MiCA Regulation: New regulatory framework for Crypto-Assets Issuers and Crypto-Asset Services Providers in the EEA

On 29 June 2023, the Regulation (EU) 2023/1114 (the "MiCAR") entered into force. The MiCAR will apply from 30 December 2024, except for Titles III and IV, which will apply from 30 June 2024. The MiCAR introduces a new, harmonised regulatory framework for crypto-assets and related services. It is expected that the MiCAR will have a significant impact on the EEA market in crypto-assets.

Three types of Crypto-Assets

The MiCAR defines crypto-assets as "a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology". It differentiates between the following three types of crypto-assets (tokens):

• Utility Token – A type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer
• Asset-referenced Token (ART) – A type of crypto-asset that is not an electronic money token and that aims to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies
• E-Money Token (EMT) – A type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency

In addition, the MiCAR introduces the notion of significant tokens for ARTs and EMTs. The categorisation of EMTs and ARTs as significant tokens will be performed by the European Banking Authority (the "EBA") and trigger the application of additional (stricter) requirements to issuers of such crypto-assets.

In a broader sense, ARTs and EMTs are the so-called stable coins that are meant to maintain a stable value by referencing to other values, or a combination thereof. Given that the MiCAR introduces a harmonised regime for the issuance and public offering of such stable coins, as well as a harmonised framework for intermediary activities in relation to crypto-assets across all EU Member States, it is expected that this will give the EU capital market a strong push towards more rapid digitalisation.

Crypto-Assets not covered by the MiCAR

Whilst the MiCAR closes the existing regulatory gap in relation to crypto-assets, it does not affect the regulation of crypto-assets that already fall within the scope of existing regulatory frameworks. In addition, some Non-Fungible-Tokens ("NFTs") will be outside the scope of the MiCAR.

• The MiCAR does not apply to crypto-assets which qualify as financial instruments within the meaning of the MiFID II, deposits, funds (except if they qualify as e-money tokens), securitisation positions, non-life or life insurance products and pension products (Article 2(4)). By way of example, investment services and ancillary services in relation to securities tokens which qualify as transferable securities under the MiFID II will not be subject to requirements under the MiCAR.
• Some types of the NFTs do not qualify as crypto-assets within the meaning of the MiCAR (Article 2(3)): All NFTs that are unique and not fungible will be outside the scope of the MiCAR. In contrast, whether fractionalised and interchangeable NFTs fall within the scope of the MiCAR needs to be assessed on a case-by-case basis.

Public Offering and Issuance of Crypto-Assets

The public offering of crypto-assets is subject to a sophisticated regulatory regime under the MiCAR. The requirements under the MiCAR vary depending on whether the offering relates to (i) other crypto-assets, (ii) the ART, or (iii) the EMT.

Other crypto-assets

For crypto-assets that neither qualify as ARTs nor as EMTs, the MiCAR provides for a notification requirement to competent authorities and focusses on obligations of offerors and firms seeking admission to trading (Title II, Articles 4 – 15). The public offering and/or admission to trading are subject to the requirement to draw up, notify and publish a crypto-asset white paper ("CA-WP") (Article 4). Both the content and the form of the CA-WP are subject to detailed requirements under the MiCAR (Article 6). The MiCAR introduces the notion of liability for the information given in a crypto-asset white paper (Article 15) and the CA-WP and marketing communications have to be notified to the competent authority (Article 8).

The public offering to fewer than 150 persons per Member State and the public of crypto-assets whose total consideration does not exceed 1 million Euros over the last 12 months are exempted from the above requirements (Article 4(2)).

Asset-referenced tokens (ARTs)

The public offering and admission to trading of ARTs is subject to further stricter requirements (Title III, Articles 16 – 47). In addition to the CA-WP related requirements, the firms making an ART-offer to the public, or seeking the admission of an ART to trading are required to apply for an authorisation (Article 16) and meet certain fit and proper requirements (Article 21). The CRR credit institutions issuing ARTs will be exempted from the authorisation requirement and have to notify the competent authorities at least 90 working days before issuing ARTs for the first time (Article 17). The issuer of ARTs is subject to own funds requirements (Article 35) and obliged to have a reserve of assets that meet certain composition requirements and are properly managed (Article 36). The reserve assets have to be held in custody in accordance with a custody policy (Article 37). The issuer shall also draw up a recovery plan in case of events that pose a significant risk of disrupting operations and fail to meet the requirements applicable to the reserve (Article 46). Furthermore, the issuer has to maintain an operational redemption plan of assets to support the orderly redemption of each ART (Article 47). Both the recovery and redemption plan have to be notified to the competent authority. If the ART is categorised as significant, the issuer will be supervised by the EBA and has to comply with certain liquidity requirements (Article 43).

ARTs with an average outstanding value that does not exceed five million Euros over a 12-month period, and/or that are addressed solely to qualified investors and can only be held by such qualified investors, are exempted from the regulatory requirements (Article 16(2)).

Electronic money tokens (EMTs)

The public offering of EMTs, the admission of EMTs to trading and requirements for issuers of EMTs are set out in the Title IV of the MiCAR (Article 48 – 58). Unlike ARTs, firms wishing to issue and offer EMTs will have to be authorised either as a CRR credit institution or an electronic money institution under the E-Money Directive (the "EMD") (Article 48(1)). No possibility to become authorised under the MiCAR is foreseen in this respect. The issuance and redeemability of EMTs are subject to requirements under the MiCAR and not the EMD (Article 49). The MiCAR provides for a strict prohibition of granting interest in relation to EMTs (Article 50). Providing information in the CA-WP that is not complete, fair or clear, or that is misleading, can give rise to issuer's and its management's liability (Article 52). As in the case of ARTs and other crypto-assets, the offering to the public and the admission to trading require the firms to notify the CA-WP, and the notification needs to meet detailed content and form requirements of the competent authority (Article 51). The issuers of EMTs are required to deposit at least 30 per cent of the funds received in separate accounts in credit institutions and invest the remaining funds in secure, low-risk assets that qualify as highly liquid financial instruments (Article 54). As in the case of the issuers of ARTs, EMT issuers are required to draw up recovery and redemption plans and notify such plans to the competent authority (Article 55).

The EBA will supervise issuers of EMTs that are categorised as significant, which will be subject to certain further requirements. The issuer of EMTs may opt-in for a voluntary classification of the EMT as a significant EMT.

Crypto-Assets Services

The core notion of the MiCAR is the introduction of a harmonised prudential and business conduct framework that applies to the crypto-asset service providers (the "CAS-Providers") (Title V, Articles 59 – 85).

CAS-Providers are defined in Article 3(1) no. 15 as legal persons or other undertakings whose occupation or business is the provision of one or more crypto-asset services to clients on a professional basis.

The MiCAR provides for the following types of crypto-asset services:

• Operation of a trading platform for crypto-assets: the management of one or more multilateral systems, which bring together or facilitate the bringing together of multiple third-party purchasing and selling interests in crypto-assets, in the system and in accordance with its rules, in a way that results in a contract, either by exchanging crypto-assets for funds or by the exchange of crypto-assets for other crypto-assets (Article 3(1) no. 18).

Whilst the definition remains silent on whether the multiple third-party purchasing and selling interests in crypto-assets have to be matched in accordance with non-discretionary rules (as is the case of MTFs under the MiFID), Article 76(1)(e) of the MiCAR provides that the operator has to set non-discretionary rules to ensure fair and orderly trading and objective criteria for the efficient execution of orders.

• Providing custody and administration of crypto-assets on behalf of clients: safekeeping or controlling of crypto-assets on behalf of clients, or of the means of access to such crypto-assets, where applicable in the form of private cryptographic keys (Article 3(1) no. 17).

Custody of crypto-assets encompasses the safekeeping or control over the crypto-assets. This will usually involve the storage of the cryptographic keys that are required to "access" and transfer the crypto-asset to third parties. The administration of crypto-assets involves the facilitation of the exercise of the rights attached to the crypto-assets.

• Exchange of crypto-assets for funds or other crypto-assets: the conclusion of purchase or sale contracts concerning crypto-assets with clients for funds or other crypto-assets by using proprietary capital (Article 3(1) no. 19 and 20).

This crypto-asset service is structurally similar to dealing on own accounts under the MiFID II that involves trading against the firm's proprietary capital. The exchange of crypto-assets is characterised by a service element (i.e. the firm engages in such activity to service its clients as opposed to entering into transaction for own purposes).

• Execution of orders for crypto-assets on behalf of clients: the conclusion of agreements, on behalf of clients, to purchase or sell one or more crypto-assets or the subscription on behalf of clients for one or more crypto-assets and includes the conclusion of contracts to sell crypto-assets at the moment of their offer to the public or admission to trading (Article 3(1) no. 21).

The execution of orders for crypto-assets on behalf of the client requires the firm to act in the best interest of the client and take all necessary steps to obtain the best possible execution result for the client.

• Reception and transmission of orders for crypto-assets on behalf of clients: the reception from a person of an order to purchase or sell one or more crypto-assets or to subscribe for one or more crypto-assets and the transmission of that order to a third party for execution (Article 3(1) no. 23).

When receiving and transmitting orders for crypto-assets, the firm acts as the messenger and does not interpose itself in the transaction as such (i.e. does not become party to the contractual arrangement of the underlying transaction).

• Providing advice on crypto-assets: offering, giving or agreeing to give personalised recommendations to a client, either at the client's request or on the initiative of the crypto-asset service provider providing the advice, in respect of one or more transactions relating to crypto-assets, or the use of crypto-asset services (Article 3(1) no. 24).
• The provision of personal recommendations to a client involves communication with the client that gives consideration to the client's personal circumstances, such as its investment objectives and/or risk appetite and implies that a specific investment decision would be aligned with such personal circumstances.
• Placing of crypto-assets: means the marketing, on behalf of or for the account of the offeror or a party related to the offeror, of crypto-assets to purchasers (Article 3(1) no. 22).

Unlike in the case of placement business within the meaning of the MiFID II (i.e. placement without a firm commitment basis), the placing of crypto-assets has been defined in the MiCAR as a pure marketing service that is performed on behalf of and/or for the account of the offeror. The placing of crypto-assets is a service that is provided to the offeror of crypto-assets. The firm's interaction with the purchasers can qualify as other crypto-asset services if they meet the relevant criteria.

• Providing portfolio management of crypto-assets: managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more crypto-assets (Article 3(1) no. 25).

The definition of the portfolio management of crypto-assets under the MiCAR is very broad and covers situations where the client portfolio includes one or more crypto-assets. This means that asset managers providing discretionary portfolio management will be considered to provide a crypto-asset service as soon as they purchase crypto-assets within the meaning of the MiCAR on behalf of the client (in line with the investment guidelines).

• Providing transfer services for crypto-assets on behalf of clients: providing services of transfer, on behalf of a natural or legal person, of crypto-assets from one distributed ledger address or account to another (Article 3(1) no. 26).

This service does not have an equivalent under the MiFID II and concerns the transfer of crypto-assets from one ledger address to another. The service will be provided in the context of the settlement of transactions in crypto-assets.

Licensing and the EU passport for the CAS-Providers

The provision of crypto-asset services is subject to licensing requirement (Article 59). CAS-Providers applying for a license under the MiCAR will have to meet fit and proper and governance requirements (Article 63(10)), including prudential requirements, such as a permanent minimum capital requirement that varies from 50,000 to 150,000 Euros, depending on the type of the crypto-asset service provided (Article 67(1)(a) and Annex IV). In addition, the CAS-Provider will be required to have in place prudential safeguards equal to one quarter of the fixed overhead of the preceding year (if such amount is higher than the permanent minimum capital) (Article 67(1)(b)). The governance requirements include the suitability requirements that apply to members of the management body (Article 68(1)), as well as the requirement to have in place effective systems, procedures and arrangements to detect and prevent money laundering and terrorist financing (Article 68(8)).

CRR credit institutions, CSDs, MiFID investment firms, electronic money institutions and UCITS managers may provide certain crypto-asset services if they notify the competent authority at least 40 working days before providing those services for the first time (Article 60(1)-(5)).

The CAS-Providers can provide crypto-asset services throughout the EEA, either through the right of establishment, including through a branch, or through the freedom to provide services (i.e. on a cross-border basis). To commence the provision of crypto-asset services in other Member States, the firms have to notify the competent authority of their home Member State in accordance with Article 65 of the MiCAR.

Ownership control procedure

Proposed acquisitions of crypto-asset service providers will be subject to the ownership control process, which will involve assesing the reputation of the proposed acquirer, its financial soundness and the potential impact on the target's ability to comply with regulatory requirements as the result of such acquisition (Articles 83 – 84).

Conduct of business rules and obligations in respect of specific crypto-asset services

Similar to the conduct of business rules under the MiFID II, the MiCAR provides that the CAS-Providers act honestly, fairly and professionally in accordance with the best interests of their clients and prospective clients (Article 66(1)). The communication with the clients will be subject to a requirement to provide information that is fair, clear and not misleading (Article 66(2)). In addition, the CAS-Providers are required to warn clients of the risks associated with transactions in crypto-assets (Article 66(3)).

In addition to such general requirements, the CAS-Providers will be subject to requirements that have been tailored to each of the crypto-asset services:

• Operation of a trading platform for crypto-assets: Article 76
• Providing custody and administration of crypto-assets on behalf of clients: Article 75
• Exchange of crypto-assets for funds or other crypto-assets: Article 77
• Execution of orders for crypto-assets on behalf of clients: Article 78
• Reception and transmission of orders for crypto-assets on behalf of clients: Article 80
• Providing advice on crypto-assets and/or portfolio management: Article 81
• The placing of crypto-assets: Article 79
• Providing transfer services for crypto-assets on behalf of clients: Article 82

The regulation states that all CASPs shall act honestly, fairly and professionally in accordance with the best interests of their (prospective) clients. Information and marketing activities have to be conducted in a clear, fair and non-misleading manner. Price policies, risks and climate or environmental impacts of the crypto-assets have to be communicated openly to the (potential) clients.

Market Integrity and Abuse

In Title VI (Articles 86 – 92), the MiCAR sets out a regulatory regime that is aimed at protecting market integrity and preventing market abuse. This includes the requirements relating to the treatment of inside information that concerns crypto-assets, the public disclosure of such information as well as the prohibition of insider dealing and general market manipulation.

Outlook

The uniform legal framework for crypto-assets provided by the MiCAR will have a significant comprehensive impact on the EU market in crypto-assets, since it will allow firms to offer crypto-assets and provide related services across the Member States. The EEA-based firms that have engaged in such activities in a non-regulated space so far will face licensing processes and will have to implement systems and processes aimed at ensuring compliance with regulatory requirements. In contrast, firms that are already regulated will not have to undergo an additional time-consuming licensing process. That said, regulated market participants planning to provide services in relation to crypto-assets will have to conduct a gap analysis and update their policies and processes to ensure compliance with requirements under the MiCAR.

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