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

February 23, 2023

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

February 23, 2023

Markets in Crypto-Assets, called MiCA for short, is a new set of regulations that are soon to be adopted in the EU. The most current draft was released on Oct 10, 2022 and a vote in the European Parliament is planned for sometime this April 2023. There is a chance it may be delayed to a later date. When adopted and effective, this regulation will create a unique regulatory regime in the EU for crypto businesses and will provide more clarity on the general rules for market players and for the industry.

View the full latest draft of the EU MiCA legislation text here. This article will provide a brief summary of the MiCA Regulation, introducing some of the most important aspects of these new rules, including: 

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

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

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? 

After the “transition period” —18 months after MiCAs eventual adoption—all EU crypto-businesses will need to receive an authorization to operate as a crypto-asset service provider. 

Currently (as of February 2023), MiCA is still pending a final vote in the European Parliament, which will bring MiCA into law. This is why the earliest point at which MiCA could become effective is currently October 2024. Any delays in this vote would ultimately push the adoption date even further into the future.

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.

Disclaimer: the information in this guide is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice. Mentioning any of the assets in this article is not an endorsement to purchase them.

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