EU Launches Groundbreaking Markets In Crypto-Assets Regulation – Fin Tech

In September 2020, the European Commission adopted a digital finance package with
the aim of creating a supportive regulatory framework to enable the
digital transformation of the European Union’s financial
industry. It established the groundbreaking piece of regulation
– the Markets in Crypto-Assets Regulation (MiCAR) – to
provide a harmonised regulatory framework for crypto-assets in the
EU. MiCAR came into force on 29 June 2023, almost three years
later, and soon will become applicable. The key dates are:

• 30 June 2024, which is when provisions
  governing in-scope stablecoins become applicable.




• 30 December 2024, which is when provisions
  governing the remaining crypto-assets become applicable.

If your business issues or deals with crypto-assets in the EU,
understanding MiCAR now and achieving compliance before the
relevant deadline will be crucial, as the regulation may
significantly impact your business’ compliance procedures and
transparency obligations.

This alert provides a high-level summary of what MiCAR is, the
scope of the regulation, and the key requirements for businesses
currently dealing, or intending to deal, with crypto-assets in the
EU.

1. What is MiCAR?

In January 2019, two reports – Advice on Initial Coin Offerings and
Crypto-Assets from the European Banking Authority
(EBA) and Report With Advice for the European
Commission on Crypto-Assets from the European
Securities and Markets Authority (ESMA) – highlighted the
issue of a majority of crypto-assets falling outside the scope of
existing EU financial services legislation, such as the Markets in Financial Instruments Directive
2014 (2014/65/EU), also known as MiFID II, and the E-Money Directive
(2009/110/EC), or EMD2. Given the increasing
popularity of markets in crypto-assets, the lack of rules
regulating crypto-assets and related services raises concerns that
it will set back fair competition and innovation due to the
following intercorrelated reasons:

• Holders of crypto-assets are exposed to significant risks.




• Holders of crypto-assets will lose confidence in such assets as
  a result of the risks.




• Market integrity is put at risk.




• Development of markets in crypto-assets will be hindered.




• Innovation of digital services (e.g., establishing new
  alternative payment instruments of funding sources for EU
  companies) will be hindered.

The European Commission recognised the urgent need to establish
a dedicated and harmonised framework at the EU level to address
such risks. Against this backdrop, MiCAR was introduced to
establish a comprehensive set of rules and standards for the
regulation of such unregulated crypto-assets in order to provide
legal clarity, consumer protection and market integrity (e.g.,
deterring market abuse and financial crime). A few key features of
MiCAR aim to achieve the following:

• Promote financial stability and the smooth operation of
  payment systems by placing focus on crypto-assets that
  have a direct effect on existing financial markets, financial
  stability, consumer rights and monetary sovereignty (e.g.,
  stablecoins).




• Address any monetary policy
  risks arising from crypto-assets that stabilise their
  price in relation to a specific asset or basket of assets (e.g.,
  stablecoins).




• Address proportionately any risks inherent in related
  crypto-assets and related services so that less risky
  crypto-assets will be subject to lighter rules, while stricter
  rules will apply to crypto-assets that are considered riskier
  (i.e., those that have a potentially systemic role in financial
  stability and monetary sovereignty).




• Generate equal opportunities in respect of
  market entry, as well as the ongoing and future development of
  markets in crypto-assets.

2. What is MiCAR’s scope?

Entities affected by MiCAR

MiCAR will apply to:

• Issuers, which means those that engage in the
  issuance, offering to the public and admission to trading of
  in-scope crypto-assets.




• Crypto-asset service providers (CASPs), which
  means those that provide certain crypto-asset services in the EU,
  such as providing advice on crypto-assets, crypto wallet providers,
  exchanges and platforms.

Crypto-assets falling within MiCAR’s
scope

The regulation defines crypto-assets as ‘a digital
representation of a value or of a right that is able to be
transferred, and stored electronically using distributed ledger
technology (DLT) or similar technology’,¹ and will
apply to three categories of crypto-assets, as listed below.

1. Asset-referenced token (ART) is sometimes
   referred to as a stablecoin, and it tracks its value by referring
   to other assets or a combination thereof (this can be the value of
   official currencies or commodities).²




2. Electronic money token (EMT)
   is a stablecoin which tracks its value against a single official
   currency,³ and should not be confused with electronic
   money that falls within the scope of the EMD2, with the key
   difference being that EMTs use DLT or similar technology, while the
   latter don’t.




3. All other crypto-assets which are not an ART
   or an EMT, and are not excluded from the scope of MiCAR.

Exceptions to MiCAR

There are several entities that MiCAR does not apply
to,⁴ including:

• Crypto-asset services provided exclusively for their parent
  companies, their own subsidiaries or for the parent company’s
  subsidiaries.




• The European Central Bank and European investment banks.




• Public international organisations.

The scope of MiCAR excludes any crypto-assets that are already
adequately regulated by other EU financial services legislation
(e.g., MiFID II or EMD2).⁵

3. What are MiCAR’s key requirements?

MiCAR’s framework aims to ensure financial stability and
market integrity, with some of the key provisions to achieve this
including the following:

• Issuers are required to publish a white paper⁶
  (essentially a report) on their crypto-assets which must include,
  among other things, information on risk, the offeror, the issuer
  and detail on the crypto-asset project.




• CASPs are subject to capital requirements, governance standards
  and other supervisory conditions (e.g., being required to act
  honestly fairly and professionally in the interest of their
  clients, to name a few)⁷.




• Issuers and CASPs are required to ensure investors are informed
  about potential risks –and be diligent in preventing market
  fraud and manipulation.⁸




• CASPs are subject to authorisation and operating
  conditions.




• Issuers of ARTs and EMTs are subject to authorisation
  requirements.




• Detailing powers of competent authorities (i.e., the EBA and
  ESMA).

Issuers of ‘significant’ ARTs and
EMTs

MiCAR places more stringent rules on issuers of
‘significant’ARTs and EMTs. An ART or EMT becomes
‘significant’ if it meets certain criteria, such as
(non-exhaustive list⁹):

• The number of holders of the ART exceeds 10 million.




• The value of the ART issued, its market capitalisation or the
  size of the reserve of assets of the issuer of the ART is higher
  than 5 billion euros.




• The same issuer issues at least one additional ART or EMT, and
  it provides at least one crypto-asset service.

Such ‘significant’ARTs and EMTs are considered to be at
risk of raising specific challenges in terms of financial
stability, monetary policy transmission or monetary sovereignty.
Therefore, issuers of ‘significant’ ARTs and EMTs will be
subject to more stringent rules relating to:

• Higher capital requirements.




• Interoperability requirements.




• A requirement to establish a liquidity management policy.




• Falling within the supervision of the EBA.

‘Significant’ CASPs

Meanwhile, CASPs become ‘significant’ when they have at
least 15 million active users in the EU on average in one calendar
year. CASPs which have reached that threshold must notify their
competent authorities, who will then notify ESMA.

4. What are next steps?

MiCAR will apply from 30 December 2024 in all EU member states,
and we can expect further published guidance from the EBA and ESMA
by that date as well. If your business currently issues or deals
with crypto-assets, or intends to do so, it may be important to
start considering if you have any obligations under MiCAR.

As noted above, this alert only provides a high-level summary of
the scope and key requirements of MiCAR. If you need further
guidance, Cooley can provide regulatory advice on whether you fall
within the scope of MiCAR and, if so, the steps your business
should be taking to ensure compliance by the relevant deadline.

Eleanor Matthews and Cooley paralegal
Alex Mizgajski also contributed to this
alert.

Footnotes

1. Article 3(5) of MiCAR

2. Article 3(1)(6)

3. Article 3(1)(7) of MiCAR

4. Article 2(2) of MiCAR

5. Article 2(4) of MiCAR

6. Article 6 of MiCAR

7. Article 66 of MiCAR

8. Article 91 of MiCAR

9. Article 43(1) of MiCAR, which details a full list of
criteria for ‘significant’ ARTs; Article 56(1) of MiCAR,
which details a full list of criteria for ‘significant’
EMTs.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.