MiCA: EU introduces world-first crypto-asset licensing regime

By John Bassilios and Georgia Francis

The European Parliament Committee on Economic and Monetary Affairs has voted to enact new crypto-asset laws, the first of their kind in the world. The Markets in Crypto Assets Regulation is expected to be formally adopted this month by the European Parliament plenary and will likely come into force in 2024.

The Markets in Crypto Assets Regulation (MiCA) introduces a licensing regime for persons and entities that are engaged in the issuance, offer and admission of crypto-assets and any related services. This is in addition to further laws which require wallet providers to check their customer's identity, in a bid to address money laundering concerns.

MiCA governs organisations providing crypto services to residents of the European Union (EU).  However, it does not cover crypto-assets regulated by other EU financial law instruments. Therefore, crypto-assets that qualify as financial instruments, such as security tokens or electronic money are not subject to MiCA.

Key features of the MiCA framework

Jurisdictional reach

The MiCA regulations apply to any person providing crypto-asset services or issuing crypto-assets in or into Europe and is applicable to any offer for crypto-assets that occurs after commencement of the regime. However, there are some grandfathering and transitional arrangements which may apply to an offer that was opened before the regulations commenced, where that offer closes after commencement.

Classification system for crypto-assets

MiCA makes three clear distinctions between crypto-assets:

• Asset Reference Token (ART) – a token aimed to maintain a stable value by being backed by one or more assets.
• E-Money Token (EMT) – electronic surrogates for coins and banknotes and are likely to be used for making payments, which are backed by an official State currency.
• Other Crypto-Asset – a digital representation of value or rights which may be transferred and stored electronically.

MiCA prescribes a separate regulatory regime for each category of crypto-asset listed above.

Requirements for ‘Crypto-Asset Issuers’

Crypto-Asset Issuers are defined under MiCA to be entities which have control over the creation of crypto-assets. Crypto-Asset Issuers are required to follow a set of requirements before they can offer crypto-assets to the public.

A Crypto-Asset Issuer will be taken to ‘offer’ crypto-assets to the public, where they communicate to persons in any way or form to present information on the terms of the offer of crypto-assets that is sufficient to enable a person to decide on whether to take up the offer.

These requirements a Crypto-Asset Issuer must comply with – if they do intend to make an offer of crypto-assets to the public – include that they must be a legal person, adhere to good conduct and technical requirements and draft a whitepaper, which is to be provided to a local authority.

The whitepaper must include disclosures relating to risks, allow for a 14-day cooling off for retail customers and, overall, be ‘fair, clear and not misleading’.

Requirements for ‘Crypto-Asset Service Providers’

Any person that provides crypto-asset services on a professional basis will be considered a Crypto-Asset Service Provider (CASP).

Broadly speaking, the categories of crypto-assets services and activities, which will require the CASP to hold a licence under the MiCA regime, include those that provide:

• custody and administration of crypto-assets on behalf of third parties;
• operation of a trading platform for crypto-assets;
• exchange of crypto-assets for funds and/or for other crypto-assets;
• placing of orders for crypto-assets and execution of orders for crypto-assets on behalf of third parties;
• providing transfer services for crypto-assets on behalf of third parties;
• reception and transmission of orders for crypto-assets on behalf of third parties; and
• providing advice and portfolio management on crypto-assets.

Only legal persons that have a registered office in the EU and have obtained an authorisation from the relevant national competent authority as a Crypto-Asset Service Provider in accordance with MiCA will be permitted to provide services in crypto-assets. An authorisation in one member state will be valid for the entire EU, in line with existing ‘passporting’ principles.

While there are specific requirements for CASPs that provide custody and administration of crypto-assets and trading platforms, more generally CASPs will be subject to the following rules to:

• act fairly and in the interest of clients;
• ensure at least one Director is a resident of the EU;
• have their place of effective management in the EU;
• ensure members of management and qualifying shareholders (10%) are fit and proper;
• adhere to prudential and organisational requirements;
• ensure the safekeeping of assets and funds;
• implement complaint handling procedures;
• prevent and manage conflicts of interest; and
• adhere to outsourcing requirements.

MiCA also provides additional enforcement powers to national authorities, including to issue fines and bans on members of management – as well as powers – to require a CASP to:

• suspend offering services;
• make a public notice that it is failing to comply; and
• suspend advertisements.