MiCA is the first and only legislation of its kind in the world, setting a new global standard for crypto asset regulation
MiCA is a regulatory framework developed by the European Commission to regulate markets for crypto assets and related services that are not currently covered by EU regulations.
It has been developed since 2018 and aims to provide a single licensing regime for all EU member states to harmonize regulation on the creation and trading of cryptocurrencies in line with the European Digital Finance Strategy.
Find out more information about the Crypto Assets (MiCA) regulation
The official name of this regulatory framework is "Proposal for a EUROPEAN PARLIAMENT AND COUNCIL REGULATION on Markets in Crypto Assets and Amendments to Directive (EU) 2019/1937. It is scheduled to enter into force in 2024.
MiCA will apply in all European Union (EU) member states once it is adopted. The regulation of crypto-asset markets in the European Union (EU) will have a new legal basis in the form of the European Commission's proposal for the regulation of crypto-asset markets (MiCA). Developed starting in 2018, the proposal regulates crypto assets and service providers that are not under common EU regulation, making it legal to provide crypto services across the EU.
The regulation will also allow the provision of licensed services within the EU without the need to implement it in national law.
The adoption of the regulation will directly affect any company that wants to operate in the EU, even if it seeks clients outside the European Union. In this way, MiCA will be able to guarantee consistency in the regulation of crypto-asset markets and increase security and transparency in these markets.
The MiCA was developed by the European Commission to regulate crypto assets in the EU and protect consumers from the financial risks associated with unregulated virtual assets. Cryptocurrencies have the potential for innovation and advanced investment products, but they also pose risks to investors and markets, such as money laundering, terrorist financing, and trading abuse.
MiCA is the result of work begun in 2018 when Bitcoin was experiencing a bull market and public interest in cryptocurrencies was at its peak. In response to the growing dangers associated with unregulated virtual assets, the European Commission tasked the European Banking Authority and the European Securities and Markets Authority to analyze whether the existing EU financial services regulatory framework is appropriate for crypto-assets.
The analysis found that most crypto-assets were not covered by EU financial services legislation and lacked consumer and investor protections and market integrity. Consequently, European regulators began work on a new regulatory framework for crypto-assets as part of the digital finance package, which became MiCA.
The proposal for "Crypto-Asset Markets" is based on four key goals:
Normally, any proposed law in the EU undergoes a complex process and must be approved within a certain timeframe, there is no specific timeframe for the implementation of MiCA. However, the European Union expects to implement the new rules over the next four years.
By 2024, the EU plans to create a comprehensive framework that will allow the use of distributed ledger technology (DLT) and crypto assets in the financial sector, taking into account the risks involved.
The European Commission's proposal has raised concerns about the inability of crypto-asset companies to take advantage of the European Union's internal financial services market. The reason for this problem is the lack of a clear legal definition of the regulatory regime for crypto assets and the lack of a uniform regulatory regime at the EU level. This situation leads to the fact that crypto-firms cannot "passport" their license in the EU, which is available in traditional financial services.
Moreover, most EU member states do not regulate businesses related to crypto assets, forcing these countries to create separate national rules to regulate such activities.
The diversity of rules and definitions applied to cryptocurrency assets and their service providers is another factor that hampers the development of these companies and their ability to scale at the EU level due to high costs, legal complexities, and regulatory uncertainties.
This situation creates an unfair competitive environment for crypto asset companies, depending on the member state, which negatively affects the efficiency of the internal market. The lack of a common framework at the EU level for cryptocurrency assets and their service providers creates risks for companies and their customers. Meanwhile, the European Union plans to address this problem with a new regulatory instrument, MiCA.
In October 2022, the Economic and Monetary Affairs Committee of the European Parliament received the final text of the Regulation of the European Parliament and of the Council relating to crypto-asset markets and amending Directive (EU) 2019/1937 (MiCA). Through these amendments, the analysis of the implemented regulation is made possible. In this article, you can read about MiCA and get our opinion on updates that directly or indirectly affect the field of crypto-assets.
MiCA is a new regulation by the European Parliament and the Council of Europe that is designed to regulate crypto-assets and virtual asset service providers (VASPs). It establishes a pan-European framework for conducting crypto-asset business and covers all types of virtual currencies, including cryptocurrencies. The new regulation is designed to protect investors, reduce risks and combat financial scams. It also obliges service providers to comply with certain security standards and obey rules set by regulators in the European Union.
As stated in the Board's press release, the new regulation also applies to `"digital assets that represent real objects, such as art, music, and video.`" Although the MiCA's final definition of NFT has not yet been established, some NFTs that do not meet that definition may be subject to the new regulation. According to this statement: collection-based NFTs, where each NFT is unique, cannot be considered exempt NFTs under the MiCA definition and would be subject to its provisions.
Some of these projects, to be released within 12 months of the entry into force of the MiCA, include guidance on qualifying crypto-assets as financial instruments, developing tools to detect and prevent money laundering and terrorist financing, and strategies for digital and innovative financial services. These projects will complement the new crypto-asset regulation in Europe and help ensure security and stability in these new financial services sectors.
A crypto-asset is a digital representation of value or a right that can be transferred and stored electronically using distributed ledger or similar technology. MiCA introduces three subcategories of crypto-assets, each with different requirements tailored to the risks they pose:
Cryptocurrencies and crypto assets have become an important part of today's economy. Many businesses have emerged in this sector that offer various services to ensure the safe and convenient use of crypto-assets. One such business is VASP, which provides portfolio management and advisory services related to crypto assets, as well as classic storage and exchange services.
VASP offers many services related to crypto-assets, including classic wallet and exchange services. It also provides advice on their use and portfolio management services. Regulation, including the activity of listing ICOs and crypto-assets.
The term "crypto-asset service" means providing any of the following services and performing actions related to the use of crypto-assets:
Control and storage of crypto assets on behalf of third parties, including their private cryptographic keys, where applicable.
Management of one or more multilateral systems.
Brokerage or mediation services, including signing agreements to sell or buy crypto assets on behalf of a third party and agreeing to sell them at the time of issuance.
Marketing on behalf of the offeror or issuer of crypto assets to buyers.
Receiving orders to buy or sell crypto assets on behalf of a customer and transmitting that order to a third party for execution.
Managing investment portfolios, including crypto-assets, including those executed on behalf of clients by pre-agreed mandates
Compliance with MICa requirements is important for an ICO project to operate legally and not violate cryptocurrency and financial laws. If a project fails to comply, it could face the risk of being blocked from accessing resources or even be held liable. In addition, compliance can increase the credibility of the project and convince potential investors of its reliability.
MICA requires a white paper from its member companies to ensure transparency and openness in the cryptocurrency industry.
A white paper is a document that contains detailed information about a project, its goals, technology, and its economic model. In the context of cryptocurrency, a white paper can include a description of the blockchain, token, token distribution, and other information that allows investors and stakeholders to better understand the project and its potential.
The mandatory availability of a white paper from MICA member companies helps set standards of transparency and integrity in the cryptocurrency industry, which increases the credibility of investing in cryptocurrency projects and furthers the development of the industry.
The white paper must contain the following information:
According to regulations from regulators such as MICa, the supervisory authority must be notified of an upcoming crypto-asset release and the submitted white paper to ensure compliance with the law and protect investors' interests. Such requirements are aimed at increasing transparency and protection to ensure a safer and more stable market for crypto-assets.
The directive focuses on stablecoins, crypto-assets that have sparked much controversy and debate about their safety and use to preserve financial stability. According to the draft legislative act, stablecoins are defined as cryptocurrencies whose value depends on fluctuations in the value of fiat currencies, gold, other crypto assets, etc., and are designated as ART and EMT.
The MiCA contains specific requirements for stablecoins, including:
These requirements are aimed at ensuring the safety and protection of investors' rights regarding stablecoins and must be strictly adhered to.
The proposed draft Directive establishes two main crypto-asset market participants: the issuer of crypto-assets (Issuer of crypto-assets) and the Crypto-asset service provider (CASP). In creating the rules and requirements for them, regulators relied on the experience of the implementation of PSD2 (Payment Services Directive) and the experience of crypto-asset regulation in Japan and South Africa.
To become an issuer of crypto assets and obtain the right to conduct its activities, the following requirements must be met:
The following requirements are imposed on the crypto-asset service provider:
Companies that issue tokens linked to real assets must have sufficient equity. This amount must be equal to either 350,000 euros or 2% of the company's average reserve assets, whichever is greater. This requirement is necessary to ensure the reliability and stability of such tokens.
The draft Directive also establishes market manipulation prevention requirements for companies that deal in cryptocurrencies allowed to trade on platforms. These requirements include disclosure of insider information, prohibition of insider trading, and prohibition of market manipulation actions.
In addition, members of the governing bodies of companies that issue asset-linked tokens must be in good standing and have sufficient knowledge, experience, and skills to perform their duties effectively. In addition, they must demonstrate a willingness to devote sufficient time to their responsibilities to ensure the company's effective functioning.
Marketing communications related to the public offering of asset-linked tokens must meet certain requirements. They must be clear and not misleading, and the information in them must comply with the official crypto-asset document. In addition, token issuers must disclose the number of tokens in circulation, their value, and the composition of reserve assets on their website at least once a month.
Issuers must also establish and maintain procedures for handling complaints received from token holders and other stakeholders, as well as identify, prevent, and manage conflicts of interest between various parties, including shareholders, employees, and token holders. Particular attention should be paid to conflicts of interest arising from managing and investing reserve assets.
These requirements were introduced to enhance the transparency and reliability of the public offering process for asset-linked tokens and protect the interests of token holders and other participants.
Issuers of asset-linked tokens must create and maintain an asset reserve that must be segregated from the issuer's assets and other tokens. The asset reserve must cover the risks associated with the assets to which the tokens are linked and must be managed using policies, procedures, and contractual relationships.
Issuers that invest in the asset reserve should use only highly liquid financial instruments with minimal market and credit risk. Ensuring that investments are liquidated quickly with minimal price effects is also important. All of these measures will help protect the interests of token holders and ensure the stability of the system.
The EBA classifies asset-linked tokens as meaningful tokens if they meet at least three of the following conditions:
Regular reporting of token transactions is part of the regulation of the token and digital asset market in the European Union.
The reporting allows regulators to monitor token market activity, identify potential risks and scams, and analyze market dynamics. In addition, regular reporting helps regulators make informed decisions about token market regulation and adapt their strategy to changes in the sector
What reporting can include:
A VASP (Virtual Asset Service Provider) is an organization that provides services related to the exchange, storage, transfer, or management of cryptocurrency, or virtual assets.
The following are general requirements that VASPs must comply with:
In addition, to provide crypto-asset services, providers must meet the following requirements:
Who is prohibited to provide crypto-asset services?
But there is an exception: organizations that are not legal entities are permitted to provide crypto-asset services only if their legal status can provide third-party protection at a level equivalent to that of legal entities and they are subject to prudential supervision appropriate to their legal form of organization.
Please note. Any person who is not a crypto-asset service provider must not use the company name or name, and may not release advertisements or use any other means that could create a misleading impression that the person is a crypto-asset service provider, or contribute to confusion about the matter.
Since the beginning of 2021, new rules have been introduced in the European Union that allow cross-border crypto-asset services. This measure was introduced to simplify and improve the regulation of crypto-asset services in the EU, as well as to improve consumer protection and prevent crypto-assets from being used to fund criminal activity.
For the cross-border provision of crypto-asset services in the European Union, providers must provide the following information to the competent authority of the state of origin:
A list of the Member States where the crypto-asset service provider intends to provide its services;
The date on which the crypto-asset service provider is scheduled to begin providing services;
A list of all other activities carried out by the crypto-asset service provider that is not covered by this regulation;
The types of crypto-asset services that will be provided in multiple Member States.
The minimum capital requirements for crypto-asset service providers depend on the class of services they provide.
The minimum capital requirements for crypto-asset service providers depend on the class of services they provide.
Three classes of crypto-asset service providers differ in terms of permitted activities and minimum capital requirements.
These capital requirements for each class ensure that crypto-asset providers have sufficient financial resources to meet their obligations to customers and comply with regulatory requirements.
One of the major innovations of MICA is the requirement of compulsory insurance for crypto-asset service providers. This requirement applies to all three classes of crypto-asset service providers described in the regulatory document.
Each crypto-asset service provider must have an insurance policy to cover possible losses related to consumer infringement, system errors, theft of crypto-assets, and other similar risks.
The provision of services by crypto-active providers must occur without interruption and regularly. Companies are responsible for implementing all necessary measures to ensure this continuity. They must have appropriate risk management systems and business plans in place to ensure the continuity of their operations. This can include regular testing of business plans and risk management systems, having backups of data, and ensuring the security and availability of company information systems. In doing so, they need to develop various strategies and policies, such as disaster recovery plans, and use robust ICT systems and security procedures.
Crypto-asset service providers must provide adequate and effective preventive mechanisms, systems, and procedures to assess risks and comply with all necessary rules and regulations, and implement continuous monitoring of compliance.
Grievance procedures are an important part of crypto-asset providers' work. They must be transparent, fair, and consistent. Customers should be able to file complaints free of charge and be notified of the status of the complaint. Crypto-asset providers should publish descriptions of their complaint procedures.
An important aspect of crypto-asset providers is the management of confidential information. Crypto-asset providers must ensure that all complaints received are kept confidential and protected from unauthorized access.
Identifying, preventing, managing, and disclosing conflicts of interest
Cryptoasset service providers must have effective policies to identify, prevent, manage and disclose conflicts of interest. They must take into account the scope, nature, and range of crypto asset services provided, as well as potential conflicts between themselves, their shareholders, executives, employees, and customers.
Conflicts of interest can arise in many situations. For example, a crypto-asset service provider may have interests that conflict with those of its customers. There may also be conflicts of interest between the crypto-asset service provider and its executives or shareholders.
Disclosure of conflicts of interest.
In addition to preventing conflicts of interest, it is also important to have effective policies and procedures for disclosing them. Crypto-asset service providers should disclose conflicts of interest and provide information about them to their customers within a reasonable time frame.
If a crypto-asset service provider encounters a conflict of interest that may affect its ability to provide services to customers their interests, it should take immediate steps to manage the conflict of interest. It is also important to assess the possible consequences and notify customers of the conflict of interest and the measures that have been taken to manage it.
One of the key aspects to consider when providing crypto-asset services is the obligation to provide specific services. Specifically, Section 67 of the crypto asset Act requires crypto asset service providers who provide custody and management services on behalf of third parties to enter into an agreement with their customers that outlines their duties and responsibilities.
For the agreement to be legally binding and protect the interests of all parties, it must contain several key points:
In a merger or acquisition of a crypto-asset service provider, the prospective purchaser must notify the competent authority of the provider in writing.
If the share of voting rights or equity ownership reaches or exceeds 20%, 30%, or 50%, or if the provider becomes a subsidiary, the competent authority must be notified and the information required by the regulatory technical standards must be provided.
Evaluation of such acquisitions is required to comply with crypto-asset service requirements and to ensure proper oversight by the competent authority.
Crypto-asset service providers that have more than 15 million active users in the European Union in a year are considered large and must comply with certain rules and requirements.
If a large crypto-asset service provider reaches the threshold, it must notify its competent authority within two months and provide it with the information required by the regulatory technical standards adopted by the Commission under Article 75(4). When the competent authority is satisfied that the criteria are met, it must notify ESMA.
CASPs have not been subject to specific requirements regarding travel regulations. This means that CASPs are currently free to travel between different countries and regions without any restrictions.
The agreement extends the already existing "travel rule" in traditional finance to cryptocurrency transfers. Providers must first ensure that the assets they transfer are not linked to restrictive measures or sanctions, and do not present a risk of money laundering or terrorist financing, before making them available to recipients.
Insider trading of crypto-assets is the use of inside information, which is not publicly available, to buy or sell cryptocurrency. Such transactions are regulated by law and punishable by fines or criminal penalties.
According to the regulations, insider trading refers to transactions in which a person in possession of insider information uses it to buy or sell crypto assets for his or someone else's account. Also, insider trading includes the cancellation or modification of a cryptocurrency order placed before the person concerned became the owner of inside information.
Using insider information to trade cryptocurrency is prohibited by law. No person may engage in insider trading or attempt to profit from possessing inside information about crypto assets. In addition, no person may recommend or induce another person to participate in insider trading.
Violators of insider trading may be subject to administrative liability or criminal prosecution, depending on the jurisdiction in which they are located.
To maintain fair and legal trading in the crypto-asset market, a ban on market manipulation has been introduced. This means that no one should engage or attempt to engage in market manipulation, which includes any action intended to create false or misleading signals about the supply, demand, or price of a crypto asset.
It is prohibited to enter into a transaction, place an order to trade or engage in any other behavior that could affect the price of one or more crypto assets using a fictitious device or any other form of deception or subterfuge.
Disseminating false or misleading information through the media or any other means is also prohibited, as it could give false or misleading signals regarding the supply, demand, or price of a crypto asset. The prohibition also applies to the dissemination of rumors where the person who made the dissemination knew or should have known that the information was false or misleading.
ESMA and EBA will acquire new powers to regulate cryptocurrency services in the European Union. They will get the right to intervene and ban services related to cryptocurrencies, as well as to control the marketing, distribution, or sale of cryptocurrencies. This decision was made due to the need to protect investors and ensure financial stability for crypto-assets.
ESMA (European Securities and Markets Authority) is the financial market regulator of the European Union. It is responsible for overseeing the European financial markets, as well as protecting investors and maintaining market stability.
EBA (European Banking Authority) is the European Union's banking sector regulator. It is responsible for supervising the banking system, consumer protection, and maintenance of financial stability in the European Union.
This means that the EBA will be responsible for controlling and regulating this stablecoin, as well as for setting requirements for its issuer. In addition, the stablecoin will be required to maintain a 1:1 reserve to cover all claims and provide holders with permanent redemption rights.
Despite the regulatory measures taken by ESMA and the EBA, some experts have raised concerns that this could negatively impact the innovation and development of blockchain technology. However, ESMA and EBA representatives assure that the regulation is not intended to suppress the development of cryptocurrency technology, but rather to ensure the safety and protection of investors.
In addition, the introduction of stricter regulations could lead to a reduction in the number of unscrupulous players in the market and improve the quality of services provided. Regulation could also increase trust in cryptocurrencies and encourage their use as an alternative form of currency and investment.
However, it is important to note that the implementation of regulatory measures requires significant resources and close monitoring by ESMA and EBA. In addition, CASP entities and stablecoin issuers will also have to pay more attention to regulatory compliance and customer advocacy, which may impose additional costs and complexities in managing the business.
Overall, the introduction of new regulatory requirements and cryptocurrency oversight powers by ESMA and the EBA is an important step toward improving the security and stability of the cryptocurrency market, but its implementation may be challenging and require strict regulatory compliance.
However, FIUs (Financial Intelligence Units) under the MICa initiative are not supervisory bodies. Their task is to collect, analyze and exchange financial information to combat money laundering and terrorist financing. The regulatory function is performed by the respective supervisory authorities in each country. FIUs work closely with supervisors, law enforcement, and others involved in combating financial crime to share information and coordinate actions.
Lõõtsa tn 2a, 11415 Tallinn, Estonia
Žalgirio g. 88-101, Vilnius, Lithuania
License for operating activity: FIU000407