For the first time, the EU provides a regulatory framework (MiCA) for crypto assets, crypto assets issuers, and crypto asset service providers.
The European Union (EU) has reached an agreement on legislation that will regulate crypto assets and service providers across the bloc’s 27 member countries.
As part of the Markets in Crypto Assets (MiCA) bill, regulators will consider consumer protections, environmental protections, and supervisory provisions.
The Markets in Crypto Assets (MiCA) framework for regulating cryptocurrency markets, has been a source of disputes between policy experts from the world’s third-largest economy for nearly two years. According to the legislation package proposed on Thursday, crypto issuers will be required to publish a technical document known as a “white paper,” and to register and maintain bank-style reserves for stablecoins (cryptocurrencies backed by sovereign currencies such as the euro).
A framework for regulating crypto-asset risk
MiCA will help consumers avoid fraudulent schemes and protect them against some of the risks associated with investing in crypto-assets. In many cases, consumers do not have much protection or redress, especially if they transact outside of the EU. The new rules require crypto-asset service providers to meet strict requirements to protect consumers’ wallets and become liable if they lose investors’ crypto assets. In addition to covering any kind of market abuse relating to any type of transaction, MiCA will also address insider dealing and market manipulation.
Those involved in the crypto-assets market will have to disclose their environmental and climate footprints. In order to ensure that regulated markets are protected from adverse health, environmental, climate, and safety impacts, the European Securities and Markets Authority (ESMA) will draft a regulatory technical standard on the content, methodology, and presentation of relevant data. A report on the environmental impact of crypto-assets and mandatory minimum sustainability standards for consensus mechanisms, including proof-of-work, will be required by the European Commission within two years.
Anti Money Laundering
To avoid any overlaps with the updated legislation regarding anti-money laundering (AML), which now covers crypto-assets as well, MiCA does not duplicate the anti-money laundering provisions as set out in the newly updated transfer of funds rules that were agreed to on 29 June. The MiCA will require that the European Banking Authority (EBA) maintain an online registry of compliance-failing providers of crypto-asset services.
In line with the EU AML framework, crypto-asset service providers whose parent companies are located in countries that face heightened risk of anti-money-laundering activities, as well as jurisdictions that refuse to cooperate with tax authorities, will have to conduct enhanced checks. In addition, stronger requirements can be applied to shareholders as well as the management of CASPs, particularly regarding localisation of their operations.
Stablecoin instability has highlighted once again risks and adverse impacts in absence of regulation.
Rules around stablecoins were an integral part of the negotiations. In a post-agreement Twitter thread, Ernest Urtasun of the Greens/EFA group stressed that “large stablecoins will be subject to strict operational and prudential rules, with restrictions if they are used widely as a means of payment, and a cap of €200 million in transactions per day.”
To protect consumers, MiCA will request stablecoins issuers to build up a liquid reserve with a 1:1 ratio partly in the form of deposits. Holders of stablecoins will be able to claim their currency at any time and for free from the issuer, and the rules governing the reserve will also guarantee a minimum level of liquidity. In addition, the European Banking Authority (EBA) will supervise all stablecoins, with the presence of the issuer in the EU a prerequisite for any issuance.
The production of asset-referenced tokens (ARTs) using a non-European currency as a widespread payment method will be restricted to protect the EU’s monetary sovereignty. It will be necessary for the issuers of ARTs to have their registered offices in the EU so that their offerings of asset-referenced tokens to the public can be properly supervised and monitored.
This framework seeks to provide the expected legal clarity and allow innovation to flourish in the European Union.
Regulation of crypto and service providers in the EU
As a result of the provisional agreement reached this week, crypto-asset service providers (CASPs) will need authorisation to operate within the EU. A minimum of three months will be given to national authorities to issue authorisations. To keep ESMA informed about the biggest CASPs, national authorities will submit pertinent information on a regular basis.
Non-fungible tokens (NFTs) or digital assets representing real objects like art, music and videos, will be excluded from the scope except if they fall under existing crypto-asset categories. The European Commission will be tasked with preparing a comprehensive assessment within 18 months, as well as a specific, proportionate and horizontal legislative proposal to create a regulatory regime for NFTs and address the emerging risks associated with this new market.