MiCA is a framework developed to standardize the regulation of crypto-asset markets within the European Union.
Originally proposed in 2019, Markets in Cryptoassets (MiCA) is a framework developed to standardize the regulation of crypto-asset markets within the European Union.
With its advent, the bloc will be the first major jurisdiction with a clearly defined regulatory framework for crypto-assets, bringing much-needed clarity and stability to the rapidly evolving crypto industry.
By establishing uniform rules that crypto-asset issuers and service providers must adhere to, MiCA could help foster a conducive environment for innovation while ensuring investor protection and financial stability while preserving market integrity.
Some believe it could position the EU as a hotbed for crypto innovation and talent in the coming years.
The new regulatory framework covers three types of assets:
- Asset-referenced tokens (ART)
- Electronic money tokens (EMT)
- Broader category of "other crypto assets not covered by existing EU law”, i.e. utility tokens.
ARTs and EMTs have additional requirements, like adherence to the new Travel Rule (discussed later), which mandates the sharing of transaction information to combat money laundering and terrorism financing.
What Are Asset-referenced Tokens (ART)?
An asset referenced token (ART) is a cryptographic token that can be exchanged, and its value can be pegged to more than one fiat, physical asset, cryptocurrency, or a combination of all three. For instance, a gold-backed token.
What Are Electronic Money Tokens (EMT)?
An electronic money token (EMT) is a cryptographic token that is pegged to a single fiat currency, and can be used for exchange. A USD-pegged stablecoin is an example of an EMT.
What Are the Key Points?
Applicable entities will need to meet clear registration and authorization requirements to provide issuance, exchange and/or wallet services to customers in the EU.
Issuers of Asset-Referenced Tokens (ARTs) and E-Money Tokens (EMTs) must obtain authorization from their respective National Competent Authorities (NCAs) before offering these tokens. They are also required to publish a crypto-asset whitepaper. Notably, EMTs can only be issued by institutions authorized under the E-Money Directive (2009/110/EC).
These firms must comply with service-specific and general requirements if they are to operate legally in the EU.
Issuers of ARTs must adhere to reporting guidelines, including providing quarterly reports for ARTs valued above €100 million. They are also required to maintain a reserve of assets that is operationally segregated from the issuer's estate and other tokens' reserve of assets. On top of this, they need to meet specific reserve requirements and have a recovery plan to ensure the orderly redemption of ARTs.
MiCA will also enforce stringent custody and redemption policies, requiring issuers to establish secure custody policies and provide ART holders with permanent redemption rights — ensuring they can redeem their ARTs at any time.
By introducing a market abuse regime, MiCA helps make it easier to prevent and detect market abuse. It achieves this by forcing firms to implement relevant systems and procedures that make tracking abuse much simpler. Significant issuers of ARTs and EMTs will be subject to stricter capital and interoperability requirements and will need to establish a l'iquidity management policy — helping to mitigate risks.
Importantly, the MiCA framework requires crypto-asset service providers to collect information about cryptocurrency transfers, including details about the sender and recipient. It mandates crypto businesses in the EU share transaction information for financial transparency, especially in anti-money laundering and counter-terrorism financing contexts.
When Does MiCA Come Into Effect?
The new crypto licensing framework was formally signed into law by the bloc in May 2023 and entered into force in June 2023.
Source: esma.europa.eu
That said, many of the new rules will not come into effect until June 30, 2024, and different parts of the regulation will continue to come into effect moving to the end of 2024, or possibly extending into January 2025. By that time, all components of the MiCA regulation should be fully operational within the EU.
The implementation of the Markets in Crypto Assets (MiCA) regulation requires the establishment of various technical standards and guidelines. These will be drafted in the coming months by the European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) and will involve discussions with various industry stakeholders and operators.
The new standards will provide clear guidelines on how crypto-asset issuers and service providers should conduct their operations within the EU to ensure compliance with the regulation, maintain financial stability, and protect investors.
Additionally, they will address key aspects such as the issuance, distribution and marketing of crypto-assets, the operation of crypto-asset trading platforms, and the governance and oversight of crypto-asset service providers providing much-needed clarity to entities covered under its scope.
Public Reaction
The MiCA regulatory framework is widely billed as a landmark milestone for the EU, with it potentially paving the way for similar regulation in other major jurisdictions.
The new framework has garnered a mixed response from the crypto community, with some praising the new rules for providing an equal-access market for firms dealing with digital assets.
Others say doesn’t go far enough or is too restrictive in scope. Indeed, the framework doesn’t currently have explicit provisions for decentralized finance (DeFi) platforms, staking or non-fungible tokens (NFTs). This leads some to believe that a more comprehensive MiCA 2.0 framework is likely to emerge in the years ahead, ensuring the framework keeps up with recent crypto innovations.
Indeed, Binance CEO Changpeng Zhao hailed the new regulations as a "pragmatic solution" to the challenges faced in the industry, with Binance already readying itself to comply with the new rules.
Meanwhile, Elizabeth McCaul, a member of the European Central Bank's supervisory board, said that MiCA may not be sufficient to deal with some of the largest crypto entities — arguing that they may need additional supervision or more stringent rules to follow.
In a recent blog post, McCaul warned of gaps in the regulation, stating:
“In line with the principle of proportionality, significant CASPs should be subject to both stricter requirements and enhanced supervision: neither of the two is catered for by MiCA.”
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