Crypto Needs Cohesive Regulation – A Look at Europe’s MiCA

In the ever-evolving world of blockchain and cryptocurrency, a cohesive regulatory and business development ecosystem is crucial to foster collaboration and innovation. A fragmented world, where companies have to comply with different rules in every country they operate in, makes building the decentralized economy harder.

Recently, Crypto Oasis, Crypto Valley, the DLT Science Foundation and Inacta Ventures joined forces to unveil the Inaugural Global Protocol Report, designed to help the industry navigate an increasingly complex world of regulation and protocol development.

Here is a contributed excerpt, written by Timea Nagy, senior legal counsel at AlpinumLaw, a Zug-based law firm, about Markets in Crypto-Assets Regulation (MiCA), Europe’s sweeping crypto standards that come into force this year, allowing companies to harmonize their offerings across all 27 members countries.

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Looking at the cryptocurrency landscape, it’s challenging how regulations can vary so greatly depending on where you are in the world, involving different regions, legal jurisdictions, and governing bodies. In an effort to create a more cohesive framework, the European Union (EU) has taken a significant step by introducing the Markets in Crypto-Assets Regulation (MiCA). This initiative could potentially serve as a blueprint for other jurisdictions around the globe. As of now, MiCA stands as a beacon of possibility for harmonizing Crypto regulations on an international scale.

MiCA isn’t just a standalone regulation; it’s a crucial piece of the comprehensive digital finance strategy devised by the European Commission. This broader strategy encompasses various aspects, including the forthcoming Regulation on digital operational resilience (DORA), which has provisions extending to crypto-asset service providers. Another noteworthy inclusion is the new Regulation centered around a distributed ledger technology (DLT) pilot regime, focusing on enhancing the functioning of financial market infrastructures built upon DLT principles.

The regulation itself casts a wide net, covering a range of subjects. From those issuing crypto-assets without backing to stablecoins, and from the platforms where crypto-assets are traded to the wallets where they’re stored, it seeks to provide a cohesive regulatory framework. This regulation defines crypto-assets as digital representations of value or rights, transferable and storable electronically. It categorizes them into utility tokens, asset referenced tokens, and electronic money tokens – effectively enveloping crypto-assets that aren’t presently regulated by existing financial services laws.

The new regulation emphasizes transparency, disclosure, authorisation, and supervision, all of which hold significant sway. Notably, Crypto-asset service providers (CASP) are required to obtain authorisation from a national competent authority, allowing them to offer their services across the entire EU. This authorisation essentially acts as a passport for their operations within the union. But what does this mean for Switzerland or other non-EU countries?

Switzerland, as well as any other non-EU country are affected by MiCA as long as they provide Crypto related businesses in EU countries. Meaning, Swiss companies will need to analyze whether they fall under the MiCA provisions; if so – whether they have the necessary license or not.

Scope. In general, MiCA applies to three categories of persons, (i) issuers of crypto-assets, (ii) CASPs and (iii) any person, in respect of acts that concern trading in crypto-assets that are admitted to trading on a trading platform for crypto-assets operated by an authorized crypto-asset service provider, or for which a request for admission to trading on such a trading platform has been made. Furthermore, MiCA distinguishes between three types of crypto-assets:

Asset references token, means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.

Electronic money token is a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.

Utility token refers to crypto-assets that are only intended to provide access to a good or a service supplied by its issuer. NOTE! Outside the scope of MiCA are: DeFI protocols, pure NFTs, CBDCs, security tokens or other crypto-assets that qualify as financial instruments according to MiFID II. Licensing. MiCA introduces licensing requirements for crypto-asset service providers, issuers of asset-referenced tokens and issuers of electronic money tokens. In general, CASP will trigger the licensing requirements, unless they are already a licensed credit institution under MiFID. As mentioned before, even with an existing license, the company would still need to notify the competent authorities about its intention to offer crypto-asset services. Supervision. At the member state level, competent authorities will hold the responsibility for overseeing CASPs and ensuring adherence to the stipulations outlined in MiCA. CASPs with an active user base exceeding 10 million will fall under the category of “Significant CASPs.” While these Significant CASPs will continue to be monitored by the relevant competent authorities, the European Securities and Markets Authority (ESMA) will be vested with an “intervention power.” This authority empowers ESMA to enact measures that either prohibit or restrict the provision of crypto-asset services by CASPs, particularly when there are perceived threats to market integrity, investor protection, or financial stability.

For stablecoins, the oversight landscape involves the European Banking Authority (EBA) stepping in. Specifically, stablecoins with user counts surpassing 10 million or possessing an asset reserve exceeding €5Bn will fall under EBA’s supervision. Additionally, the European Central Bank will possess the authority to exercise veto rights concerning any stablecoin it deems concerning, thereby influencing its operations.

Market abuse restrictions. Crypto-assets that do not qualify as financial instruments under MiFID II will fall outside the scope of the EU Market Abuse Regulation. However, MiCA sets out its own market abuse rules for crypto-asset markets in an attempt to guarantee market integrity. These rules will be applicable to crypto-assets that are admitted to trading on a trading platform for crypto-assets operated by an authorized cryptoasset service provider.

Conclusion. It is without any doubt that the influence of MiCA on CASPs is bound to be substantial. This means that we might be looking at extended and potentially demanding phases for implementing the necessary changes. Despite the potential hurdles that lie ahead, we’re maintaining an optimistic outlook as we’re prepared to tackle the challenges not only from a practical perspective but also from a legal standpoint.

For more from the Inaugural Global Protocol Report, including analysis of 50 leading crypto projects, click here.