto world. Subscribe to our newsletter, the Web3Blast, to get early updates straight into your inbox.

If you'd like to get help with preparing your project for MiCA, Legal Nodes might help you. Fill out a form and we'll be in touch with you with the next steps.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

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