Markets in Crypto Assets (MiCA) is a piece of European Union regulation likely to become law in July 2023, with some of its rules effective in July 2024 and others in January 2025. It is part of a broader digital finance package that has been integrated within the EU, and is hailed as the most important crypto-specific regulation anywhere in the world. But what does it involve?
What does MiCA use?
As per latest available text versionMiCA applies to any person or entity that “engages in the issuance, public offering and admission to trading of crypto-assets or that provides services related to crypto-assets in the Union.”
Crypto-assets are defined as “a digital representation of a value or a right that can be transferred and stored electronically, using distributed ledger technology or similar technology.” Then it is considered one of the three categories.
There are electronic money tokens (EMTs), which only use one currency to stabilize their value, thus encapsulating most of the fiat-backed stablecoins. Then there are asset-referenced tokens (ARTs), which place their value on something else, or on a basket of currencies and assets. This is how the Meta is now-abandoned Diem (formerly known as Libra) project would have been categorized.
The third type includes almost all other types of crypto assets, with some notable exceptions, such as those already covered by existing legislation. To prevent a burden on small businesses, projects offered to less than 150 EU residents, or which cost less than €1 million over the course of 12 months, are exempt of the obligation to publish a white paper (see below) but still have to follow other rules.
Does MiCA apply to NFTs?
MiCA is not applicable to NFTs. The regulation is aimed at functional assets, and not at those whose value “is related to the unique characteristics of each cryptoasset and the utility it provides to the token owner.”
However, the text leaves room for regulators to guard against large collections of NFTs, stating that the “issuance of crypto-assets as non-fungible tokens in a large series or collection should which should be taken as an indication of their fungibility”. The experts have TAUGHT that this may mean further examination of popular collections such as Bored Apes and CryptoPunks.
What rules does MiCA introduce?
In the course of more than 500 pages, MiCA introduces a new set of standards and rules. In short, it includes stricter rules additional disclosure obligations for all crypto businesses, and the implementation of anti-money laundering (AML) and data security procedures.
Under the proposal, a crypto-asset service provider (CASP) is any business or person that provides crypto-related services on a professional basis.
These include exchanges and trading platforms, professional traders, custody providers, advisors and portfolio managers, and providers of transfer services.
These entities must adhere to strict requirements to protect consumer funds and can be held accountable if investors’ assets are lost. They must “act honestly, fairly and professionally”, and they must ensure their security protocols are up to date. They are also required to have a minimum amount of their “own funds”, and may be subject to additional regulation depending on their activities.
Once they have obtained a license from a regulator in a country, CASPs will be able to offer their services throughout the EU, which is made up of 27 countries. One of the main objectives of MiCA is to harmonize the rules throughout the Union, replacing the patchwork approach of different countries.
What does MiCA say about white papers?
A headline change to be brought under MiCA is the requirement for issuers of any type of crypto asset to produce a “white paper,” informing potential holders about in tokens. It must be published before the asset is offered to the public, and works a little like the prospectus a company makes before offering its shares for sale to the public on a stock exchange.
The white paper must include information on the issuer or the entity offering the asset, as well as what project will be carried out with the capital raised, and any rights and obligations attached to the token. Information must also be provided on any adverse environmental impact of the project, but the exact form it should take is still to be decided by the European Banking Authority (EBA) and the EU’s securities regulator ESMA.
For those issuing and offering most types of crypto assets, the creation of a white paper and notification to the authorities of the EU country in which they intend to do business is sufficient. They do not need to be approved by the relevant regulator before trading begins.
However, the rules are stricter for asset-oriented tokens. ART issuers must get their white papers approved before publishing them, as part of the process of becoming authorized in their chosen country.
What does MiCA mean for stablecoins?
Under MiCA, investors must redeem their ARTs or EMTs at any time. This means that issuers of stablecoins must have reserves that match their obligations to token holders, and these must be separated from other funds.
For ARTs, issuers must have a registered office in the EU. The use of ARTs based on non-European currencies will also be restricted, in order to preserve the monetary sovereignty of member countries.
As mentioned above, ART issuers must also obtain approval from local authorities before publishing their white papers, while any issuer of EMTs and other crypto asset can only inform the regulator in their white paper.
EMT and ART issuers classified as ‘significant’ in size must meet higher standards.
Can MiCA prevent crypto meltdowns?
In addition to liquidity and disclosure requirements, the regulation includes a set of market abuse rules modeled on those already in place for traditional finance. This includes the usual restrictions on insider dealing and market manipulation.
The governing bodies may be subject to fines if they do not ensure the proper management of reserve funds, and they are responsible for any incorrect information provided in the white paper.
While there is no guarantee that MiCA will prevent any future explosions in the industry, regulators are hopeful that it will at least prevent “crypto’s” excesses.wild west“.