The EU’s proposal for the Regulation of markets in crypto-assets (MiCA) is a comprehensive effort to harmonise regulatory requirements and provide legal certainty for the issuance and servicing of crypto-assets across the EU.

EU-wide standardisation of the crypto-asset taxonomy, and robust rules around crypto-asset issuances and servicing, will legitimise and support the growth of the crypto-asset market in the EU. Increased transparency and disclosures will help investors to better understand the risks associated with investing in specific crypto-assets.

In addition, a new supervisory framework will be implemented to oversee the development of crypto-assets which could potentially have a significant impact on financial stability, monetary policy transmission or monetary sovereignty. These crypto-assets designated as “significant” will be supervised by the EBA for asset-referenced tokens, and by both the EBA and the national competent authorities (NCA) for e-money tokens.

The comprehensive MiCA proposal highlights the EU’s commitment to apply the “same business, same risk, same rules” principles to all Financial Services (FS) activities, irrespective of whether it is undertaken by a regulated FS firm or not. Given the focus on proportionality, these rules will largely affect non-FS players looking to disrupt the payments space through issuing global asset-backed or fiat-backed tokens.

Harmonisation of the crypto-asset taxonomy

The MiCA proposal is primary aimed at those crypto products and services not captured by MiFID2 and will harmonise the current fragmentation of crypto-asset taxonomies and frameworks across the EU.  

Crypto-assets covered by this proposal have been broadly classified into three categories, namely utility tokens, asset-referenced tokens, and e-money tokens[1]. 

Key requirements

The comprehensive proposal includes:

- A focus on transparency for crypto-assets issuances - In a bid to increase transparency around crypto issuances, all crypto-assets will require an information document or white paper. The content will vary depending on the type of crypto-assets concerned, but it will need to be written in a fair, clear and non-misleading way. Issuers will also need to notify their designated NCA. While pre-approval is (generally) not required, the NCA will have the power to suspend or prohibit the offering, or ask for further information to be included. After publication, issuers will be able to offer crypto-assets throughout the EU and access EU trading platforms.

- A robust framework for asset-referenced tokens [2] - Asset-referenced tokens have been of great concern to regulators due to the lack of robust governance and liquidity requirements. Under this proposal, they will now be subject to additional requirements, including around the custody of reserve assets, own funds requirements, conflicts of interests, capital requirements, minimum rights for asset holders and the implementation of a wind-down plan. They will have to comply with stricter capital and interoperability requirements and establish a liquidity management policy.

- Regulation of e-money tokens [3] -E-money tokens will be subject to the Electronic Money Directive and the requirements set out in the MiCA proposal. These include the obligation to give a 1:1 claim to token holders, restriction rules on the investment of funds, governance and liquidity management. E-money tokens designated as “significant” will be subject to stricter capital and interoperability requirements.

- Crypto-asset service providers subject to a stricter regime - Crypto service providers will need regulatory authorisation and will be subject to requirements specific to the service they provide, i.e. trading, exchange, execution of orders, placing, reception and transition of orders and advice. Such requirements focus on prudential safeguards and capital requirements, risk management and governance, rules on safekeeping clients’ crypto-assets and funds, as well the creation of a complaint handling procedure, rules on conflict of interests and outsourcing to third-party providers. The proposal also includes new rules to tackle market abuse.

By harmonising requirements across the EU, the MiCA proposal should bring clarity to firms, particularly incumbent financial services firms, who will be able to leverage their existing governance and risk management frameworks to engage with crypto products or services.

This proposal has been published alongside the pilot for the use of distributed ledger technology for markets infrastructures and aims to support crypto-asset markets and underlying innovative market infrastructures, while ensuring adequate consumer protection and market integrity.

While this proposal should help firms - crypto issuers, service providers and other market participants - to shape their crypto strategy, they will need to wait for the detail of the final regulation and the accompanying EBA and ESMA technical standards to understand the full operational impact. In the meantime, for the next two to three years, firms will have to operate in a largely fragmented crypto regulatory landscape across the EU.

[1] Utility tokens “provide digital access to an application, services or resources available on a digital ledger”.

[2] Asset-referenced tokens aim to maintain a stable value by referencing a basket of currencies that are legal tenders, one/several commodities, one/several other crypto-assets, or a basket of such assets. These tend to be used as a means of payments to buy goods/services and as a store of value.

[3] e-money tokens aim to stabilise their value by referencing fiat currency.