EU Adopts New Crypto Asset Regulation

EU Adopts New Crypto Asset Regulation

by May 22, 2023

The European Union (EU) has taken a significant step in regulating the crypto-assets sector with the Council’s adoption of the Regulation on Markets in Crypto-Assets (MiCA). 

This milestone marks the establishment of an EU-level legal framework for the crypto-assets industry, ensuring investor protection, preventing money laundering, and fostering innovation.

Elisabeth Svantesson, Minister for Finance of Sweden

Elisabeth Svantesson, Minister for Finance of Sweden, expressed her satisfaction with the new regulation, stating, “Today, we are delivering on our promise to start regulating the crypto-assets sector. Recent events have confirmed the urgent need for imposing rules to protect better Europeans who have invested in these assets and prevent the misuse of the crypto industry for money laundering and financing terrorism.”

Comprehensive Coverage and Regulatory Harmonization

MiCA encompasses a broad range of entities and activities within the crypto-assets industry. It introduces a comprehensive framework that includes issuers of utility tokens, asset-referenced tokens, and stablecoins

The regulation also covers crypto-asset service providers such as trading venues and wallets, ensuring these entities comply with anti-money laundering rules. 

By establishing a harmonized regulatory framework across the EU, MiCA represents a substantial improvement over the existing patchwork of national legislation.

Supporting Innovation and Strengthening Consumer Protection

The European Commission introduced the MiCA proposal as part of the digital finance package, which aims to foster technological development, ensure financial stability, and enhance consumer protection.

 In addition to MiCA, the package includes the Digital Operational Resilience Act (DORA) and a proposal on distributed ledger technology (DLT) pilot regime for wholesale uses. 

This comprehensive package bridges the regulatory gap, enabling new digital financial instruments to be used while ensuring they fall within the scope of financial regulation and operational risk management arrangements.

Assets Covered and Excluded under MiCA

MiCA will apply to a wide range of crypto assets, encompassing “a digital representation of value or a right that uses cryptography for security and is in the form of a coin, token, or any other digital medium transferred and stored electronically, using distributed ledger technology or similar technology.” 

This definition includes both traditional cryptocurrencies like Bitcoin and Ethereum, as well as newer variants like stablecoins.

However, MiCA will not regulate digital assets that qualify as transferable securities or function similarly to shares, nor will it cover crypto assets already regulated as financial instruments. Non-fungible tokens (NFTs) are also excluded from the regulation. 

Additionally, central bank digital currencies issued by the European Central Bank and digital assets issued by national central banks acting as monetary authorities are not within the scope of MiCA.

Regulation of Crypto-Asset Service Providers

Under MiCA, the regulation introduces comprehensive rules for Crypto-Asset Service Providers (CASPs) to ensure stability and security and protect user funds. 

CASPs must be incorporated as a legal entity within the EU and can obtain authorization from any member country, enabling them to operate across all 27 countries. 

Regulatory bodies such as the European Banking Authority will oversee the supervision of CASPs, ensuring compliance with the established standards. 

CASPs are required to demonstrate stability, soundness, and the ability to safeguard user funds effectively. Additionally, CASPs must have measures to defend against market abuse and manipulation, enhancing the integrity of the crypto-asset sector.

White Paper Requirements for Stablecoin Service Providers

MiCA imposes white paper requirements on Stablecoin Service Providers to promote transparency and enable informed decision-making. 

Stablecoin service providers are obligated to provide a detailed white paper that includes vital information about the crypto product, the main participants in the company, and the terms of the public offer. 

This also consists of the type of blockchain verification mechanism utilized, the rights associated with the crypto assets, critical risks for investors, and a summary facilitating potential purchasers’ understanding. 

By offering comprehensive information, this measure empowers investors to make informed choices regarding their investments in stablecoins.

Reserve Requirements for Stablecoin Issuers

MiCA addresses the potential risks of stablecoins by establishing reserve requirements for stablecoin issuers. Issuers will be mandated to maintain sufficient reserves corresponding to the value of their stablecoins, ensuring the avoidance of liquidity crises.

 Insufficient reserves can have severe implications for stablecoin users, leading to significant losses. By imposing reserve requirements, MiCA aims to safeguard the interests of stablecoin holders and maintain the stability of the crypto-asset market.

Transaction Limits for Stablecoin Firms (Non-Euro Currencies)

Stablecoin firms pegged to non-euro currencies will be subject to transaction limits within specified regions. MiCA sets a daily volume cap of €200 million (US$220 million) for such transactions. This measure aims to manage the potential risks associated with stablecoins and their impact on financial stability. 

By implementing transaction limits, MiCA seeks to strike a balance between fostering innovation in the crypto-asset sector and ensuring the appropriate management of associated risks.

Anti-money Laundering Measures for Crypto Companies

Recognizing the importance of preventing money laundering and terror financing activities, MiCA includes stringent anti-money laundering measures for crypto companies. 

Crypto companies will be required to provide information about senders and recipients of crypto assets to their local anti-money laundering authority. Compliance with these measures is crucial, as failure to do so can result in significant legal and reputational consequences for crypto companies. 

By enforcing anti-money laundering regulations, MiCA aims to protect the financial system’s integrity and mitigate the risks associated with illicit activities in the crypto-asset industry.

About MiCA and Future Implications

MiCA represents a pivotal milestone for the EU in regulating the crypto-assets sector. By establishing a comprehensive framework, the EU aims to protect investors, enhance transparency, preserve financial stability, foster innovation, and promote the attractiveness of the crypto-asset sector. 

With a harmonized regulatory approach across all member countries, MiCA paves the way for a more consistent and efficient functioning of the crypto-asset market within the EU.