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Markets in Crypto Assets (MiCA) is a piece of European Union regulation that will likely become law in July 2023, with some of its rules taking effect in July 2024 and others by January 2025. It is part of a wider digital finance package that has been put together within the EU, and has been hailed as the most significant crypto-specific regulation anywhere in the world. But what does it involve?
What does MiCA apply to?
According to the most recent available version of the text, MiCA applies to any person or entity “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 Union.”
Crypto-assets are defined as “a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology.” These are then treated as one of three categories.
There are electronic money tokens (EMTs), which use just one currency to stabilize their value, therefore encapsulating most fiat-backed stablecoins. Then there are asset-referenced tokens (ARTs), which peg their value to something else, or to a basket of currencies and assets. This is how Meta’s now-abandoned Diem (formerly known as Libra) project would have been categorized.
The third type covers pretty much all other types of crypto assets, with a few notable exceptions, such as those which are already covered by existing legislation. To prevent a burden on small businesses, projects which are offered to fewer than 150 EU residents, or which are worth less than €1 million over the course of 12 months, are exempted from the obligation to publish a white paper (see below) but still need to adhere to other rules.
Does MiCA apply to NFTs?
MiCA does not apply to NFTs. The regulation is aimed at assets which are fungible, and not to those whose value "is attributable to each cryptoasset’s unique characteristics and the utility it gives to the token holder.”
However, the text leaves wiggle room for regulators to keep an eye on large collections of NFTs, saying that the “issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility”. Experts have pointed out that this could mean additional scrutiny on popular collections such as Bored Apes and CryptoPunks.
What rules are introduced by MiCA?
In the course of more than 500 pages, MiCA introduces a swathe of new standards and rules. In short, these include stricter rules on , more 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 will have to adhere to strong requirements to protect consumer funds and become liable in case they lose investors’ assets. They should “act honestly, fairly and professionally”, and they should ensure their security protocols are up to scratch. They also need to have a minimum amount of their “own funds”, and may be subject to additional regulation depending on their activities.
Once they have secured a license from a regulator in one country, CASPs will be able to offer their services across the whole of the EU, which consists of 27 countries. One of the main goals of MiCA was to harmonize rules across the Union, replacing the patchwork approach of different countries.
What does MiCA say about white papers?
One headline change that will be brought in under MiCA is the requirement for issuers of any type of crypto asset to produce a “white paper,” informing potential holders about the token. They have to be published before the asset is offered to the public, and function a little bit like the prospectus a company produces before offering its shares for sale to the public on a stock exchange.
The white paper should cover 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 also has to be provided on any adverse environmental impacts of the project, but the exact form this should take is still to be decided by the European Banking Authority (EBA) and the EU’s securities regulator ESMA.
For issuers and offerers of most types of crypto assets, creating the white paper and notifying the authorities of the EU country in which they intend to do business will be sufficient. They do not need to be approved by the relevant regulator before trading begins.
However, the rules are stricter for asset-referenced tokens. Issuers of ARTs need to 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 should be able to redeem their ARTs or EMTs at any time. This means issuers of those stablecoins need to have reserves that match their liabilities to holders of the token, and it needs to be insulated from other funds.
For ARTs, issuers will need to have a registered office in the EU. The use of ARTs based on non-European currencies will also be constrained, in a bid to preserve the monetary sovereignty of member countries.
As mentioned above, issuers of ARTs also have to get approval from local authorities before publishing their white papers, whereas anyone issuing EMTs and other crypto assets can just notify the regulator of their white paper.
EMT and ART issuers that are classed as ‘significant’ in size will need to meet higher standards.
Will MiCA prevent crypto meltdowns?
On top of liquidity requirements and disclosures, the regulation includes a set of market abuse rules modelloned on existing ones for traditional finance. This includes the usual prohibitions of insider dealing and market manipulation.
Management bodies can be subject to fines if they do not ensure proper management of reserve funds, and they are held responsible for any incorrect information provided in the white paper.
While there’s no guarantee that MiCA will prevent any future blow-ups in the industry, regulators are hopeful that it will at least curb the excesses of crypto’s “wild west”.