On April 9th, 2018, The European Securities and Markets Authority (ESMA) published guidelines regarding cryptocurrencies. The public is now waiting for national financial authorities to provide some regulatory framework to define the market. The guidelines are not being applied directly in law and will not become a part of the EU financial framework. They are, however, a suggestion for financial regulators not to make any hasty moves towards regulation, or to take any action before the market is clearly defined.
The global regulatory landscape for crypto assets is diverse, and while it is becoming increasingly complex, many regulators still prefer to wait and see how the space develops and what others will do. Right now, all eyes are on the European Union and its individual approach to regulating crypto assets.
As part of a comprehensive digital finance package announced in September 2020, the European Commission (EC) has published a regulatory proposal called Crypto Asset Markets (MiCA). The proposal is currently going through the legislative procedure and is the subject of an intensive debate. The impetus for this regulatory milestone was concern about the increasingly fragmented national regulatory landscape for crypto assets in the EU.
The emergence of Stabelcoins was another important factor in the regulatory review. Stable coins have been around for a few years – the first stablecoin, Tether (USDT), appeared in 2014 – but they didn’t attract much attention from regulators until June 2019, when Facebook announced Libra (which was later renamed Diem). This was a wake-up call for many authorities as they realized that global stable currencies can quickly become large scale due to strong network effects and that this can have systemic implications for the financial sector.
Related: New name, old problems? Libra’s rebranding to Diem still faces challenges
Crypto assets under MiCA
The EC has acted to cover and regulate all crypto assets not covered by existing European financial services and has proposed an individual, comprehensive and mandatory regulation of crypto assets under the MiCA. The Regulation will be directly applicable within the EU without the need for transposition into national law, and will replace all national frameworks. It aims to provide legal certainty for industry and operators and to contribute to the harmonisation of legislation.
Related: Looking for the latest trends in cryptocurrencies, the EU is trying to clamp down on stablecoins and DeFi.
The MiCA provides a set of uniform guidelines for crypto assets that are already more widely applied in financial markets, including in the areas of transparency and disclosure, authorisation and supervision, a range of operational, organisational and governance measures, consumer protection and prevention of market abuse.
MiCA provides the definitions and classifications of crypto assets that we so desperately need. This is a welcome development that can help consolidate the divergent definitions and taxonomies used in different European jurisdictions and by different market participants. To cover all crypto assets (other than crypto assets already covered by financial regulation), a crypto asset is broadly defined under the MiCA as a digital representation of value or rights that can be electronically transferred and stored using a distributed ledger or similar technology. This means that any asset hosted on a blockchain could potentially be subject to MiCA regulatory requirements, regardless of its nature or economic function. We will have to wait for the final version of the regulation to see if exceptions to this broad scope are introduced during the negotiation process.
Related: US has already lost race to regulate cryptocurrencies to Europe by 2020
Crypto asset categories under the MiCA
The MiCA distinguishes three regulatory categories of crypto assets:
- Electronic coins used as a medium of exchange and which seek to achieve a stable value by reference to the value of a single legal tender, such as the euro or the US dollar. These include stable coins such as USD Coin (USDC) and Diem (Libra 2.0), which are linked to a single currency.
- Tokens linked to assets that claim to maintain a stable value by reference to multiple legal tender assets, one or more commodities, one or more crypto assets, or a combination of these assets. This includes the version of Libra (Libra 1.0) that was originally proposed, but is no longer implemented.
- Finally, the third category of crypto assets is a global category for all other crypto assets. It will cover nutstokens and algorithmic stackcoins, and possibly bitcoin (BTC) and other similar tokens.
The MiCA provides a comprehensive set of regulatory requirements for issuers, including different licensing and operational requirements depending on the type of crypto asset. Issuers of asset-linked tokens and e-money tokens must be licensed and established in the EU.
This is certainly good news for issuers already established and operating in the EU, but it imposes an additional burden on issuers outside the EU. Issuers of asset-based tokens will be subject to certain capital, governance and corporate requirements. Issuers of e-money tokens must also be licensed by a credit or e-money institution, in addition to meeting the operational requirements of the e-money legal regime. Electronic money tokens should be issued and redeemed at par and holders should have direct recourse against the issuer.
Issuers must prepare a white paper containing essential information about the project, including its main features, rights and obligations. Only certain projects and proposals of low value will be exempt from this potentially costly requirement. To address the risks associated with larger projects (such as global stablecoins), the MiCA provides an additional set of more stringent rules for large asset tokens and e-money tokens. These significant tokens, which are classified by the European Banking Authority (EBA) based on criteria set out in the MiCA, are subject to more stringent capital, investor and prudential requirements of the EBA, including requirements on governance, conflicts of interest, reserve holding, custody and white papers.
Crypto asset service provider
The MiCA also outlines the legal framework for the licensing and terms of service for crypto asset service providers (CASPs). Each CASP must be a legal entity registered in the EU and hold an operating licence. Compliance requirements are similar to those of financial regulation and include legal safeguards, organisational requirements and specific rules for the safekeeping of client funds.
The list of regulated services related to crypto assets also reflects financial regulation and includes the storage and management of crypto assets, the operation of trading platforms, the exchange of crypto assets into fiat currency and other crypto assets, the receipt, transmission and execution of orders, the placement of crypto assets and, finally, advisory services related to crypto assets.
Like any regulatory proposal, the MiCA goes through the EU legislative procedure. It is hoped that this process will help to refine the provisions of MiCA, resolve frictions and problems, and produce the best possible arrangement that meets the needs and expectations of all stakeholders. Once the MiCA enters into force, an 18-month period will apply for the application of the Regulation, with the exception of e-money tokens and asset-linked tokens, for which the Regulation will apply immediately.
The MiCA will serve as a precedent that other countries can build on or deviate from to gain a competitive advantage. This is an ambitious regulatory project. Adapting such a comprehensive regulatory framework to a rapidly evolving innovation requires a careful approach – binding enough to ensure legal certainty, but flexible enough to allow for future developments.
Careful consideration must also be given to the four main objectives why the MiCA was designed: Legal certainty, support for innovation, consumer and investor protection and market integrity. The mistakes will affect the whole EU and will be difficult to put right, but if done right it will be a success for the whole EU and a great opportunity for the region.
The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent those of Cointelegraph.
This article is intended as general guidance and is not, and should not be construed as, legal advice.
Agata Ferreira is an associate professor at Warsaw University of Technology and visiting professor at several other institutions. She has studied law in four different jurisdictions, both in the common law and civil law systems. Agatha worked for over ten years at a leading UK law firm and an investment bank in the financial sector. She is a member of the EU Blockchain Observatory and Forum expert group and a member of the Blockchain for Europe advisory board.
The opinions expressed are solely those of the author and do not necessarily reflect those of the University or its affiliates.
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