Understanding MiCA: the first comprehensive legal framework regulating digital assets and the crypto ecosystem.
The European Commission, the European Parliament and the Council on the European Union have designed the first comprehensive regulatory framework in the world for crypto-assets. This new landmark law is known as the Markets in Crypto-assets Regulation (MiCA), and it aims to bring legal certainty to digital currencies
With Europe accounting for 25% of global crypto activity, it’s important to understand the requirements players in crypto will have to meet under MiCA. In this article, you’ll find out more about its background, purpose, scope, and its impact on Cryptocurrency Asset Service Providers (CASPs).
– MiCA in figures
2022 witnessed sharp drops in the value of major crypto-assets. This accelerated policy efforts to address risks related to stablecoins and ensure the stability of crypto trading platforms.
The full text of the MiCA regulation was completed in October. But the final voting had to be pushed back twice: from an initial date in December until April 20.
Wondering what caused this delay?
All EU laws must be translated into all the official languages of the bloc before voting takes place.
Now, MiCA has:
- 126 articles, and
- 380 pages.
It took several months for the text to be available in all 24 languages spoken on the continent. And for the regulation to be approved by the European Parliament with:
- 517 votes in favor.
- 38 against.
- 18 abstentions.
So, all is well that ends well. MiCA’s ratified provisions will start applying after a transitional period of 18 months
– The purpose of MiCA
According to a paper published by Deloitte, crypto offers businesses opportunities such as:
- Access to new demographic groups.
- Access to new capital and liquidity pools and to new asset classes.
- More efficient, cheaper and secure money transfers.
- Better control over your company’s capital.
- An alternative to cash, which may depreciate due to inflation.
- Access to new options, such as real-time and accurate revenue-sharing.
These incentives have led more and more companies to use digital assets for investment, operational and transactional purposes.
Hence the need for a harmonized legal framework aiming to:
- Promote crypto-assets and the wider use of distributed ledger technology (DLT).
- Protect consumers against deception and fraud.
- Preserve market integrity.
- Enhance financial stability.
– New measures under MiCA
Here are some of the guidelines crypto players will have to follow in order to comply with the EU regulation:
- Anyone planning on issuing digital assets/coins will have to publish a white paper, outlining possible risks.
- Crypto companies must report financial information to regulators with a view to decreasing the chances of insolvency.
- Issuers of stablecoins (e.g., Circle’s USDC and Tether’s USDT) will have to hold reserves to meet redemption requests and reduce the likelihood of a collapse.
- Miners will be obliged to disclose their energy consumption and the environmental impact of digital assets.
- Transactions from wallets owned by individuals will have to be reported if they exceed €1,000. This measure aims to prevent the use of crypto-assets for money laundering and evasion of sanctions.
– Crypto-assets covered by MiCA
The regulation package provides a regulatory framework for digital assets that use distributed ledger technology (DLT). This means that data are spread across different sites, countries, or institutions, without having a central administrator.
The 3 main crypto-assets covered by MiCA are:
1. Asset-referenced tokens (ARTs).
They are stablecoins that peg their value to a basket of currencies, non-cash assets or cryptocurrency, or a combination of all three.
An example of this is Digix (DGX), where every token represents 1 gram of gold that is stored in secure vaults in Singapore and Canada.2
2. Electronic money tokens (EMT).
EMTs are designed to maintain a stable value by referring to the value of one currency that is legal tender.
Under MiCA, EMTs must be backed by tangible world assets. Say you want to issue €50,000 of a euro-pegged EMT. Then, you’d need to have that amount stored somewhere (e.g., in a bank account or vault).
3. Crypto-assets that are neither ARTs nor EMTs.
An example is “utility tokens”, which provide digital access to a good or service available on DLT, and are only accepted by the issuer of the token.
– Crypto-assets not covered by MiCA
There are some new paradigms that fall outside the scope of the EU regulation, such as:
1. Non-fungible tokens (NFTs).
These are blockchain-based tokens that represent a unique, unrepeatable piece of digital art, content or media (e.g., a video or a tweet).
2. Security tokens.
They are the digital form of traditional investments like stocks, bonds, or other securitized assets.
3. Decentralized Finance (DeFi).
This new way of providing financial services relies on cryptocurrency and blockchain technology. So, traditional intermediaries such as brokerages, exchanges or banks are no longer needed.
4. Central bank digital currencies (CBDCs).
CBDCs are the digital form of a government-issued currency that isn’t pegged to any physical commodity.
– Requirements for Cryptocurrency Asset Service Providers (CAPs)
Under MiCA, anyone looking to offer a crypto-asset is required to:
- Prove their stability and soundness.
- Show they exercise prudence to safeguard users’ funds.
- Undergo controls to verify they don’t engage in proprietary trading.
- Avoid conflicts of interest.
With a view to enhancing transparency, CASPs will need to produce a white paper disclosing:
- Details of the issuer or entity looking to have a crypto-asset admitted to trading.
- Intended use of the capital raised.
- Rights or obligations attached to the asset.
- Underlying technology.
- Possible risks to investing.
The information included in the white paper should be “clear and not misleading”. This also applies to any marketing communication (i.e., ads, marketing material and social media).
Besides, white papers and operating rules of trading platforms will have to be drafted “in at least one of the official languages of the home Member State and of any host Member State, or, alternatively, in a language customary in the sphere of international finance”.
So, if you are a crypto-asset issuer seeking to register in Europe, you’ll need to have plenty of documents translated into different languages. And you should identify your translation needs at the start of the process, not as an afterthought.
Remember how MiCA’s voting had to be pushed back by 4 months due to complications around its translation?
Avoid unnecessary delays by working with a reliable language service provider with proven experience in financial translation.
