By Anndy Lian

The EU has recently adopted the Markets in Crypto-Assets Regulation (MiCAR). This groundbreaking legislation aims to provide a clear and consistent framework for regulating crypto-assets and related services in the EU. MiCAR will apply from the end of 2024, with some provisions applying from mid-2024.

MiCAR defines crypto-assets as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” This definition covers various types of crypto-assets, such as cryptocurrencies, tokens, stablecoins, and non-fungible tokens (NFTs). It excludes crypto-assets already regulated under existing EU financial services legislation, such as financial instruments, deposits, electronic money, or insurance products. I agree with this definition, as it is broad and neutral enough to capture the diversity and innovation of crypto-assets while also respecting the existing regulatory frameworks for other types of assets.

Furthermore, it classifies crypto-assets into three main categories: e-money tokens (EMTs), asset-referenced tokens (ARTs), and other tokens. EMTs are crypto-assets pegged to one official currency, such as Tether or USD Coin. ARTs are crypto-assets backed by a pool of assets, such as fiat currencies, commodities, or other crypto-assets. Other tokens are crypto-assets that have various purposes and characteristics, such as utility tokens, payment tokens, or governance tokens.

As mentioned above, MiCAR also introduces the concept of significant tokens for EMTs and ARTs, which are subject to additional requirements due to their potential impact on financial stability or monetary policy. The European Banking Authority (EBA) will identify and monitor significant tokens based on criteria such as the number of users, transaction values, interconnectedness with the financial system, or innovation or complexity of the token. I think this classification is reasonable and valuable, as it reflects the different functions and risks of crypto-assets while also allowing for some flexibility and adaptation. Personally, when I spoke to EU-based bankers who are considering ESG-related crypto funds, they mentioned that MiCAR should also consider the environmental and social impact of crypto-assets, especially those that consume a lot of energy or resources or those that may affect human rights or privacy. I did not comment on that, but I am well aware of their “crypto agenda”. Additionally, I also think that they should actively involve other stakeholders, such as consumers, investors, or developers, in identifying and monitoring significant tokens, as they may have valuable insights and feedback.

MiCAR imposes different authorization and supervision requirements for crypto-asset issuers and crypto-asset service providers (CASPs), depending on the type and significance of the crypto-asset. Crypto-asset issuers offer crypto-assets to the public or seek their admission to trading on a trading platform for crypto-assets. CASPs provide or perform services or activities related to crypto-assets, such as custody, exchange, execution, advice, or portfolio management. Crypto-asset issuers of EMTs and ARTs must obtain authorization from the competent authority of their home member state before offering or admitting such tokens to trading. They must also prepare and publish a white paper that discloses essential information about the crypto-asset project, such as the features, rights, and obligations of the crypto-asset, the risks and costs involved, the governance and technical arrangements, and the identity and contact details of the issuer. Do note that they do not need authorization but must comply with the white paper requirement and other general obligations.

CASPs must obtain authorization from the competent authority of their home member state before providing or performing any crypto-asset services or activities. They must also comply with prudential requirements, the conduct of business rules, safeguarding requirements, and anti-money laundering and counter-terrorism financing (AML/CTF) obligations. I support these requirements, as they aim to ensure the transparency, accountability, and responsibility of crypto-asset issuers and CASPs and protect the interests and rights of consumers, investors, and the public. On top of this, I think that MiCAR should also provide some incentives and benefits for crypto-asset issuers and CASPs that comply with these requirements, such as lower fees, faster processing, or broader access. I also think that MiCAR should promote cooperation and coordination among the competent authorities of different member states and other international regulators and organizations to avoid duplication, inconsistency, or conflict.

MiCAR also provides some transitionary provisions and exemptions for crypto-asset issuers and CASPs already operating in the EU before the application date of MiCAR. For example, those authorized or registered under national regimes in one or more member states may continue to operate in those member states until mid-2025 without obtaining authorization under MiCAR. However, they must comply with the relevant national rules and regulations and apply them by mid-2024 if they wish to operate in the EU after mid-2025.

They also established a pilot regime for distributed ledger technology (DLT) market infrastructures, which are a new type of market participants that use DLT to provide trading and settlement services for crypto-assets that qualify as financial instruments. The pilot regime aims to test the use of DLT in trading and post-trading crypto-assets while ensuring high investor protection and market integrity. The pilot regime will apply for five years from the application date of MiCAR, with a possibility of extension. These provisions are good in my opinion, as they recognize the diversity and maturity of the existing crypto-asset market in the EU and can provide a smooth and gradual transition to the new regulatory framework. They should also ensure a fair and equal treatment of all crypto-asset issuers and CASPs, regardless of origin, size, or status, and avoid creating undue advantages or disadvantages for some over others. If they can encourage and support the participation and experimentation of different actors and stakeholders in the pilot regime, such as incumbents, newcomers, or innovators, and foster a collaborative and inclusive environment for the development and adoption of DLT. This will be a big plus for them.

MiCAR does not apply to crypto-assets issued or guaranteed by central banks, member states, third countries, or public international organizations. It also does not apply to crypto-asset services or activities provided or performed by central banks or other public authorities in performing their public tasks or functions. These exemptions aim to preserve the monetary sovereignty and policy of the EU and its member states and facilitate the development of central bank digital currencies (CBDCs) and other public initiatives in the crypto-asset space. While I understand these exemptions, as they reflect the special and privileged status of central banks and public authorities and their role and responsibility in the monetary and financial system. However, I think MiCAR should also ensure a close and constructive dialogue and cooperation between the public and the private sectors and foster a balanced and complementary relationship between the traditional and innovative forms of money and finance. I also think that MiCAR should monitor and assess the impact and implications of CBDCs and other public initiatives on the crypto-asset market and address any potential issues or challenges that may arise.)

I also want to highlight that there are also some implications for investment firms and the travel rule, which are relevant to the crypto-asset market. Investment firms are those who provide or perform investment services or activities on a professional basis, such as execution of orders, portfolio management, or investment advice. The travel rule is a requirement that obliges financial institutions to exchange certain information about the originator and the beneficiary of a funds transfer, such as their names, addresses, account numbers, and transaction amounts.

They allow investment firms that are authorized under the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) to provide or perform crypto-asset services or activities in relation to crypto-assets that qualify as financial instruments without obtaining additional authorization under MiCAR. However, they must comply with the relevant MiFID II rules and regulations, as well as some specific requirements under MiCAR, such as the safeguarding and AML/CTF obligations. Investment firms that wish to provide or perform crypto-asset services or activities concerning crypto-assets that do not qualify as financial instruments must obtain authorization and comply with its rules and regulations.

The travel rule applies to crypto-asset transfers, which are any transactions resulting in the change of ownership of one or more crypto-assets from one person to another. MiCAR requires CASPs that are involved in crypto-asset transfers to exchange certain information with other CASPs, such as the name and account number of the originator and the beneficiary, the amount and type of crypto-asset transferred, and the date and time of the crypto-asset transfer. The CASPs must ensure that the information is accurate, complete, secure, and confidentially transmitted. They must also keep records of the information for at least five years. They must implement the travel rule by mid-2024, the same date as applying the Financial Action Task Force (FATF) standards on virtual assets and virtual asset service providers.

They aim to establish a level playing field and a single market for crypto-assets and related services within the EU. This is achieved by harmonizing and simplifying the current national regulatory frameworks, thereby eliminating regulatory fragmentation and uncertainty. They also acknowledge the need for a degree of regulatory flexibility and discretion at the national level, which opens the door to regulatory arbitrage and competition among EU member states in specific areas. Some of the leading EU jurisdictions for MiCAR compliance and regulatory arbitrage are France, Germany, and Malta. These jurisdictions have already adopted national regimes for crypto-assets and related services, which are solid, flexible, favorable, attractive, and clear and consistent. They also have supportive and innovative regulators, such as the AMF, BaFin, and MFSA, which have issued several guidance and recommendations on crypto-assets and related services. They also have robust and diversified crypto-asset ecosystems, with several established and emerging players. These jurisdictions are likely to maintain and enhance their leading positions in the crypto-asset market under MiCAR, as they have a competitive edge and a first-mover advantage over other member states.

To sum up, MiCAR is a landmark legislation shaping the future of crypto-assets in the EU. It will introduce legal certainty, consumer protection, market integrity, and financial stability and foster innovation and competition by enabling cross-border activities and passporting rights for crypto-asset issuers and CASPs within the EU.

They are visionary and ambitious legislation that reflects the importance and potential of crypto-assets and related services and that responds to the needs and expectations of the crypto-asset community and society at large. It is also a complex and dynamic legislation that requires constant monitoring and evaluation and may face some difficulties and uncertainties in its application and enforcement. I hope that MiCAR will be able to adapt and evolve with the changing and growing nature of crypto-assets and related services and that it will be able to achieve its objectives and benefits.

I look forward to seeing the development and implementation of this framework, and I hope it will contribute to the growth and maturity of the crypto-asset industry in the EU and beyond. 

The author is an inter-governmental blockchain advisor

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