Introduction to Regulation of Markets in Crypto Assets (MiCA)
Following public consultations on 24 September 2020 the European Commission (EC) adopted a digital finance package. Intended to develop a competitive EU financial sector, the package includes a digital finance strategy and a proposal for crypto asset regulation. Once implemented with EU member states, it will allow consumers access to innovative financial products and provides consumer protection and financial stability.
MiCA strives to harmonize the legal framework pertaining to crypto assets at the EU level. MiCA is to apply in the territory of all member states upon being adopted. MiCA establishes the legal framework and market for crypto assets. It defines crypto asset issuers as „legal persons offering any crypto asset to the public or seeking to sell them via any trading platform“. It then seeks to regulate both issuers and crypto asset service providers (both of whom are generally unregulated at the EU level). Going forward, any company wanting to provide crypto asset related services in the EU must be in compliance with MiCA. Interestingly, MiCA does not apply to blockchain or any other technology which enables crypto assets to function. Nor, for that matter, will it apply to crypto assets issued and regulated by states and their central banks or those having the characteristics of financial instruments, or e-money (save for e-money tokens which are separately regulated by MiCA).
In contrast with financial/investment service providers who enjoy an established legal framework for their EU operations, there is currently no single legal regulation at the EU level for crypto asset service providers seeking to do business within the single market. This absence, combined with the patchwork system of unilateral measures created by member states to cover the crypto assets market, has lead market participants and consumers to face legal uncertainty, inefficiency, and higher costs. There is also greater risk. The EU hopes MiCA will rectify this situation.
MiCA has four objectives. The first objective is one of legal certainty. For crypto-asset markets to develop within the EU, there is a need for a sound legal framework, clearly defining the regulatory treatment of all crypto-assets that are not covered by existing financial services legislation. The second objective is to support innovation. To promote the development of crypto-assets and the wider use of DLT, it is necessary to put in place a safe and proportionate framework to support innovation and fair competition. The third objective is to instil appropriate levels of customer and investor protection and market integrity. The fourth objective is to ensure financial stability. While some have a quite limited scope and use, others, such as the emerging category od „stablecoins“, have the potential to become widely accepted and potentially systemic.
The MiCA provides the following activities are subject to regulation:
- Crypto asset custody and administration on behalf of third parties;
- Crypto asset trading platform operation;
- Crypto asset exchange for legal tender;
- Crypto asset exchange for other crypto assets;
- Crypto asset order execution on behalf of third parties placing crypto assets;
- Crypto asset order reception and transmission on behalf of third parties; and
- Provision of crypto asset advice.
To obtain a license to provide crypto related services in the EU, a legal entity must have a registered seat in the EU. The legal entity may then submit a request to the competent authority of that EU member state. Upon satisfying all required conditions, the legal entity should receive a permit which may be passported throughout the EU.
The minimum founding capital for crypto asset service providers varies, depending on the type of service, is 50,000 euros, 125,000 euros and 150,000 euros.
Just as in the traditional financial industry where issuer are generally obliged to publish a prospectus, MiCA requires all crypto asset issuers to public a white paper before distributing respective crypto assets to public. The crypto-asset white paper shall be drawn up in a language accepted by the competent authority of the home Member State and, if offered in another Member State, either in a language accepted by the competent authorities of each host Member State notified or in a language customary in the sphere of international finance. The respective summary shall be drawn up in a language accept by the competent authority of the home Member State and in the languages accept by the competent authorities of each host Member State. It should include namely:
- Basic information about the issuer;
- The characteristics of the crypto property to be issued;
- The rights and obligations arising from the crypto assets; and
- The technology behind the project.
The white paper must be submitted to the competent authority at least 20 days before publication, and is not subject to approval. Once published on the issuer’s website, it can be marketed throughout the European Economic Area. The home member states will supervise domestic crypto asset issuers.
Consumers will have a period of 14 calendar days to, cost and condition free, withdraw from their agreement to purchase crypto assets. Finally, due to blockchain´s inherent complexity, lack of security and risk, crypto asset issuers must provide appropriate security measures to protect investors‘ funds.
The national authorities may impose fines of up to 5,000,000 euros or 3% of legal entities´ annual turnover, or 700,000 euros for natural persons. Interestingly, penalties provided by MiCA are separate from the sanctions provided for by the national laws of the member states, which remain in force.