A guide to MiCAR

The Markets in Crypto-Assets (MiCA) regulation signifies a significant leap in European
Union (EU) financial legislation, aimed at addressing the various challenges emerging within
the sphere of crypto-assets and virtual currencies. Functioning within the framework of the
EU’s Fourth Money Laundering Directive, MiCA strives to establish a robust regulatory
framework that ensures consumer protection, reinforces financial stability, and rigorously
combats money laundering and terrorist financing activities across the European crypto
landscape. The regulation sets out strict requirements for Crypto Asset Service Providers
(CASPs) operating within the EU and introduces a new asset and service taxonomy, along
with corresponding licensing prerequisites. MiCA regulation covers virtually all forms of token
offerings and stablecoin issuance plus new market abuse rules for the entire crypto space.
Furthermore, it proposes the creation of a register for all crypto-asset service providers,
which will be accessible to the public and regularly updated.

Crypto-asset services listed by MiCA

MiCA enumerates the following crypto-asset services:

  • Custody and administration of crypto-assets on behalf of third parties
  • Operating a trading platform for crypto assets
  • Exchange of crypto-assets for funds
  • Exchange of crypto-assets for other crypto-assets
  • Execution of orders for crypto-assets on behalf of third parties
  • Placing of crypto assets
  • Reception and transmission of orders for crypto-assets on behalf of third parties
  • Provision of advice on crypto-assets

As one can see, issuing a crypto-asset is not listed as a service. One does not need a
license to issue crypto-assets, however there are detailed requirements and, depending on
the asset type, authorization might be needed.

Asset taxonomy

MiCA identifies 4 different types of assets with respective requirements:

  1. A crypto-asset is a “digital representation of a value or a right, which may be transferred and stored electronically, using distributed ledger or similar technology”. Most crypto-assets should fall under this “catch-all” category, including Bitcoin and Ether.
  2. An utility token is a sub-type of crypto-assets “which is only intended to provide
    access to a good or a service supplied by its issuer”. There are lighter requirements
    for issuing utility tokens, but we don’t expect to see many of these. 
  3. An asset-referenced token (ART) is a token that aims at stabilizing its value by
    referencing/pegging to a basket of currencies, commodities, crypto-assets or other
    single non-fiat currency assets. 
  4. An e-money token (EMT) aims at stabilizing its value by referencing the value of one
    single fiat currency, for example USDC, USDT, BUSD or EUROC. This concept and
    most of its requirements stem from the existing regulatory concept of e-money in the
    EU.

Notably, for the scope of MiCA, it doesn’t matter if your stablecoin is based on a algorithm – it
is in the scope if it matches any of the above mentioned definitions.

Key regulatory requirements and obligations for CASPs

To apply for a CASP license, the application must contain all the following:

  • The name, legal entity identifier, website, and physical address of the applicant
  • The legal status and articles of association of the applicant
  • Program of operations detailing the types of crypto-asset services intended, their marketing strategies, and operational locations
  • A description of the applicant crypto-asset service provider’s governance arrangements
  • For all natural persons involved in the management body of the applicant, 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
  • Proof of collective knowledge, skills, and experience of management
  • Description of internal control mechanisms, risk assessment procedures, and business continuity plans.
  • Technical and non-technical descriptions of IT systems and security arrangements
  • Proof of meeting prudential safeguards.
  • A description of the procedures for handling client complaints, client funds segregation, and market abuse detection systems
  • Where the applicant intends to ensure the custody and administration of crypto- assets on behalf of third parties, a description of the custody policy
  • Where the applicant intends to operate a trading platform for crypto-assets, a description of the operating rules of the trading platform
  • Where the applicant to exchange cryptoassets for fiat currency or crypto-assets for other crypto-assets, a description of the non-discriminatory commercial policy
  • Where the applicant intends to execute orders for crypto-assets on behalf of third parties, a description of the execution policy
  • Where the applicant intends to receive and transmit orders for crypto-assets on behalf of third parties, proof that the natural persons giving advice on behalf of the applicant crypto-asset service provider have the necessary knowledge and expertise to fulfil their obligations.

Key obligations for CASPs

MiCA is very detailed, so let’s highlight some key obligations

  • Permanent minimum capital requirements based on the type of crypto-asset service
  • provided
    • 150 000€ for trading platforms,
    • 125 000€ for custodians and exchanges (brokers),
    • and 50 000€ for all the others
  • Requirement for EU-based offices, management, and at least one director resident in the EU
  • Public availability of conflict of interest policies (description of procedures in place for identifying, preventing, managing and disclosing conflicts of interests)
  • Prudential safeguards, which may take the form of own funds requirement or an insurance policy covering the territories of the Union where crypto-asset services are actively provided
  • Record-keeping of all crypto-asset services, activities, orders and transactions undertaken by the CASP and allowing clients to receive such records
  • Promptly placing any client’s funds with a central bank or a credit institution. CASPs must take all necessary steps to ensure that these client funds held in mentioned institutions remain in separate, distinctly identifiable accounts, independent of the accounts used to hold the their own funds
  • Service providers that rely on third parties for the performance of operational functions, take all reasonable steps to avoid additional operational risk.
    • outsourcing cannot result in the delegation of the responsibility of the CASPs
    • outsourcing cannot alter the relationship between CASPs and their clients, nor the obligations of the service providers towards their clients;
    • CASPs must have direct access to the relevant information of the outsourced services;
    • Crypto-asset service providers shall have a policy on their outsourcing, including on contingency plans and exit strategies;
    • CASPs shall enter into a written agreement with any third parties involved in outsourcing. That written agreement shall specify the rights and obligations of both the CASP and of the third parties concerned and shall allow the crypto-asset service providers concerned to terminate that agreement.
  • Specific Environmental, Social, and Governance (ESG) requirements
  • Comprehensive plan to facilitate a structured cessation of operations
  • Establishing and maintaining a proper complaint handling procedure, including informing clients of a possibility to file a complaint

Depending on the services they provide and due to the specific risks raised by each type of
services, crypto-asset service providers are subjected to requirements specific to those
services.

Requirements for issuing assets

As mentioned above, MiCA identifies 4 different types of assets with respective
requirements: crypto-assets, utility tokens, asset-referenced tokens (ARTs) and e-money
tokens (EMTs).

Issuing assets other than ARTs and EMTs

  • Issuer must be a legal person
  • Requirement to draft and publish a white paper
    • Doesn’t have to be approved previously, but a local competent authority needs to be notified and the white paper has tons of requirements
  • Requirements on marketing communication
  • No ex-ante approval of documents, notification to the home member state competent authority 20 working days prior to publishing white paper
  • Possibility to modify the white paper

There are exemptions for when there is no obligation to draft the white paper and publish it:

  • Crypto-assets are offered for free
  • Crypto-assets are offered to fewer than 150 natural or legal persons per Member State.
  • Small offering – does not exceed 1M EUR (or equivalent) over a period of 12 months.
  • Offer is solely addressed to qualified investors and crypto-assets can only be held by qualified investors.

As mentioned, MiCA’s goal is to also offer protection for consumers and investors. This is reflected in the consumer’s right to withdraw from a crypto-asset purchase within 14 calendar days. Issuer must make this possible without incurring any costs and without asking for a reason or an explanation.

Issuing Asset-Referenced Tokens

  • Asset-referenced tokens are considered more risky and their regulation is heavier:
  • Issuers need to apply for an authorization (including approval of white paper).
  • Exemptions:
    • Over a period of 12 months, the average outstanding amount of asset-referenced tokens does not exceed 5M EUR (or equivalent).
    • Offer solely addressed to qualified investors and tokens can only be held by such.
  • Notification of the white paper to the competent authorities.
  • Publication of the white paper.
  • Strict requirements which the application and its documentation must meet.
  • Modifications to the white paper are allowed, but are subject to new approval by the authority.
  • Obligation to have reserve assets.
  • Obligation to regularly audit and have independent audit of the reserve assets in every six months.
  • Obligation to disclose at least every month the amount of asset-referenced tokens in circulation and the value of the composition of the reserve assets.

Issuing E-money Tokens

  • Authorization required to act as a Credit institution or an e-money institution.
  • Requirement to draft and publish a white paper while also notifying the competent authority.
  • No ex-ante approval of documents, notification to the home member state competent authority at least 20 working days prior to publishing a WP.
  • E-money Directive applies.
  • The above does not apply if:
    • E-money tokens are marketed, distributed, and held by qualified investors and can only be held by qualified investors;
    • If the average outstanding amount of e-money tokens does not exceed 5M EUR (or equivalent) over a period of 12 months.
  • White paper modifications are allowed – subject to informing the public and notifying the competent authority along with reasons.

Additionally, for ARTs and EMTs, MiCA introduces the concept of “significance”. Significant ARTs and EMTs are tokens that reach certain adoption thresholds and have to meet higher prudential, governance, and liquidity requirements. If three of the following criteria (TBA by EU supervisors) are met, ARTs and EMTs are deemed significant:

  • More than 10 million holders.
  • More than €5 billion market capitalization.
  • Whether the number and value of transactions per day are higher than 2.5 million and €500 million, respectively.
  • Whether the issuer is designated a gatekeeper according to the Digital Markets Act.
  • Whether the issuer is deemed significant on an international scale, including the use of the token for payments and remittances.
  • The degree to which the token is interconnected with the financial system.
  • Whether the issuers offer additional ARTs, EMTs, or crypto-asset services.

It is also very important to mention that MiCA Article 36 prevents issuers of asset-referenced tokens and crypto-asset service providers from granting any interest to holders of asset-referenced tokens and Article 45 prevents issuers of e-money tokens and crypto-asset service providers from granting any interest to holders of e-money tokens.

Conclusion

The MiCA regulation has ignited significant debate in social media and crypto communities, raising concerns about increased regulatory burdens and potential impacts on innovation and competition in the sector. Criticism has been directed at MiCA’s exclusion of certain activities, such as staking, lending, or fully decentralized finance, leading to discussions about its effectiveness and calls for MiCA 2.0.

Despite these concerns, we regard MiCA as a crucial step in regulating the crypto industry, offering clarity and security to market participants while emphasizing investor protection. MiCA has the potential to enhance trust and confidence in the sector, potentially fostering greater adoption of crypto-assets and virtual currencies. The future trajectory of the crypto industry in the EU and beyond appears promising with MiCA’s implementation.