On 20th April 2023, the European Parliament gave its final blessing to the new Markets in Crypto-Assets Regulation (“MiCA”).
MiCA forms part of the EU’s broader digital financial package, which includes the Digital Operational Resilience Act and the Pilot Regime on Distributed Ledger Technology. The package aims to embrace innovation and the use of new financial technologies, while ensuring consumer protection and financial stability across the EU.
The Scope of MiCA
MiCA is the first, harmonised EU framework governing crypto-assets. As a regulation (and not a directive), MiCA will be directly applicable across Member States - including Malta - without the need for transposition at a national level. In 2018, Malta had enacted the Virtual Financial Assets Act (Chapter 590, Laws of Malta) (“VFA Act”) – which evidences the jurisdiction’s foresight and willingness to support financial innovation. The Malta Financial Services Authority (“MFSA”) has already commenced discussions with stakeholders to ensure a seamless transition to MiCA once the VFA Act is repealed.
The term “crypto-asset” under MiCA is broadly defined as any “digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology”. MiCA introduces 3 sub-categories of crypto-assets, namely:
- asset-referenced tokens (“ARTs”);
- e-money tokens (“EMTs”); and
- other crypto-assets (a catch-all category for tokens that are not ARTs or EMTs) such as utility tokens and other cryptocurrencies including Bitcoin or Ether.
MiCA establishes three distinct, but interrelated, regulatory regimes, namely (i) a regime for issuers of stablecoins (ARTs and EMTs), (ii) a regime for issuers of non-stablecoins (other crypto-assets), and (iii) a regime for entities providing services in respect of crypto-assets, who are referred to as crypto-asset service providers or CASPs in short.
Primary Market Players (Issuers of Crypto-Assets)
A core requirement under MiCA is that issuers of all three types of crypto-assets must publish a white paper with details of the issuer, the characteristics of the crypto-assets, project timelines, risks, and other matters. The aim is to achieve a harmonised disclosure regime for issuers of crypto-assets, which seems to have been modelled on the EU Prospectus Regulation (Regulation (EU) 2017/1129).
For crypto-assets other than ARTs or EMTs, MiCA establishes disclosure, transparency, and governance requirements. Offering these types of crypto-assets to the public (or listing them on a trading platform) does not require prior authorisation by the national regulator. Rather, issuers will need to notify the regulator and publish the white paper in advance.
The regime for stablecoins (ARTs and EMTs) is more onerous. In essence, MiCA will introduce an authorisation requirement for ART issuers. On the other hand, EMTs may only generally be offered or listed on a trading platform by authorised credit institutions or e-money institutions under Directive 2009/110/EC (EMD2). While there is no separate authorisation requirement for EMT issuers under MiCA, an EMT issuer will need to comply with the various requirements under.
An application for the authorisation of an ART issuer will principally require:
- a programme of operations, with the intended business model;
- proof of initial capital - €350,000 or 2% of the average of ART reference values in reserve (or at least the highest thereof);
- details on the issuer’s governance arrangements and shareholding structure;
- a legal opinion confirming that the ART does not qualify as an EMT or a crypto-asset excluded from MiCA;
- the crypto-asset white paper
- the various policies and procedures, business continuity plan, internal control mechanisms, risk management framework and security safeguards required under MiCA.
Crypto-Asset Service Providers
MiCA establishes general and service specific rules for CASPs. The list of crypto-asset services under MiCA is inspired by the MiFID II regime (Directive 2014/65/EU), which also served as a basis for the VFA Act in Malta. A CASP intending to provide crypto-asset services (such as investment advice, portfolio management, brokerage services or operating a trading platform) in respect of EU customers will require a seat in Europe and authorisation from the national regulator.
MiCA introduces 10 categories of crypto-asset services that trigger an authorisation requirement for CASPs. A licence is required for (i) persons located or established in the EU and (ii) persons established outside the EU, such as the UK and Switzerland, targeting clients in the EU. In a manner similar to other EU legislation, MiCA introduces passporting rights for CASPs (and issuers). A CASP licensed in Malta may passport its activities to other Member States, on a cross-border basis or via a physical branch, and approach clients in those Member States without additional authorisation requirements.
MiCA also has implications for AIFMs, UCITS management companies, MiFID firms, credit institutions and electronic money institutions, who are authorised under other regulatory regimes but undertake crypto-asset services. While a separate authorisation under MiCA is not necessary, these entities will generally need to notify the national regulator at least 40 days before providing the crypto-asset service(s) – together with the programme of operations and other documentation required under MiCA.
After formal (but anticipated) approval by the EU Council, MiCA will be published in the EU’s official journal and enter into force 20 days later. MiCA will apply in two parts. The first part dealing with stablecoins should apply after 12 months (Q2 2024), while the second part dealing with CASPs should apply after 18 months (Q4 2024).
In the meantime, the European Banking Authority and European Securities Markets Authority will develop technical standards and guidelines to compliment MiCA. The industry will be eager to assess the criteria for the classification of crypto-assets under MiCA and the (dis)qualification of tokens as financial instruments under MiFID II. Classification has resurfaced as a hot topic, particularly since Ether, the world’s second-largest cryptocurrency, was labelled as a security - alongside stocks and bonds - by the NY attorney general earlier last month.
Malta remains attractive for establishing crypto-asset operations. The jurisdiction is already familiar with a designated licensing regime for cryptocurrencies. The MFSA’s experience with licence holders, including its supervisory function, should give Malta an edge over other Member States.
You may access our previous publications on MiCA at the following links:
- The Classification of Crypto-Assets under the new Markets in Crypto-Assets Regulation
- The Regime for Crypto-Asset Service Providers under the Markets in Crypto-Assets Regulation
This article was written by Dr Mark Caruana Scicluna (Senior Associate, Investment Services & Funds) and Dr James Debono (Associate, Banking & Finance, Fintech & Blockchain).