MiCAR is the European Regulation 2023/1114 on markets in crypto-assets (MiCA). It provides a legal framework to the sector of crypto-assets, which was previously almost unregulated: only the crypto-assets qualifying as financial instruments were subject to the european legislation on financial services. The lack of a comprehensive set of rules was detrimental to the development of a market in crypto-assets and would have led to miss the opportunities these applications of distributed ledger technology may offer in terms of innovation in the financial sector.
MiCAR entered into force on 29 June 2023; it will apply from 30 December 2024. The titles dedicated to asset-related tokens and e-money tokens will apply earlier, from 30 June 2024.
Index
Scope of MiCAR
The MiCA Regulation establishes a european regulatory framework for crypto-assets and related services, setting requirements and obligations for persons and legal entities working with crypto-assets.
The objectives or MiCAR are:
- support innovation and competition;
- protect retail holders of crypto-assets;
- address the risks that the possible widespread adoption of crypto-assets as means of exchange may entail, particularly in terms of financial stability and monetary policy.
What is a crypto-asset?
A crypto-asset is a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology.
.
Crypto-assets out of the scope of MiCAR
MiCAR does not apply to crypto-assets that qualify as:
- financial instruments as defined in Directive 2014/65; ESMA will issue guidelines to clarify the criteria defining crypto-assets as financial instruments.
- funds as defined in Directive 2015/2366, unless they also qualify as e-money tokens (more on that later);
- securitisation positions as defined in Regulation 2017/2402;
- pension products, life or non life insurance contracts, social security schemes.
Non-fungible tokens
Moreover, MiCAR does not apply to non-fungible tokens, or NFT: crypto-assets that are unique and not fungible with other crypto-assets
, as pointed out in the recital n° 10, are not readily interchangeable and the relative value of one such crypto-asset in relation to another, each being unique, cannot be ascertained by means of comparison to an existing market or equivalent asset.
Lastly: MiCAR does not apply to:
digital assets that cannot be transferred to other holders
, such asloyalty schemes where the loyalty points can be exchanged for benefits only with the issuer or offeror of those points.
- fully decentralised crypto-assets, with no intermediary, like Bitcoin.
Classification of crypto-assets
MiCAR classifies crypto-assets into 3 categories and provides for a different set of requirements for each category. The main distinction is between tokens that stabilise their value with reference to another value or assets, known as stablecoins, and all the others.
Stablecoins
The MiCA Regulation splits the stablecoins into 2 categories, depending on whether they stabilise their value with reference to:
another value or right, or combination thereof, including one or several official currencies
: asset referenced tokens, or ARTs.- only one currency: e-money tokens.
For these 2 categories of crypto-assets, known as stablecoins; the Regulation provides stricter requirements. This, due to the potential widespread use of stablecoins as means of exchange and the risks this would entail in terms of financial stability, the smooth operation of payment system, monetary policy transmission or monetary
sovereignty
.
Non-stablecoins
The third category includes all crypto-assets other than asset-referenced tokens and e-money-tokens.
We are now going to see the different set of requirements that the Regulation provides for each category; we will start with the crypto-assets other than asset-referenced tokens or e-money tokens.
Crypto-assets other than asset-referenced tokens or e-money tokens
Title III of MiCAR applies to crypto-assets other than asset referenced tokens or e-money tokens, UNLESS THEY ARE:
- offered for free;
- the reward for miners;
utility tokens providing access to an existing good or service
.
Obligations of the issuer, offeror or person seeking admission to trading
White paper
The issuer of a crypto-assets other than ARTs or e-money tokens is required to draw up, notify and publish a white paper: a document containing information on the issuer and the operation involving crypto-assets.
A crypto-asset white paper should contain general information on the issuer, offeror or person seeking admission to trading, on the project to be carried out with the capital raised, on the offer to the public of crypto-assets or on their admission to trading, on the rights and obligations attached to the crypto-assets, on the underlying technology used for such crypto-assets and on the related risks.Recital 24
The obligations concerning the white paper do not apply when the offer:
- is addressed to less than 150 natural or legal person per Member State;
- is
addressed solely to qualified investors where the crypto-assets can only be held by such qualified investors
whose total consideration does not exceed EUR 1 000 000 over a period of 12 months
The white paper has to be notified to, but not approved by, the competent authority of the Member States where the issuer is based; however, the authority may ask to modify and integrate the white paper with further information (we will talk about the authorities later).
The information published in the white paper need to be fair, clear and not misleading
and the offeror or person seeking admission to trading is liable to the holders for any loss that they may suffer as a consequence of a non-compliant white paper. The competent authorities can suspend or prohibit an offer to the public or the admission to trading of crypto-assets where the white paper contains false or misleading information, or in any case where the operation breaches the terms of the Regulation.
Lastly, the white paper needs to be published on the offeror's website before the offer to the public begins.
Marketing communications
Marketing communications need to be:
- clearly identifiable as marketing communications;
- fair, clear, not misleading;
- consistent with the information published in the white paper;
and
- need to make reference to the white paper and provide the url address of the webpage where it's published.
- are notified to the competent authorities upon request.
Protection of the funds raised with the offer to the public
The offeror of crypto-assets other than asset-referend tokens or e-money tokens needs to implement measures to monitor and safeguard
the funds or other crypto-assets raised during an offer to the public. These measures should enable the issuer to quickly return the funds to the holders if, for any reason, the offer is cancelled.
Right of withdrawal
Holders of crypto-assets other than asset-referenced tokens and e-money tokens have a right of withdrawal within 14 days from the purchase UNLESS:
- the subscription period is expired;
- the crypto-assets are admitted to trading before the purchase.
Act honestly, fairly and professionally - security protocols
Issuers, offerors and persons seeking admission to trading of crypto-assets other than ARTs or e-money tokens should:
- act honestly, fairly and professionally;
- communicate with holders in a fair, clear and not misleading way;
- prevent, manage, disclose and handle the conflicts of interest that may arise;
- have security protocols in place meeting EU standards. These standards will be the subject of guidelines to be issued by EMA.
Asset-referenced tokens (ARTs)
What is an asset-referenced token or ART ?
‘asset-referenced token’ means a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.
Article 3
As we said earlier, for the 2 categories of stablecoins MiCAR provides for additional requirements. The issuer of asset-referenced tokens can be either
- a legal person established in the EU which has been authorised by the competent authority OR
- a credit institution.
Authorisation
As we just said, the issuer of asset-referenced tokens needs the authorisation of the competent authority of its home Member state. The issuer submits an application containing the documents listed in article 18.
- The authorisation is not required
where the asset-referenced tokens are addressed solely to qualified investors or where the offer to the public of the asset-referenced tokens is below EUR 5 000 000.
- the competent authority can deny the authorisation only for objective and demonstrable reasons, for example when the business model of the applicant
might pose a serious threat to market integrity, financial stability or the smooth operation of payment systems.
- before deciding whether or not to grant the authorisation, the competent authority acquires the non binding opinion of ESMA and EBA, on the classification of the token, and of the ECB on the possible
risks to financial stability, the smooth operation of payment systems, monetary policy transmission or monetary sovereignty.
The competent authorities can revoke the authorisation, upon request of central banks, in case asset-referenced tokens pose a threat to the smooth operation of payment systems, monetary policy transmission or monetary sovereignty
. As alternative measure, when the threat asset-referenced tokens pose is less serious, central banks can request to the competent authorities to limit the quantity of tokens that can be issued.
Restrictions on ARTs widely used as a means of exchange
MiCAR sets a limit to the number and value of transactions of asset-referenced tokens when used as a means of exchange. The threshold refers to the estimated daily volume or aggregated value of transactions, on a quarterly basis, of ARTs used as means of exchange in a single currency area. The limit is 1 million of transactions and € 200 millions of value; once reached it, the issuer is required to:
- stop issuing the asset-reference token in question AND
- within 40 days draft and submit to the competent authority a plan committing to keep the number and value of transactions below the threshold.
The competent authority authorizes to resume the issuance only when it has evidence that the volume and aggregated value of transactions are back within the limit.
Obligations of issuers of ARTs
- White paper. The white paper of an asset-referenced token
- it is included in the application for authorisation and it is subject to the approval of the competent authority.
- includes information on the:
- stabilisation mechanism;
- investment policy of the reserve assets;
custody arrangements for the reserve assets
- rights of holders.
- Act honestly, fairly and professionally and have
a clear procedure for handling complaints received from holders
.a policy to identify, prevent, manage and disclose conflicts of interest that can arise
.
- Governance:
Issuers of asset-referenced tokens should have robust governance arrangements, including a clear organisational structure with well-defined, transparent and consistent lines of responsibility and effective processes to identify, manage, monitor and report the risks to which they are or to which they might be exposed
(recital n° 51).- issuers of ARTs should put in place a
business continuity policy
ensuring the continuity in the performance of the activities: interruption of systems or procedure, for instance caused by technical failures, should not halt or disrupt the regular performance of activities related to asset-referenced tokens. - members of the management body as well as shareholders and members should not have been
convicted of any offence in the field of money laundering or terrorist financing or of any other offence that would affect their good repute
.
- No interest on ARTs:
Issuers of asset-referenced tokens shall not grant interest in relation to asset-referenced tokens.
(article 40)
Redemption plan for asset-referenced tokens
Holders of an asset-referenced token have a right to redemption and can redeem the token at any time.
Micar requires issuers of ARTs to have a redemption plan : its aim is to make sure that tokens will be redeemed even in case of difficulties, when the issuer is unable to comply with its obligations. This may be the case for instance due to insolvency or withdrawal of the authorisation.
The redemption plan shall demonstrate the ability of the issuer of the asset-referenced token to carry out the redemption of the outstanding asset-referenced token issued without causing undue economic harm to its holders or to the stability of the markets of the reserve assets.
Article 47(2)
The redemption plan can be implemented only after a competent authority issues a decision which finds the issuer of ARTs
to be unable or likely to be unable to fulfil its obligations
.
EBA guidelines on redemption plans for asset-referenced tokens
EBA will issue guidelines on redemption plans specifying:
- the content of the redemption plan and the timing of its review;
the triggers for implementation of the redemption plan
: when a competent authority should deem an issuerunable to fulfil its obligations
. As we said, this is a condition for the implementation of the redemption plan.
Update
On 8 March 2024 EBA published a draft Guidelines and launched a consultation on the Guidelines for the redemption plans for ARTs and e-money tokens. Comments to the consultation paper can be submitted until 10 June 2024.
Reserve of assets
Issuers of ARTs constitute a reserve of assets : a "safeguard" which covers the liability against the holders. In other words, the reserve has to take into account and cover the risks the issuer is exposed to against the holders. For instance, the reserve of assets comes into play when, due to insolvency, the issuer can no longer fulfil its obligations towards the holders.
In order to meet the demands of the holders even when the issuer is in dire straits, the Regulation requires that:
- the value of the reserve of assets has to amount to at least the value of the tokens in circulation.
- the reserve of assets is
fully segregated from the issuer’s own assets at all times
; - the issuer has a policy on the custody of the reserve aiming at preserving its value.
- the reserve of assets is held in custody by a third party, depending on the nature of the assets:
- a crypto-assets service provider, or;
- a credit institution, or
- an investment firm.
Recovery plan
Lastly, issuers of ARTs should also have a recovery plan describing how to restore the reserve of assets when its value drops below the required threshold, for instance due to the issuer receiving and fulfilling many requests for redemption of tokens.
Own funds requirements
The MiCAR Regulation provides funds requirements so that issuers of asset-referenced tokens are better equipped against the risks to the financial stability of the wider financial system
.
Thereore, according to article 35, Issuers of asset-referenced tokens shall, at all times, have own funds equal to an amount of at least the highest of the following:
:
EUR 350 000;
2 % of the average amount of the reserve of assets
;a quarter of the fixed overheads of the preceding year.
Significant asset-referenced tokens
Asset-referenced tokens are considered "significant" when they meet certain criteria, listed in article 43, such as a large customer base, a high market capitalisation, or a large number of transactions
: elements that show that the token has the potential to be used by a large number of people.
The potentially widespread use of ARTs, which can be assumed or expected when the token is deemed "significant", poses specific challenges, particularly in terms of financial stability and monetary policy, and justifies stricter requirements.
Article 45 details the specific additional obligations for issuers of significant asset-referenced tokens, such as:
- a remuneration policy promoting an effective risk management and that
does not create incentives to relax risk standards
. - giving the tokens in custody to
different crypto-asset service providers authorised for providing custody and administration of crypto-assets on behalf of clients
; - a liquidity management policy ensuring that issuers of significant ARTs have enough resources to operate normally even when under liquidity stress.
- conduct liquidity stress testing.
E-money tokens
What is an e-money token ?
‘electronic money token’ or ‘e-money token’ means a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.
Article 3
Requirements for e-money tokens
Issuers of e-money tokens should be authorised either as a credit institution under Directive 2013/36/EU or as an electronic money institution under Directive 2009/110/EC. E-money tokens should be deemed to be ‘electronic money’ as that term is defined in Directive 2009/110 and their issuers should, unless specified otherwise in this Regulation, comply with the relevant requirements set out in Directive 2009/110/EC for the taking up, pursuit and prudential supervision of the business of electronic money institutions and the requirements on issuance and redeemability of e-money tokens
Recital 36
Therefore:
- issuers of e-money token can be either credit institutions or electronic money institutions under the relevant EU legislation;
- e-money tokens are considered electronic money and comply with the Directive 2009/110 on on the taking up, pursuit and prudential supervision of the business of electronic money.
Obligations of issuers of e-money tokens
For the most part, issuers of e-money tokens have the same obligations of the issuers of asset-referenced tokens that we have already seen, such as:
- draft, notify and publish a white paper
- marketing communications: fair, clear, not misleading, identifiable as marketing communications, consistent with the white paper.
- redeem the tokens upon request;
- should not grant interest on e-money tokens: like issuers of ARTs.
- have a redemption and a recovery plan.
Significant e-money tokens
E-money tokens are deemed significant when they meet the criteria listed in article 43: as we said earlier for ARTs, significant tokens pose a greater risk and are subject to stricter requirements.
We have mentioned that e-money tokens are subject to the requirements for electronic money provided for by Directive 2009/110. However, when deemed significant, e-money tokens comply with the same requirements on the reserve of assets of ARTs, instead of with the articles 5 and 7 of Directive 2009/110, which apply instead to electronic money and non significant e-money tokens.
Crypto-assets service providers
‘crypto-asset service provider’ means 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 Article 59;
Article 3
What are the crypto-assets services?
The crypto-assets services subject to MiCAR are those listed in article 3:
providing custody and administration of crypto-assets on behalf of clients;
operation of a trading platform for crypto-assets;
exchange of crypto-assets for funds;
exchange of crypto-assets for other crypto-assets;
execution of orders for crypto-assets on behalf of clients;
placing of crypto-assets;
reception and transmission of orders for crypto-assets on behalf of clients;
providing advice on crypto-assets;
providing portfolio management on crypto-assets;
providing transfer services for crypto-assets on behalf of clients
.
Requirements for crypto-assets services providers
Crypto-assets service providers comply with the following requirements:
- authorisation from the competent authority of the home Member State;
- legal persons with registered office in a Member State
in which they carry out substantive business activities, including the provision of crypto-asset services
. The key decisions for the management of the business are taken in the UE, which makes the providers subject to the UE legislation. - at least one of the directors residing in the UE.
Undertaking that are not legal persons can be authorised to provide crypto-asset services as long as:
- they offer the same level of protection to users offered by legal persons AND
- are subject to a prudential supervision adequate for their legal form.
Obligations of crypto-assets services providers
act honestly, fairly, professionally and in the best interests of their clients
;- provide their clients with complete, clear, fair, not misleading information, and inform clients on the risks associated with crypto-assets.
- have a clear policy on prices and fees and publish it on their website;
- have complaints-handling procedure;
- prevent, identify and manage conflicts of interest.
Prudential requirements
Article 67 of MiCAR provides for prudential requirements, or minimum capital requirements for crypto-asset service providers, for an amount equal to the higher of the following parameters:
- the amount defined for the specific service by ANNEX IV;
one quarter of the fixed overheads of the preceding year, reviewed annually.
The goal of prudential requirements is to ensure that providers have enough resources to guarantee the continuity of the service and to withstand possible crisis. In short, prudential requirements are a safeguard for providers and eventually for their clients. Crypto-assets service providers comply with prudential requirements either by setting aside funds for the required amount, or by stipulating insurance policies.
Governance
Article 68 requires the provider to comply with organisational requirements, and particularly:
- members of the management body as well as shareholders or members should
not have been convicted for any offence in the field of money laundering or terrorist financing or any other offense that would affect their good repute
; - adopt policies and procedures ensuring the compliance with the Regulation;
all reasonable steps to ensure continuity and regularity in the performance of their crypto-asset services.
- establish measures preserving the availability, authenticity and confidentiality of data according to Regulation 2022/2254 on digital operational resilience for the financial sector (DORA).
Custody of crypto-assets and funds
In order to ensure protection of their clients, crypto-asset service providers should have adequate arrangements to safeguard the clients’ ownership rights with respect to the crypto-assets they hold
Recital 82
Therefore, the provider has a duty to protect the ownership rights of its clients on their crypto-assets, which particularly for cryptocurrencies mostly means to store and safeguard the keys giving access to the funds.
Crypto-assets service providers are required to deposit clients' funds other than e-money tokens in a credit institution, in a dedicated account, so not to confuse these funds with those belonging to the crypto-assets service provider or anyone else.
Market abuse
MiCAR defines 3 conducts amounting to market abuse for crypto-assets:
- insider dealing;
- unlawful disclosure of inside information;
- market manipulation.
Insider information
The Regulation considers cases of market abuse involving inside information, that is information:
- precise;
relating, directly or indirectly, to one or more issuers, offerors or persons seeking admission to trading, or to one or more crypto-assets,
- which have not been disclosed to the public, and if they were, that would probably have a significant impact on the price of crypto-assets.
Issuers have an obligation to disclose inside information that concern them, in a quick and complete manner so to enable the public and potential holders to base their decisions on all the information that may be relevant from a market standpoint.
Issuers can delay the disclosure only if ALL the following conditions are met:
- the immediate disclosure is likely to harm the legitimate interest of the issuer;
- the delay
is not likely to mislead the public
; - issuers can keep the inside information confidential.
Insider dealing
The MiCA Regulation prohibits insider dealing : the use of inside information for orienting the decision on whether to acquire or dispose the crypto-assets related to those information.
The person who possesses inside information is required to abstain from instructing others to execute certain operations with crypto-assets based on the inside information. Using the advice given by someone having access to inside information still amounts to insider dealing, if the person following the advice knows or should know that the advice is based on inside information.
Unlawful disclosure of inside information
Inside information are confidential and should not be disclosed unless the disclosure is due to the normal exercise of an employment, a profession or duties
.
Market manipulation
MiCAR deems as market manipulation any activity aimed at artificially influencing the price of a crypto-asset.Article 91 mentions certain cases of market manipulation, such as:
- engage in a transaction, place an order or any other conduct which:
- gives to the market false or misleading signals on the supply, demand or price of the crypto-asset;
- set the price of one or more crypto-assets to an artificial level.
- spread information which give false or misleading signals on the supply, demand or price of one or more crypto-assets, when the person engaging in such activities knows or should know that the information are false or misleading.
- achieving a dominant position, on the supply or demand of a crypto-asset, which has
the effect of fixing, directly or indirectly, purchase or sale prices or creates, or is likely to create, other unfair trading conditions
.
Lastly, MiCAR requires that any person executing transactions in crypto-assets by profession:
- has procedures and tools to detect and prevent market abuse: these will be specified by a draft of regulatory technical standards that ESMA will submit to the Commission by the end of December 2024.
- reports to the local competent authority any fact, concerning transactions or other technical aspects, that show that a market abuse has been (or it's likely to have been) committed.
Competent Authorities, EBA and ESMA
Title VII of MiCAR regulates in great detail the powers of competent authorities, EBA and ESMA.
Competent authorities
Here we can briefly introduce the topic, starting with the competent authorities: they are designated by the Member States and have the (many) powers and duties that the Regulation gives them. Therefore, Member States designate the authorities responsible for the implementation of the Regulation at the national level.
Designation of competent authorities
Each Member States can designate more than one authority, although in this case Member States also need to assign them their respective tasks and pick one as single point of contact for cooperation with other authorities as well with ESMA and EBA. Member States notify the designation to ESMA, which publishes a list of all the competent authorities on its website.
Powers of competent authorities
- Supervision on:
- issuance of crypto-assets, including e-money tokens and asset-referenced tokens;
- crypto-asset service providers.
- Suspend or prohibit an offer to the public or admission to trading of crypto-assets in case of breach of the Regulation;
- investigate on market abuse;
- impose penalties on issuers and crypto-assets service providers.
EBA - European Banking Authority
EBA is the European Banking Authority, established with Regulation n° 1093/2010. It supervises issuers of significant asset-referenced tokens and shares a dual supervision with competent authorities on significant e-money tokens.
EBA temporary intervention powers
EBA may temporarily prohibit or restrict
- marketing, distribution or sale of asset-referenced-tokens or e-money tokens;
- any practice or activity related to asset-referenced tokens or e-money tokens.
WHEN
- the restriction addresses a risk for investors, for the integrity of markets in crypto-assets, or for the financial system.
- there are no other regulatory requirements applicable to ARTs or e-money tokens that address that particular risk.
- a competent authority did not intervene or did it without success.
AND
- the temporary restriction is not disproportionate: it does not cause harm to the efficiency of markets or to holders without any worthwhile benefit.
- does not create a risk of regulatory arbitrage.
ESMA
ESMA is the European Securities and Markets Authority established with Regulation n° 1095/2010.
ESMA temporary intervention powers
ESMA has the same temporary intervention powers than EBA with reference to crypto-assets other than asset-referenced tokens and e-money-tokens.
ESMA register
ESMA also publishes on its website a register of:
- white papers for crypto-assets other than ARTs and e-money tokens;
- issuers of ARTs and e-money tokens
- crypto-assets service providers.
Lastly, ESMA also keeps a specific register for non compliant entities providing crypto-assets services
(article 110).
About the author
Vincenzo Lalli
Founder of Avvocloud.net
Avvocloud is an Italian network of lawyers passionate about law, innovation and technology.Feel free to reach out for any info: send a message.
Thanks for reading!
