On 30 June 2022, the Council of the EU and European Parliament reached a provisional political agreement on the Markets in Cryptoassets (MiCA) regulation, the EU’s comprehensive framework that will harmonise regulatory requirements for the issuance and servicing of most cryptoassets.
The provisional agreement is a key milestone on a legislative journey that began almost two years ago with the EU Commission’s initial proposal. It means that the EU will likely have a crypto framework in place by 2024, fulfilling the commitment it made in 2020 .
Details on the provisional agreement are high-level for now – limited to two short readouts from the Council  and Parliament  – but they still provide clarity on the direction of travel for four key components of the MiCA framework. Firms will now eagerly await the detailed framework to understand its full operational impact. This will likely only become clearer from the Autumn onwards, with the publication of the final MiCA regulation, followed by regulatory technical standards (RTS), after its entry into force.
What do we expect the MiCA to cover?
Based on readouts from the Council and Parliament, the high-level approach to four key components of the MiCA is clearer.
MiCA will cover most cryptoassets not captured by existing FS legislation (e.g. MiFID II), including unbacked cryptoassets and stablecoins. A few types of cryptoassets are not fully in scope - for example, non-fungible tokens (NFTs) will be out of scope unless their unique features mean that they are classed as a cryptoasset as defined by MiCA, or a financial instrument as defined by MiFID II. Within 18 months the EU Commission will prepare an assessment and, if deemed necessary, propose a tailored, horizontal framework for NFTs.
2. Framework for stablecoin issuers
MiCA will require stablecoin issuers to hold a liquid reserve, with a 1:1 ratio, partly in the form of deposits. Issuers will also need to offer all stablecoin holders a claim at any time, free of charge.
In terms of supervisory architecture, significant stablecoins will be supervised by the European Banking Authority (EBA). Early indications suggest that this will likely be stablecoins with more than 10 million users or a reserve worth more than EUR 5 billion, although these thresholds will only be confirmed once the legal text is finalised.
In addition, all stablecoin issuers will need to have a EU presence. This location requirement for issuers will enable regulators to better supervise the creation and operation of the stablecoin.
There will also be requirements and constraints placed on stablecoins based on a non-European currency and widely used as means of payment. However, issuers of this type of stablecoin will need to wait for the final text to understand the detail of any constraints. For example, whether there will be a daily cap on the total value of transactions, and how thresholds for “widely used as means of payment” will be calculated. Only then will issuers based outside the EU understand the full implications of offering stablecoins or related services in the EU.
3. Framework for cryptoassets service providers (CASPs)
As expected, CASPs will need an authorisation to operate in the EU. National competent authorities (NCAs) will be required to issue these within three months of application. NCAs will have to send information on the largest CASPs to ESMA regularly, although there is no clarity yet on the detail that needs to be reported.
We expect significant CASPs will be supervised by NCAs but ESMA will have powers to restrict their services if there are threats to core regulatory objectives – market integrity, consumer protection or financial stability. Early indications (subject to MiCA text being finalised) suggest a CASP will likely be significant if it has over 15 million active users.
CASPs will also be subject to robust requirements to protect consumers’ crypto wallets and be liable if they lose customers’ cryptoassets. They must also adhere to new environmental safeguards, detailed below, and from a financial crime perspective, consider the new transfer of funds rules agreed in June 2022 .
CASPs will be subject to a lot more regulatory scrutiny and accountability under MiCA. As we saw in the UK, this will likely lead to a shake-up of the market, with some providers choosing to exit, while others significantly expanding operations in the face of regulatory certainty.
4. Environmental safeguards
Significant CASPs will need to disclose information (to be further specified in an RTS by ESMA) on the environmental impact of their services. This will be a new area for CASPs and will likely increase the pressure on offering services related to proof of work cryptoassets.
There is also a review clause requiring the EU Commission to publish a report within two years on the environmental impact of cryptoassets and mandatory minimum sustainability standards for consensus mechanisms, including the energy-intensive Proof of Work. This means that the climate impact of crypto markets is likely to remain a key area of policymakers’ focus over the coming years.
What do we expect the MiCA to not include?
We do not expect the MiCA to include frameworks specific to digital assets lending and staking or decentralised finance (DeFi).
In a recent appearance before the European Parliament’s Committee on Economic and Monetary Affairs, Christine Lagarde, President of the ECB, called for a follow-up “MiCA 2.0” to set out frameworks for these areas . This is an indication that the EU’s regulatory approach to crypto markets will continue to evolve once this version of the MiCA enters into force. Over the next two years we may see reports – and if deemed necessary, possibly legislative proposals – to create frameworks for crypto lending and DeFi.
Next steps and implications
The provisional political agreement in relation to MiCA is a result of rapid progress and significant efforts by EU negotiators in June 2022 on key outstanding issues. However, we now expect a significant amount of technical work over the summer to transition the provisional agreement into a final legal text.
As a result we do not expect to see the final MiCA framework until October 2022 at the earliest, after which MiCA’s implementation timeline will begin. For now it is unclear how long this will be, and whether some parts will have shorter implementation periods than others (e.g. the framework for stablecoins). However, we do not expect implementation timelines to be longer than two years, meaning that the MiCA framework will likely apply by end-2024. In the meantime, the European Central Bank (ECB) is expected to warn EU national authorities of the need for harmonisation and the dangers of moving ahead of the MiCA with domestic frameworks . National regulatory approaches to crypto markets already vary significantly across the EU.
Both crypto native issuers and service providers and traditional FS firms building a crypto strategy will now eagerly await the final MiCA text and clarity on implementation periods.
The MiCA is likely to be some crypto native firms’ first interaction with regulation, which will require a change in mindset to governance, controls and reporting capabilities. Some crypto natives will likely have significant gaps between current state and target operating models under the MiCA and would benefit from understanding requirements as soon as possible and considering the design and execution of a suitable target operating model.
Meanwhile regulated FS firms will await the final text to give them confidence to shape their long-term crypto strategies, embedding regulatory requirements into risk and compliance approaches (our recent report sets out some key considerations for EU/UK wholesale banks building a digital assets strategy). The ECB recently noted that EU FS firms are interested in offering crypto services including custody and trading once the MiCA enters into force and regulatory uncertainty reduces .
However, regulated FS firms in the EU also await clarity in three other key areas.
First – for banks – the Basel Committee’s final framework on the prudential treatment of cryptoassets, expected around end-2022, and the EU approach to implementing it. This and the MiCA will help banks to determine if and how to increase their crypto activities and exposures.
Second, more clarity on how to practically apply the full suite of applicable regulation to crypto activities, e.g. MIFID and CSDR. This will likely only come from 2023 onwards, after the launch of the EU’s DLT Pilot regime .
Lastly, the transition or alignment between current NCA approaches and the broader MiCA framework and the validity of existing permissions.
Until the final MiCA text and details on the above areas are set out, regulated FS firms are likely to progress their crypto strategy cautiously.
Overall the provisional political agreement is a key milestone in the development of the MiCA framework and firms will eagerly look forward to detailed technical standards and regulatory expectations to progress their crypto strategy.
 The pilot regime will enable regulated firms to develop DLT-based market infrastructure for the trading, custody and settlement of securities