We explain the content and significance of the new rules below.
This article is a rewrite of Samar Law's Christmas calendar from December 2023 on LinkedIn about the MiCA regulation. You can follow Samar Law on LinkedIn to stay updated.
Published 8 February 2024
MiCA stands for "Markets in Crypto-Assets". MiCA is a regulation which thus has direct effect in the EU member states.
MiCA introduces regulation of companies that offer activities with crypto-assets – both stablecoins and other crypto-assets. It's worth noting that apart from a few provisions of the Anti-Money Laundering Act, crypto companies were not subject to any financial regulation before MiCA.
The regulation is generally characterized by already known rules from the stock market and the payment industry, which are simply adapted to the unique nature of crypto-assets.
MiCA's rules on asset-backed tokens (ART) and e-money tokens (EMT) will enter into force on June 30, 2024. The remaining rules will enter into force on 30 December 2024.
ART, EMT and "other crypto-assets"
MiCA divides crypto-assets into three categories: asset-backed tokens (ART), e-money tokens (EMTs), and "other crypto-assets".
EMT and ART are both stablecoins, but while the value of EMT refers to one fiat currency, the value of ART can refer to multiple fiat currencies or other rights and assets.
An example of an ART is the cryptoasset PAX Gold, which is pegged to the value of gold. 1 PAXG represents the value of 1 troy ounce of gold. Another example of an ART was Facebook's Libra, whose value was determined by the following fiat currencies: 50% US dollars, 18% euros, 14% Japanese yen, 11% British pounds, and 7% Singaporean dollars.
The EMT, on the other hand, refers only to one specific fiat currency, which is also intended to constitute the EMT's security. Examples of EMTs are USDT (Tether) and USDC (Circle), which issuers should hold $1 for every USDT or USDC in circulation. The issuer must therefore always ensure that 1 EMT can be redeemed for the equivalent value, for example USD 1.
However, MiCA imposes a daily cap on non-euro-based stablecoins/EMTs of 1 million transactions and a total value of €200 million. Thus, the aforementioned examples of EMTs will not currently stay within these thresholds. The restriction is probably due to the increasing demand for dollar-backed stablecoins, which European politicians have considered a threat to the euro, which is why this "skewed" development is now being regulated.
"Other crypto-assets" is a term for crypto-assets that do not fall under the definitions of an ART and EMT. This is thus the vast majority of the market's cryptoassets today.
Inside and outside the EU
MiCA is of course applicable to companies within the EU, but companies outside the EU are actually also covered if they 1) offer MiCA-regulated activities and 2) actively contact customers in the EU. It is worth noting that if customers in the EU choose to use companies outside the EU, without these companies contacting customers in the EU, then MiCA does not apply. In some cases, MiCA will therefore also apply outside the EU's borders. Thus, companies cannot simply move out of the EU with the sole purpose of falling outside the MiCA regulation.
It is therefore crucial whether an EU citizen chooses to become a customer of a non-EU company on his or her own or whether the company has approached the customer. The inquiry can be made through e-mails, social media or advertisements, for example. ESMA is preparing guidelines on this.
Decentralised units
MiCA does not apply to "fully decentralised services" (e.g. DAOs), but only to central and partially decentralised services. The assessment of this is relevant due to the decentralized virtual economy (DeFI).
The reason for this is that it is not possible to regulate an entity that has no legal entity or an identifiable management. For example, to whom should the supervisory authorities send a letter? No DAOs have an e-Boks, and it can be difficult to hold anyone accountable in the event of non-compliance with the regulation.
The most obvious examples of DAOs can be Uniswap, 1inch, and MakerDAO.
The European Commission will make a statement on the topic in 2024, and the Danish Financial Supervisory Authority has set up a working group to assess the issue of decentralisation after MiCA. [1]
NFTs
Unlike cryptoassets like BTC and ETH, NFTs are "non-fungible," i.e., not generic or separable. Like traditional physical art, this is due to the uniqueness of the works. Trading platforms for NFTs therefore also have more similarities with digital auction houses than traditional crypto exchanges with order books.
Therefore, MiCA specifically exempts NFTs due to their unique nature. Unlike crypto assets, an NFT cannot be exchanged for an identical NFT, just as there is an economic and visual difference between NFTs. Compared to crypto-assets, NFTs are also less likely to be used as a trading asset and thus carry a more limited risk. The artists and trading platforms for NFTs are therefore not subject to MiCA's rules.
The license and the "grandfathering" provision
In order for the regulated companies to be able to carry out or continue their activities, they must apply for a so-called MiCA license from the relevant supervisory authority – the Danish Financial Supervisory Authority. If the company already carries out MiCA-regulated activities when MiCA enters into force, they can make use of the "grandfathering" provision in MiCA. This is a transitional arrangement that allows companies to continue with the MiCA-regulated activities for up to 18 months while they adapt to the new requirements. The condition is that the company must have applied for a MiCA license before MiCA's entry into force. Crypto companies can therefore continue their activities while the Danish Financial Supervisory Authority processes their application.
Although the provision is optional for the Member States to apply, it is planned that Denmark will use the rule.
The license across the EU
If a Danish cryptoasset provider wants to offer its activities to the rest of the EU, it can use passporting to "transfer" its license to other EU countries. Thus, the supervisory authorities of the EU countries do not also have to approve the licence.
Danish companies only need to inform the Danish Financial Supervisory Authority about 1) which member states they want to "transfer" their license to and when, and 2) what their services are exactly. Once the information has been submitted, it will take a maximum of 14 days for the license to be transferred. For Danish companies, a MiCA license from the Danish Financial Supervisory Authority will therefore open up the entire crypto market in the EU.
The license and banks
MiCA explicitly mentions that banks do not have to apply for a MiCA license. A bank is thus free to offer crypto-asset services without a MiCA license. The reason behind this is that banks are already subject to strict regulation. At the same time, however, the legislator recognizes that crypto-asset services are different from traditional banking activities.
Danish banks must only inform the Danish Financial Supervisory Authority of the intended activities within 40 days of the provision of such services. At the same time, the bank must document its ability to offer the services by, among other things, presenting a business plan, IT security policy and a detailed description of the operating rules for the intended trading platform.
If banks embrace this business area, it could bring significant changes to the current crypto-asset ecosystem. This can mean, among other things, that you can store your crypto assets in a depository/wallet at your local bank.
14-day right of withdrawal when buying cryptoassets
One of MiCA's focus points is consumer protection. This can be seen, for example, in the fact that MiCA extends the 14-day right of withdrawal for online purchases to also include crypto-assets. Private investors will therefore be able to get their money refunded 14 days after a purchase of cryptoassets.
However, there are significant exceptions: the right of withdrawal only applies to "other crypto-assets" and not to the purchase of ARTs and EMTs. In addition, the right of withdrawal does not apply if the cryptoasset is already traded on a trading platform before the purchase. This is partly due to the fact that a market has been created for the cryptoasset, which is why the investor should know what they are buying.
If a customer uses his or her right of withdrawal, the refund must be made through the same means of payment as the original transaction.
However, the consequence of the right of withdrawal for issuers of crypto-assets is that they cannot dispose of or use the proceeds of an offering of crypto-assets until the deadline for the right of withdrawal has expired. Thus, issuers of crypto-assets must be aware of the right of withdrawal, which changes current IDO and ICO processes.
The many "ICO scams" have probably been decisive for the introduction of the right of withdrawal, which now ensures both that you as a consumer get your money back and that the purchased crypto assets actually keep what is promised.
Disclaimers
MiCA now states that issuers of crypto-assets are responsible for the information in their white papers. Issuers of crypto-assets can therefore not disclaim liability in the same way in the event of a breach of their information obligations in the white paper – "not financial advice" can therefore no longer be used.
This gives investors a better legal basis for obtaining compensation if a white paper contains misleading information. The aim is to strengthen the protection of investors and support a more transparent and accountable sector. In addition, a better foundation is created for well-considered investment decisions.
Securing clients' funds
MiCA contains strict requirements for the segregation of clients' crypto-assets (client funds) and company funds. A trading platform must thus have a register of the distribution of crypto-assets at the customer level, and measures must be implemented to protect customers' rights in the event of insolvency.
Thus, even if the company goes bankrupt, customers must be entitled to have their funds and cryptoassets paid out.
In addition, MiCA requires crypto-asset service providers to prepare a plan for winding down the business. This plan must ensure the least possible financial damage to customers.
Insider knowledge and trading
Insider knowledge and trading in the stock market has long been considered a serious crime. However, there have been no similar rules for crypto-assets, but MiCA is now introducing rules on this.
Inside information is (1) any specific, undisclosed information that directly or indirectly relates to crypto-assets and (2) is likely to significantly affect their price if it were made public.
Insider trading in crypto-assets thus occurs when a person possesses insider knowledge that is used to buy or sell crypto-assets – both on their own account or on behalf of others. This also includes cancelling or modifying an order for a cryptoasset if the action is based on insider knowledge gained after the order was placed.
MiCA introduces a strict prohibition against any form of insider trading in crypto-assets, which is continued in section 299 d, no. 1 of the Danish Criminal Code, where it is specified that violations of the rules can be punished with up to 6 years in prison.
Market manipulation
While market manipulation in the stock market is prohibited, it is only with MiCA that similar regulations will come for crypto assets. MiCA contains a prohibition against market manipulation. The ban is inspired by the same rules for the stock market. The purpose of the prohibition is to counteract misleading signals about a cryptoasset's supply, demand, or price. This means, for example, that you must not provide "incorrect or misleading" information regarding a cryptoasset.
An obvious example of market manipulation is "pump and dump", where misinformation is spread to artificially "pump" up the price of a cryptoasset, after which the cryptoasset is "dumped" by selling off.
Other examples of market manipulation are:
The rules are important to protect victims of market manipulation and to ensure that transactions can be made on transparent terms without spreading misinformation.
MiCA also introduces rules on what white papers must contain, and the content requirements have many features in common with the prospectuses of financial instruments. White papers must therefore contain necessary and clear information on the characteristics, functioning and risks of the crypto-asset.
In addition, MiCA now requires that all white papers must include this statement on the first page:
"This White Paper on crypto-assets has not been approved by a competent authority of a Member State of the European Union. The provider of the crypto-asset shall be solely responsible for the content of this crypto-asset white paper.';
Trading platforms are also only allowed to offer a crypto asset for trading once the issuer has published a white paper.
The term "whitepaper" can thus no longer be used interchangeably for a document that may contain erroneous information intended to contribute to artificially driving up the price of a crypto-asset. Instead, it is now a legal concept with substantive requirements, the violation of which can be sanctioned by a financial supervisory authority in the EU.
The regulation of crypto marketing has so far been flawed. However, MiCA introduces rules on this that apply to the offering or admission to trading of crypto-assets. The rules require that the marketing 1) is clear and unambiguous, 2) does not contain misleading information, 3) reflects the content of the white paper and 4) provides information on where to read the white paper.
In addition, MiCA now requires that all marketing communications must include this statement:
"These crypto-asset marketing communications have not been reviewed or approved by a competent authority in any Member State of the European Union. The provider of the crypto-asset is solely responsible for the content of these crypto-asset marketing communications."
Prohibition of certain crypto-assets
MiCA includes a blanket ban for trading platforms to prevent the admission of crypto assets "with a built-in anonymity feature" to trading. Anonymous crypto assets, such as Monero or Zcash, are characterized by their transactions and ownership being "invisible" on the blockchain. This means that transactions and holdings cannot be read on the blockchain. This makes them particularly attractive to criminal activities.
The indirect prohibition of anonymous crypto-assets will therefore have the consequence of reducing the supply and use of anonymous crypto-assets. Regulation is therefore important to address concerns about the use of crypto-assets for criminal activities and towards the emergence of a more transparent market.
Accrual of interest
MiCA also introduces a ban on interest attribution to ART and EMTs. This will particularly affect platforms that offer interest accrual on stablecoins.
According to the European Central Bank, the reason behind the ban is that interest charges on ART and EMT can challenge banks' lending capacity, affect the prices of ART and EMT in an inappropriate upward direction, and it can give investors an illusory impression of the stability of crypto-assets. [2] With MiCA, it is thus clear that neither ARTs nor EMTs should be used as a store of value.
However, the ban does not apply to crypto-assets such as a digital euro issued by the European Central Bank or the central bank of a Member State. In addition, the prohibition (and MiCA by the way) only applies to European companies and companies that target European customers.
During the preparation of MiCA, legislators have received several inputs from industry players, which led, among other things, to the amendment of Article 76(12). In the first version of MiCA, it was planned that all transactions on trading platforms should be settled on the blockchain. This meant that trading platforms with thousands of daily trades would have to record all of these on the blockchain at the end of the day, which is not possible in practice due to the fees of using the blockchain.
Following input from the industry, trading platforms can execute trades off-chain, i.e., order books, through which most trades today happen. In that case, the settlement should only take place internally and not on-chain. The platforms can thus continue according to the same resolution procedures as today.
Comments and suggestions from the industry have thus helped to shape the legislation to be effective and detailed in practice. This is particularly important to take away from MiCA, as with the constantly evolving crypto industry naturally comes several unresolved areas – not just here and now, but also in the future.
For example, there are still uncertainties about the regulation of NFTs, staking, lending platforms and the handling of completely decentralized entities. Additionally, ambiguities remain about the interaction between traditional financial institutions and crypto-asset services. Here, the industry's biggest problem is crypto companies' access to a bank account, which has been the end of many crypto companies' lifetimes. It may therefore be necessary to have a counterpart to section 63 of the Payment Services Act, which obliges banks to offer payment services, including bank accounts, to payment institutions on objective, non-discriminatory and proportionate terms.
It is therefore obvious that the ambiguities are addressed by the legislators, who potentially seek help from the industry again, and that we are presented with MiCA 2.0 in the future. The President of the ECB also describes MiCA as just one of many steps in the EU's regulation of crypto-assets. [3]
Of course, we are following these developments.
MiCA's extensive regulation of crypto-assets has meant that MiCA has also been a catalyst for changes in existing financial regulation. An example of this can be found in the EU's regulation of financial instruments (MiFID II), where security tokens are proposed as directly included.
The Money Transfer Regulation (TFR) will also be amended to include crypto-assets. Crypto-asset service providers must therefore collect and transmit information on both senders and recipients of crypto-asset transfers. The recast regulation will enter into force at the same time as MiCA.
In addition, anti-money laundering regulation in the EU has previously been through directives, but MiCA has now inspired an anti-money laundering regulation in this area. Here, the aim is to harmonize the requirements for anti-money laundering procedures within the EU and include specific aspects of crypto-assets directly in the regulation.
Read more about the Money Transfer Regulation and the Anti-Money Laundering Regulation here.
As Denmark's only specialist office in cryptocurrency, Samar Law has extensive experience in advising on the regulation of CASPs. If you would like advice, we encourage you to contact attorney Payam Samarghandi on payam@samarlaw.dk or mobile 60793777 for a non-binding conversation.
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