Regulatory tightening and EU MICA - risk or opportunity

 

What is MiCA? 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937

It’s part of a broader digital finance package, which, inter alia, also includes the Digital Operational Resilience Act (DORA) and the DLT Pilot Regime Regulation

MiCA is expected to enter into force in 2024.

 

Main idea of MiCA

The idea of ​​creating common regulations for the entire European Union is aimed at the development of crypto-assets and wider use of DLT by introducing a safe and proportionate framework to support innovation and fair competition.

The divergent frameworks, rules and interpretations of both crypto-assets and crypto-asset services throughout the Union hinder the service providers’ ability to scale up their activity at EU level.

This means that service providers of these inherently cross-border products and services are forced to familiarise themselves with several Member States’ legislations, obtain multiple national authorisations or registrations and comply with often divergent national laws, sometimes adjusting their business model throughout the Union.

 

A dedicated and harmonised framework should support innovation and fair competition while ensuring a high level of consumer protection and market integrity in crypto-asset markets. 

 

MiCA – main goals

1. Legal certainty - ensure for crypto-asset markets a legal framework, clearly defining the regulatory treatment of all crypto-assets that are not covered by existing financial services legislation. 
2. Supporting innovation – support the development of crypto-assets and wider use of DLT by creating a legal framework that supports innovation and fair competition. 
3. An appropriate level of consumer and investor protection and market integrity.
4. Ensuring financial stability – creating safeguards to counter potential threats to financial stability and an orderly monetary policy.

 

MiCA – definitions of crypto-assets world

The regulation introduces a number of definitions that allow you to organize the world of crypto-assets. The regulation contains, among others, definitions of:

1. Distributed ledger technology or DLT - a type of technology that supports the distributed recording of encrypted data
2. Crypto-asset - a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology
3. Asset-referenced token - a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets
4. Electronic money token or e-money token - a type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender
5. Utility token - a type of crypto-asset which is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token

 

MiCA – definitions of crypto-assets world

Another important definition in MiCA is the definition of a crypto-asset service provider.

Crypto-asset service provider - any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis.

Crypto-asset service means any of the services and activities listed below relating to any crypto-asset:

• The custody and administration of crypto-assets on behalf of third parties;
• The operation of a trading platform for crypto-assets;
• The exchange of crypto-assets for fiat currency that is legal tender;
• The exchange of crypto-assets for other crypto-assets;
• The execution of orders for crypto-assets on behalf of third parties;
• Placing of crypto-assets;
• The reception and transmission of orders for crypto-assets on behalf of third parties
• Providing advice on crypto-assets;

 

What does MiCA mean for EU businesses? 

MiCA imposes many formal and legal obligations on all market participants, which should detect potential problems and prevent potential threats.

All this should protect customers from situations such as the collapse of the Luna currency or FTX exchanges.

The application that legal persons intending to provide services in the field of crypto-assets should submit to the competent authority should include, among others:

• Name, including the legal name and any other commercial name to be used, the legal entity identifier of the applicant crypto-asset service provider, the website operated by that provider, and its physical address
• Programme of operations setting out the types of crypto-asset services that the applicant crypto-asset service provider wishes to provide, including where and how these services are to be marketed
• For all natural persons involved in the management body of the applicant crypto-asset service provider, and for all natural persons who, directly or indirectly, hold 20% or more of the share capital or voting rights, proof of the absence of a criminal record in respect of infringements of national rules in the fields of commercial law, insolvency law, financial services law, anti-money laundering law, counter-terrorism legislation, and professional liability obligations
• Description of the applicant crypto-asset service provider’s internal control mechanism, procedure for risk assessment and business continuity plan
• Descriptions both in technical and non-technical language of the applicant crypto-asset service provider’s IT systems and security arrangements

 

Also what is important 

Crypto-asset services shall only be provided by legal persons that have a registered office in a Member State of the Union and have been authorised as crypto-asset service providers.

An example of the documents required to obtain a license and the conditions that a company must meet shows how the European Union wants to protect customers from fraudulent companies.

But on the other hand, it will be a challenge for companies from the crypto-assets market to adapt to all formal issues.

 

What are the risks associated with the implementation of MiCA?

• Transfer of requirements and regulations from the world of traditional finance to the world of Crypto without taking into account the specifics of the crypto-assets market which may result in slowing down the development of entities operating on the crypto-assets markets
• Problem with understanding the rules of functioning crypto-assets markets by the authorities delegate to perform control functions due to the lack of appropriate training and the appropriate number of specialists in this field

 

What are the opportunities offered by MiCA?

• Regulation of the crypto-assets market will open the possibility of cooperation between crypto-asset service providers and financial companies. 
• The introduction of common definitions for the entire market describing the world of crypto-assets will make it easier for people who have not had contact with it before to understand it. This will be a step towards the adoption of DLT and crypto technologies by other sectors of the economy.
• A common legal framework for the entire market, supporting innovation and fair competition, will eliminate entities acting dishonestly or illegally from the market.

 

Even though MiCA has a fairly wide scope, it does not cover certain sectors of the crypto-asset markets that are very popular, such as: 

•  CBDC
•  NFT 
•  DeFi