MiCA Regulation – Stricter Terms in the Markets in Crypto assets

  • 2023-06-29
  • Ellex Klavins Associate Lelde Elīna Liepiņa – Goldberga

New Regulation (EU) 2023/1114 of the European Parliament and of the Council for markets in crypto assets (so-called MiCA Regulation) is a crucial novelty to achieve a common legal framework in the growing market of crypto assets in the EU countries. The regulation provides for a protection in such crucial areas as consumer rights, stability of the crypto - market, as well as safe and lawful investments, concurrently preventing exposure to such risks as fraud and incompetent provision of services. On 20 April 2023 the MiCA Regulation was supported by the European Parliament, whereas the Council of the European Union gave their approval on 16 May 2023. The regulation is expected to come into force from June or July 2024 for on the issuance of asset-referenced tokens and e-money tokens whereas the rest of provisions are expected to apply around December or January 2025. 

As from the MiCA Regulation coming into effect, laws and regulations are to be adjusted in Latvia as well for them to reflect the obligations set out in the regulation, including registration and licensing of the providers of crypto asset services. The Financial Instrument Market Law and others will have to be amended.

The MiCA Regulation will not overall with the AML (anti-money laundering) law as an agreement was reached on 29 June 2022 on the crypto assets being subject to the rules of money transfers either. Nevertheless, the MiCA Regulation states that the European Banking Authority (EBA) is under an obligation to maintain a public register of ineligible nonconformant crypto asset service providers.

Fundamental Objectives Set by the MiCA Regulation

- Legal certainty and harmonization. The MiCA Regulation will ensure a stable legal framework with respect to all crypto assets which are not regulated by the current legal framework.

- Legal framework for innovations. The MiCA Regulation will facilitate a fair competition and development of innovations in the crypto asset market, well as a more widespread use of the distributed ledger technology (DLT). 

- Protection of consumers and investors.  The MiCA Regulation will facilitate trust of consumers in the crypto asset market concurrently establishing a higher degree of responsibility for providers of crypto asset services. It is contemplated to facilitate the development of crypto asset market in this way.

- Market integrity, financial stability, and smooth operation of payment systems. The MiCA Regulation will ensure protection measures to prevent financial instability in the crypto asset market, inter alia, regarding asset referenced tokens, as well as will supplement the current law governing prevention of the flow of money from crime and funding of terrorism, where the cryptocurrency is used.

The Regulation sets the requirement for licensing regarding the service providers and issuers of asset referenced tokens and other crypto assets as the main criteria. Furthermore, the Regulation establishes a duty to introduce the so-called White Papers of crypto assets and carry out other duties for transparency and provision of information with respect to offers of crypto assets and access to the trading in crypto assets. Furthermore, the Regulation is set to prevent risks related to abuse or incompetent use of the crypto asset market.

The MiCA Regulation categorizes the crypto assets into three categories.

According to the Regulation, the crypto assets are to be categorized into asset referenced tokens – these are tokens with goal to maintain a stable value referring to any other value, right or combination thereof, including one or more of the official currencies. The second category is e-money tokens – crypto assets which allow to retain a stable value based on the value of the currency of a single country. And other crypto assets – such crypto assets which are not asset referenced tokens or e-money tokens. 

The MiCA Regulation will apply to mined tokens. Furthermore, the MiCA Regulation stipulates that the asset referenced tokens will be subject to a stricter supervision establishing an obligation to secure each token by the respective value in the currency.

Crypto asset service providers 

For the Regulation, the crypto asset service provider is any person who performs:

- Holding and managing crypto assets for third parties. This is the holding or control of crypto-assets or means of access to them on behalf of third parties in the form of private cryptographic keys.

- Maintenance of a trading platform for crypto assets. It is about operating of platforms where several third-party interests facilitate the conclusion of a contract either by exchanging one crypto asset for another or a crypto asset for fiat currency.

- Exchange of crypto assets for fiat currency, which is a legal tender. This is the conclusion of purchase or sale agreements with third parties on crypto assets against fiat currency using equity.

- Exchange of crypto assets for other crypto assets. Entering into purchase or sale agreements with third parties on crypto assets against other crypto assets using equity.

- Execution of orders related to crypto assets on behalf of third parties. It is about concluding contracts for the purchase or sale of one or more crypto assets, or for subscribing to one or more crypto assets on behalf of third parties.

- Placement of crypto assets. Sale of newly issued or already issued crypto assets that are not admitted to trading on a trading platform to specific purchasers that do not involve an offer to the public or an offer to existing holders of the issuer's crypto assets.

- Reception and transmission of orders related to crypto assets on behalf of third parties. This means accepting an order from a person to buy, sell or subscribe for one or more crypto assets and forwarding that order for execution to third parties.

- Provision of advice on crypto assets. This means tailor-made or specific recommendations for a third party, consulting on acquisition, sale of one or more crypto assets or use of crypto asset services.

What is beyond the scope of the MiCA Regulation?

The MiCA Regulation will not apply to unique and non-fungible tokens or NFT, as well as to crypto assets which are classified under the already existent legal framework, inter alia:

- Financial instruments which are subject to EU Directive No 2014/65/EU on the financial instruments markets.

- Funds and means that are not e-money tokens, which are subject to EU Directive No 2015/2366 on payment services in the internal market (save for e-money tokens).

- Deposits, including structured deposits, which are subject to EU Directive No 2014/49/EU on deposit guarantee schemes.

- Miscellaneous insurance and pension products, which are subject to Directive No 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance.

- Securitization transactions, which are subject to EU Regulation No 2017/2402 or the Securitization Regulation.

Furthermore, the provisions of MiCA Regulation will not apply to the European Central Bank (ECB) and EU national banks.

White papers of crypto assets

One of the main plans of the Regulation is to provide for a mandatory introduction of a so-called crypto asset White Paper, in which issuers of crypto assets will have to include a description of the issuer and the key stakeholders of the development of the project; on the rights and obligations related to crypto assets, including the procedures and conditions for exercising those rights. It will also be necessary to include a description of the features of the public offer, including the number of crypto assets, the issue price and the subscription terms; information on the technology and its standards applied by the issuer of crypto assets and enabling the holding, safekeeping and transfer of those crypto assets.

Furthermore, the White Paper should also include information on the risks associated with crypto assets, the issuer of crypto assets, the public offer of crypto assets and the implementation of the project; and a statement from the management confirming that the information provided therein is true and complete.

Until now, the White Paper was a free choice of entrepreneurs, the content of which was not monitored. With the entry into force of the MiCA Regulation, liability will be established for the provision of false information in the White Paper, which might reach at least 700 thousand euros for natural persons and at least 5 million euros for legal entities.

MiCA is also expected to provide consumer protection against so-called greenwashing risks. The Regulation will concurrently develop draft technical standards to require crypto asset market participants to provide information on the environmental and climate impacts of the activities of crypto assets. The European Securities and Markets Authority (ESMA) is expected to develop draft technical standards for the content and presentation of information. It is expected that the EU Member States will retain a comparatively high level of discretional powers with respect to the sustainability issues.