MiCA (Markets In Crypto Assets) Dissected - Part 2
This is the second article of our detailed examination on the European Union's Markets in Crypto-Assets Regulation ("MiCA"), the most comprehensive regulatory action in the crypto-assets industry. We will closely scrutinize MiCA with a crisp and clear approach over six weeks, with an article in each week dedicated to essential aspects of MiCA.
For a better understanding, please read the previous part.
1. Who is subject to MiCA?
MiCA stipulates provisions affecting the entire crypto ecosystem, from crypto-asset issuers to crypto-asset service providers ("CASPs"). It is crucial to assess and understand how MiCA will apply to your business. MiCA applies to natural and legal persons and certain other undertakings that are engaged in the issuance, offer to the public, and admission to trading of crypto-assets or that provide services related to crypto-assets in the European Union ("EU"). This means that if, for instance, you plan to conduct a token generation and issuance activity such as an ICO in or offered to the EU or list your crypto-asset on a crypto exchange platform in the EU, you will be subject to the requirements set forth by MiCA.
On the other hand, MiCA shall not apply to entities and persons who only provide crypto-asset services for their parent companies and subsidiaries, liquidators or administrators during an insolvency process, the European Central Bank, national central banks of the EU member states when acting as a monetary authority, other public authorities of the EU member states, the European Investment Bank and its subsidiaries, the European Financial Stability Facility, the European Stability Mechanism, and public international organizations.
2. Extraterritorial Application of MiCA
If a non-EU firm provides a crypto-asset service or activity to persons established or situated in the EU at their own initiative, the crypto-asset service is not considered to be provided in the EU.
In other words, if a client in the EU uses the services of a non-EU CASP at its own exclusive initiative, such a CASP will not trigger MiCA's application. Nevertheless, this kind of a non-EU firm cannot market new categories of crypto-assets or crypto-asset services to that client without an authorization required by MiCA.
It is also essential to understand that if non-EU firms or persons, or their representatives, try to reach out to EU clients or potential clients through any means of communication used to solicit, advertise, or promote themselves, it will not be considered a service provided at the own exclusive initiative of the client. This applies regardless of the communication method used, and without prejudice to any internal group relationships.
Furthermore, even if there is a contractual clause or disclaimer stating that the non-EU firm is considered to be responding to the client's exclusive initiative, this will not be interpreted as the client acting exclusively on their own initiative.
In other words, if a non-EU company is trying to offer its services to clients in the EU, it cannot avoid the requirement to obtain approval in the EU based on a clause in its contract or a disclaimer stating that it is only responding to the client's request. In such cases, the non-EU firm is required to obtain authorization in the EU to offer crypto-asset services.
However, the extraterritorial scope of MiCA is not yet clearly defined. The European Securities and Markets Authority ('ESMA') will address this through its guidelines, which will be published 18 months after MiCA takes effect. These guidelines will determine when non-EU firms are considered to have solicited clients who are resident of or located in the EU.
3.1. Definition of Crypto-Assets
MiCA defines the crypto-asset as a digital representation of a value or a right that is able to be transferred and stored electronically using distributed ledger technology or a similar technology.
The Distributed Ledger Technology ("DLT") is defined as a technology that enables the operation and use of distributed ledger, an information repository that keeps records of transactions and that is shared across, and synchronised between, a set of DLT network nodes using a consensus mechanism.
However, some criticized the crypto-asset definition of MiCA for not including "cryptography" despite the term itself being called "crypto-asset" rather than "digital asset" or "virtual asset" and for the use of a vague phrase "similar technologies." Nevertheless, the Council argues that the definition of crypto-assets should be broad to accommodate future advancements and technological innovations.
3.2. Classification of Crypto-Assets
MiCA classifies crypto-assets into three categories based on whether they aim to maintain their value by referencing other assets, and imposes distinct regulatory requirements according to the risks they entail.
- Asset-Referenced Token ('ART'): refers to a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing to another value or right or a combination thereof, including one or more official currencies. For example, PAX Gold and DIAM will be considered ARTs.
- Electronic Money Token or E-Money Token ('EMT'): refers to a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency. EMTs are similar to electronic money as defined in EU Electronic Money Directive ('EMD2'). The determination of whether an asset falls under MiCA or EMD2 will depend on whether it utilizes DLT for custody or transfer. In this regard, Tether, USD Coin, BiLira, and Statis Euro, for instance, will be considered EMTs.
- Other crypto-assets: refers to the crypto-assets other than asset-referenced tokens or e-money tokens. For example, Bitcoin and Ethereum which are payment tokens using DLT will be considered as "other crypto assets" under MiCA. This category also includes utility tokens, such as Binance Coin, which only intend to provide access to a good or a service supplied by the issuer of that token.
Some ARTs and EMTs are considered significant if they meet, or are likely to meet, certain criteria, such as having a large customer base, a high market capitalization, or a high number of transactions.
Recital 71 indicates that significant ARTs and EMTs pose greater risks to financial stability and monetary policy. Therefore, they must meet more stringent requirements, such as higher capital requirements, interoperability requirements, liquidity management policies, and custody requirements for the reserve assets. The European Banking Authority ("EBA") is responsible for supervising the compliance of issuers of significant ARTs and EMTs, and has the power to enforce supervisory measures and impose fines.
In the next part of our articles, we will explore the criteria for determining which ARTs and EMTs are considered significant and the consequences of this classification.
The MiCA framework covers a wide range of crypto-assets, but there are certain types that are exempt from its scope.
These includes crypto-assets that are offered for free or that are generated automatically as a reward for the maintenance of the DLT or the validation of transactions in the context of a consensus mechanism. For example, airdropped crypto-asset will not be subject to MiCA's requirements.
MiCA also does not cover unique and non-fungible crypto-assets, such as digital art and collectibles, as well as crypto-assets representing unique services or physical assets, such as product guarantees or real estate. This means that NFTs are exempt from this regulation. Because, despite being traded in marketplaces, these kind of crypto-assets have unique characteristics that prevent them from being compared to other markets or equivalent assets, which may pose risk to holders and financial system.
It is important to highlight that the assets or rights represented by such a crypto-asset must be unique and non-fungible to be considered as such. Therefore, MiCA states that simply attributing a unique identifier to a crypto-asset is not sufficient to classify it as a unique or not fungible. Competent authorities will focus on the substance and actual features of the asset and not just its form or label given by the issuer. For example, if NFTs are issued in a large series or collection, this would indicate that they are fungible. In this regard, fractionalized NFTs are not considered unique and non-fungible under MiCA.
Additionally, MiCA excludes crypto-assets that qualify as financial instruments under the EU Directive on Markets in Financial Instruments ('MiFID II'), regardless of the technology used for their issuance or transfer. However, MiCA does not clearly differentiate between crypto-assets and financial instruments. ESMA is expected to provide guidance on the criteria that will be used to classify crypto-assets as financial instruments.
MiCA also does not apply to the offer concerns a utility token providing access to a good or service that exists or is in operation, or when the holder of the crypto-asset has the right to use it only in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror. However, if the utility token offering exceeds EUR 1 000 000, the offeror must send a notification to the competent authority in each 12-month period containing a description of the offer and explaining why the offer is exempt from MiCA.
Finally, MiCA excludes crypto-assets that qualify as deposits, structured deposits, funds other than e-money tokens, securitization positions in the context of securitization, non-life or life insurance contracts, pension products or schemes, and social security schemes, as defined in the relevant EU directives and regulations.
Crypto-asset service provider, or CASP, is a legal person or other undertaking whose occupation or business is the provision of one or more crypto-asset services to clients on a professional basis, and that is allowed to provide crypto-asset services in accordance with MiCA.
In order to provide crypto-asset services in the EU, an entity must either be authorized as a CASP under MiCA or be a specific type of financial institution that is allowed to offer such services. This second group includes credit institutions, central securities depositories, investment firms, market operators, e-money institutions, management companies of UCITS, or alternative investment funds. However, these institutions can only provide services to the extent allowed under MiCA. For example, while credit institutions can offer all crypto-asset services, an e-money institution may only provide custody and administration and transfer services for the e-money tokens it issues.
CASPs must have their registered office located in an EU Member State where they perform at least part of their crypto-asset services, must have effective management in the EU, and must have at least one director based in the EU. They also meet several other requirements such as capital requirements, organizational requirements, prudential requirements.
A CASP's authorization in its home EU Member State will be valid across the entire EU. This means that the CASP will be able to offer crypto-asset services throughout the EU by setting up a physical branch, or by offering services remotely without having to have a physical presence in other member states.
Authorized CASPs will be able to provide the following services:
a. custody and administration of crypto-assets on behalf clients (safekeeping or controlling crypto-assets, the means of access to such crypto-assets, or their private cryptographic keys)
b. operation of a trading platform for crypto-assets (management of at least one multilateral system that brings together buyers and sellers of crypto-assets, resulting in a trade of one crypto-asset for another or for funds)
c. exchanging crypto-assets for funds (buying or selling crypto-assets for funds such as fiat money by using proprietary capital)
d. exchanging crypto-assets for other crypto-assets (buying or selling crypto-assets for other crypto-assets by using proprietary capital)
e. execution of orders for crypto-assets on behalf of clients (concluding agreements to buy or sell crypto-assets or to subscribe for crypto-assets on behalf of clients and includes the conclusion of agreements to sell crypto-assets at the moment of their issuance)
f. placing of crypto-assets (marketing crypto-assets to purchasers on behalf of or for the account of the offeror or of a party related to the offeror)
g. reception and transmission of orders for crypto-assets on behalf clients (receiving a buy, sell, or subscribe order for crypto-assets from a person and transmitting that order to a third party for execution)
h. providing advice on crypto-assets (providing personalized recommendations on crypto-assets to a third party, either in response to a third party's request or at the initiative of the CASP providing the advice)
i. providing portfolio management on crypto-assets (managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis)
j. providing transfer services for crypto-assets on behalf of clients (transferring crypto-assets from one distributed ledger address or account to another on behalf of a natural or legal person)
CASPs must meet specific requirements based on the type of service they offer and the risks associated with each. For example, CASPs providing custody and administration of crypto-assets to clients must establish a contractual relationship with clients that includes mandatory provisions, and must have a custody policy available to clients upon request. Additionally, they are not allowed to actively use the clients' crypto-assets on their own accounts.
5. MiCA Dissected
With the growing popularity of crypto-assets, MiCA provides much-needed clarity on regulatory framework in the EU's crypto-asset landscape, aiming for a safe and secure environment for issuers, CASPs, investors and users. In this regard, offerors, issuers and CASPs must work with a competent law firm with expertise in the crypto-asset industry and a deep understanding of MiCA to assess whether their token or service falls within the scope of MiCA.
In the following four articles, we will explore MiCA in greater depth, including the requirements for issuing, offering and listing different types of crypto-assets, authorizations and obligations of CASPs, and measures to prevent market abuse.
1. MiCA Article 2/1
2. Recital 10