Impact of MiCAR – Europe’s new regulation of cryptoassets
On May 31, 2023, the Council of the European Union adopted a regulation on markets in crypto assets (known as “MiCAR”)[1] which aims to prevent the misuse of the crypto industry for the purposes of money laundering and financing of terrorism. At the same time, it is intended to protect investors and provide financial stability by introducing one set of uniform rules for crypto assets that fall outside the scope of existing EU financial legislation. MiCAR establishes uniform rules on transparency and disclosure requirements for the issuance, public offering and admission to trading of different types of crypto assets. It further provides rules for the licensing and supervision of crypto asset service providers (CASPs) and the issuers of crypto assets. Similar to the Prospectus Regulation,[2] MiCAR does not regulate crypto-assets when the issuer is not an offeror or a person seeking admission to trading.
MiCAR defines the term “crypto-asset” widely, as a digital representation of a value or a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology. MiCAR defines and distinguishes between different types of crypto assets while its main focus is on issuers of e-money tokens (EMTs) and asset referenced tokens (ARTs).
An EMT is a type of crypto-asset that maintains a stable value by referencing the value of one official currency and is also referred to as “stable coin.” An EMT is the closest equivalent in the crypto-asset world to coins and bank notes and can be used for payment purposes.
ARTs are a type of crypto-asset that maintain a stable value by referencing any other value or right or a combination thereof, including one or more official currencies. An ART is also a stable coin.
MiCAR also regulates “utility tokens” which is a type of crypto-asset that is only intended to provide access to a good or service supplied by its issuer. Examples of utility tokens are tickets, vouchers, memberships. MiCAR also applies to “unclassified crypto-assets” which are crypto-assets which do not fall in any other of its categories such as bitcoin or ether.
Public Offer or Admission to Trading
Under MiCAR, the right to offer an E-Money or Asset-Referenced token to the public or seek its admission to trading is limited to its issuer, subject to exceptions. In the case of an EMT, the issuer must be authorised by its national competent authorities as an electronic money institution under the E-Money Directive or as a credit institution.
In the case of an ART, the issuer must be authorised by its national competent authorities under MiCAR or as a credit institution. In both cases, offers to the public or seeking admission to trading is subject to preparing a white paper in accordance with various specifications. Similar to a prospectus, the whitepaper must describe the essential characteristics of the crypto asset, rights and obligations, the underlying technology, and the associated risks.
The white paper is then notified to the national competent authorities and published. In the case of EMTs, the white papers are not subject to any prior approval requirements. In the case of ARTs, a prior approval requirement applies to the white papers. Purchasers of crypto-assets are entitled to claim damages from the issuer of the white paper, in case there is any infringement of certain MiCAR requirements. In addition, the European Securities and Markets Authority (ESMA) has been authorised to issue regulatory technical standards (RTS), against which the environmental and climatic impact caused by the issuance of the crypto assets will be assessed.
MiCAR imposes a number of other obligations, such as rules on marketing communications, on offerors and persons seeking admission of a crypto-asset to trading. A person offering a crypto-asset to the public must provide a 14 day right of withdrawal to retail buyers where the relevant crypto-assets have not been admitted to trading.
Both issuers of EMTs (under the E-Money Directive and MiCAR), and ARTs (under MiCAR) are subject to extensive ongoing obligations. These include rules on the composition, management, and custody of their reserves as well as governance arrangements, own funds requirements, and a prohibition on granting interest to token-holders. Certain EMTs or ARTs may, on the basis of certain criteria, qualify as “significant”, in which case they are subject to additional obligations and are directly supervised directly by the European Banking Authority (EBA).
Authorisation and Supervision of CASPs
The other key provisions of MiCAR relate to the authorisation and supervision of CASPs. CASPs are persons who provide one or more of the following 10 crypto-asset services:
- Providing custody and administration of crypto-assets on behalf of clients
- Operation of 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 clients
- Placing of crypto-assets
- Reception and transmission of orders for crypto-assets on behalf of clients
- Providing advice on crypto-assets
- Providing portfolio management on crypto-assets
- Providing transfer services for crypto-assets on behalf of clients
The MiCAR authorisation regime is considered similar to existing authorisation regimes under EU financial services legislation. It supercedes and replaces the previously applicable national authorisation/registration regimes in EU member states although transitional provisions may apply. CASPs will be required to comply with a number of economic substance requirements and ongoing obligations, including prudential requirements, governance arrangements, conduct of business rules, and certain special rules only relevant to the provision of specific crypto-asset services. The authorisation and supervision of CASPs is the responsibility of the national competent authority of each member state under the coordination of the ESMA.
Importantly, traditional regulated institutions (eg credit institutions and investment firms) can, in certain cases, provide crypto-asset services without obtaining a CASP authorisation. Moreover, passporting provisions enable EU CASPs to freely provide crypto-asset services across the European Economic Area and rules have been put in place for the provision of crypto-asset services by third country firms to EU-based persons.
Exclusions from MiCAR
It is very important to understand the exclusions from MiCAR because its entire purpose is to regulate crypto assets which are not governed by other EU financial sector legislation. Therefore, at the outset, MiCAR does not apply to “financial instruments” within the meaning of Art. 4 para. 1 no. 15 MiFID II.[1] ESMA has been tasked with drawing up guidelines with criteria and conditions for the classification of crypto-assets as financial instruments. For example, tokenised securities or derivatives referencing crypto-assets may qualify as financial instruments.
The following are also excluded from MiCAR:
- Deposits – Deposits (including structured deposits) covered by Directive 2014/49/EU on Deposit Guarantee Schemes;
- Payment Services – funds covered by Directive 2015/2366 on payment services in the internal market (with the exception of EMTs);
- Securitisation Positions – covered under the Securitisation Regulation.
- Insurance – certain insurance products such as non-life or life insurance products, reinsurance and retrocession contracts covered by Directive 2009/138/EC on insurance and reinsurance.
Another very important exclusion from MiCAR is for NFTs. Recital 10 of MiCAR states that crypto-assets that are unique and non-fungible are excluded from MiCAR’s scope. In a press release, the European Parliament has stated that NFTs offered to the public at a fixed price such as cinema tickets, digital collectibles from clothing brands or in-game items in computer games will be exempt from MiCAR. Therefore, NFTs are largely excluded from MiCAR.
However, not all NFTs are excluded because fractional parts of an NFT are not themselves considered unique and nonfungible. Therefore, fractional NFTs are subject to MiCAR. In another example, if an NFT qualifies as an EMT or ART, it will be subject to MiCA. Moreover, certain types of NFTs issued “in a large series or collection” may or may not be considered fungible. Therefore, the question arises whether or not MiCAR will apply. The exclusion of NFTs may be considered by the competent authorities on a case-by-case basis applying an approach that privileges substance over form. The European Commission will also review this exemption in 18 months.
Crypto-assets which have no identifiable issuer (such as bitcoin) are expressly excluded from the scope of MiCAR. However, this raises an interesting question of what happens when an operator of a trading platform wants to list bitcoin which is excluded from MiCAR. The operator will have to comply with the white paper requirements just like an issuer and, consequently, would also be held liable in any eventual disputes with buyers of these crypto-assets.
MiCAR also provides that that cryptoasset services which are provided in a fully decentralised manner without any intermediary, are excluded from its scope of application. Decentralised finance, that is services without an issuer or CASP are excluded from MiCAR. MiCAR exempts on-chain staking and mining activities and non-custodial digital wallets.
The concept of Decentralised Autonomous Organisations ( DAO) are excluded from MiCAR. However, when decentralised crypto-asset services and/or activities are performed or controlled by a group of natural or legal persons (DAO), such DAO should be subject to MICAR requirements. The Commission will present 18 months after the entry into force of MiCAR, a report to the European Parliament and the Council which will include “an assessment of the development of decentralised-finance in the markets in crypto-assets and of the appropriate regulatory treatment of decentralised crypto-asset systems without an issuer or crypto-asset service provider, including an assessment of the necessity and feasibility of regulating decentralised finance.
MiCAR’s Entry into Force
The MiCA Regulation comes into effect on December 30, 2024. Therefore, all CASPs operating on the European crypto market must have a MiCAR license from December 30, 2024 onwards. However, the licensing requirements for issuers to offer ART and EMT tokens to the public and request their admission to trading and related rules come into force earlier on June 30, 2024. The European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) are required to submit many technical standards and guidelines to the European Commission by 30 June 2024.
[1] Directive (2014/65/EU).
[1] Regulation (EU) 2023/1114.
[2] Regulation (EU) (2017/1129)
Aparna Viswanathan
Bar at Law (of Lincoln’s Inn), Attorney (admitted in NY, DC, CA)
APARNA VISWANATHAN received her Bachelor of Arts (A.B.) degree from Harvard University and her Juris Doctor (J.D.) from the University of Michigan Law School. She is called to the Bar in England (of Lincoln’s Inn) as well as in New York, Washington D.C., California and India.
In 1995, Ms. Viswanathan founded Viswanathan & Co, Advocates, a firm based in New Delhi. Since then, she has advised over 100 major multinational companies doing business in India and argues cases before the Delhi High Court and the Bombay High Court.
