Markets in Crypto-Assets.

 

The regulation of crypto-assets has become an increasingly discussed topic in recent years, and has led to a variety of legal approaches within the EU. To counteract this fragmentation, on the 24th of September 2020 the European Commission proposed a new Regulation on Markets in Crypto-Assets (MiCA). The Commission has attempted to create a tailor-made regulatory framework for all crypto-assets residing on the blockchain.

 

Below we -the blockchain experts from Watsonlaw- will give a general overview of MiCA itself and the various topics MiCA attempts to regulate, from the issuance of crypto-assets and the provision of crypto-asset services to the prevention of market abuse, followed by a Q&A on the new proposal. This way, we will try to give an overall image of the ‘catch-all’ regulatory framework the Commission has proposed.

MiCA: a catch-all regulatory framework for crypto assets.

FAQ.

1. What is the new Regulation on Markets in Crypto-assets (MiCA)?

1.1 What is MiCA?

On the 24th of September 2020, the European Commission (EC) presented the proposal for MiCA, as part of the Digital Finance Package. With this proposal, the EC wants to counteract the regulatory fragmentation within the European Union (EU) in the field of crypto. The EC further aims to promote innovation and competition in the digital financial sector, and to mitigate risks.

 

1.2 When will MiCA enter into force?

To date, no specific deadlines have been given for MiCA to enter into force, although it is expected that the regulation will enter into force in mid-2024. After entry into force, there will be a transitional period of 18 months during which existing businesses will have the opportunity to comply with the new rules.

 

1.3 What are the objectives of MiCA

MiCA pursues four main objectives:

  1. To provide legal certainty for crypto-assets that are not covered by current European financial regulation;
  2. Bring all crypto-asset issuers and crypto-asset service providers (CASPs) under one regulatory framework;
  3. Replace current national regulation for crypto-assets not covered by European regulation; and
  4. Create a specific regulatory framework for stable coins.

 

1.4 Which firms are regulated

MiCA targets both EU-based firms and non-EU firms carrying out activities or providing services in the EU. The firms regulated under MiCA are issuers of crypto-assets and CASPs. Chapters 3 and 4 will discuss when your firm is a provider of crypto-assets or a CASP.

 

1.5 Which crypto-assets are excluded from the operation of MiCA?

MiCA was created to regulate all crypto-assets that are not currently supervised. Crypto-assets that are already regulated are therefore not covered by the framework of MiCA. Crypto-assets are regulated if they qualify as:

  1. Financial instrument;
  2. Electronic money
  3. Deposit
  4. Structured deposit; and
  5. Securitisation

However, if your token qualifies as electronic money, as well as an e-money token (explained below), it is still subject to MiCA regulation.

 

1.6 What are the advantages of MiCA?

MiCA offers benefits to providers, users and authorities alike.

  1. Providers need to do less research on all the rules that need to be complied with in each Member State.
  2. Providers only need to obtain one license for the entire EU.
  3. There is a level playing field for all providers in the EU, they do not benefit from easier or cheaper regulation in a certain Member State.
  4. Investors are better protected by the rules MiCA proposes to prevent market abuse. Scams and ‘pump-and-dump’ will be prevented.
  5. Investors are also better protected by the information requirements for providers.
  6. National regulators also benefit from MICA. Because a license under MiCA works throughout the entire EU, there is no need for each Member State to examine each firm individually.

2. The scope of MiCA

2.1 What key definitions are used in MiCA?

 

Crypto-asset
‘a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology’

 

Asset-referenced token (ART)
‘a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets’

 

E-money token (EMT)
‘a type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender’

 

Issuer of crypto-assets
‘a legal person who offers to the public any type of crypto-assets or seeks the admission of such crypto-assets to a trading platform for crypto-assets’

 

Offer to the public
‘any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis’

 

Aanbieder van cryptoactivadiensten
‘iedere persoon wiens gewone beroep of bedrijf bestaat in het beroepsmatig aanbieden van één of meer cryptoactivadiensten aan derden’

 

Utility token
‘a type of crypto-asset which is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token’

 

2.2 Token categories

Within all tokens on the blockchain, three different categories can be identified. These are the well-known utility tokens, payment tokens and security tokens. How do these fit into the framework of MiCA?

 

Utility tokens are crypto-assets that give their holder access to or a right to use a platform, or its goods or services. These tokens are defined in MiCA, and are ideally covered by the regulation of crypto-assets that are not stable coins.

 

Payment tokens are, as the name suggests, tokens used to make payments. Because of the purpose of making payments, it is important that these tokens maintain a stable value. Therefore, these are the so-called stablecoins. These stablecoins are divided into two categories in MiCA, ART and EMT.

 

Security tokens are tokens that legally qualify as a security or financial instrument. These include shares, bonds or derivatives. This type of tokens qualifies as a financial instrument, and are therefore not regulated under MiCA.

3. My company issues tokens. Does MiCA apply to me?

If your company issues a token, it is important to know whether you fall under the regulations of MiCA. MiCA calls tokens that fall under its regulations ‘crypto-assets’ and makes two distinctions here: stablecoins, and crypto-assets that are not stablecoin. However, MiCA does not want to regulate crypto-assets that are already covered by existing regulations. Therefore, crypto-assets are exempted if they qualify as:

  1. Financial instruments;
  2. Electronic money, unless they also count as stablecoin;
  3. Deposits;
  4. Structural deposits;
  5. Securitisations.

 

3.1 My company issues stablecoins

Stablecoins are tokens that are intended to be used as a means of payment and try to maintain a stable value. MiCA knows two types of stablecoins and calls them ART and EMT. The difference between them is important. When your company issues ART, different obligations apply than when you issue EMT. ART refer to different fiduciary currencies (fiat money like the Euro or Dollar), one or more commodities, or one or more crypto-assets, or a combination of these. EMTs refer to a single fiduciary currency only.

 

3.1.1 ART

If your company issues a stablecoin that qualifies as ART, you must obtain a license from the regulator. This license will then be valid throughout the EU. For this your company must be a legal entity established in the EU. This license is not required if:

  • Over a 12-month period, the average amount of ART does not exceed €5.000.000; or
  • The offer is exclusively addressed to qualified investors and the tokens may only be held by qualified investors.

 

Your company must also issue a white paper. This is the case both if you are required to have a license and if you are not required to have a license. This white paper must contain the following:

  1. A description of governance arrangements;
  2. A description of asset reserves;
  3. A description of custodial arrangements;
  4. A description of the investment policy if reserve assets are invested;
  5. Information on the nature and enforceability of rights;
  6. Mechanism to ensure liquidity of the crypto-assets;
  7. A complaints procedure; and
  8. Further information from Annex I and II of MiCA.

 

The issuance of these types of stable coins is also subject to equity capital requirements. This must be at least equal to the higher of the following two amounts;

  • €350.000; or
  • 2% of the average amount of your asset base.

 

3.1.2 EMT

If your company issues a stable coin that qualifies as EMT, you must have a license as a credit institution or electronic money institution. These licenses are valid for the entire EU. This license is not required if:

  • Your tokens are marketed, distributed and held by qualified investors and may only be held by these qualified investors;
  • Over a 12-month period, the average amount of EMT does not exceed €5.000.000, or the equivalent in another currency.

 

Your company must also issue a white paper. This is the case both if you are required to have a license and if you are not required to have a license. This white paper must contain the following:

  1. A description of the publisher;
  2. A description of the project and the main participants;
  3. A statement whether the white paper concerns an offer of EMT or admission of EMT to trade on a crypto-asset trading platform;
  4. A description of the rights and obligations attached to the tokens;
  5. Information about the underlying technology;
  6. The risks associated with the project and the tokens;
  7. The information set out in Annex III.

 

3.1.3 Significante stable coins

When your token qualifies as a stable coin, it is also possible that it will qualify as significant. This is the case when you meet at least three of the following criteria:

  1. The customer base threshold is not lower than two million natural or legal persons;
  2. The threshold for the value of the issued ART or, where appropriate, the market capitalization of that type of ART is not lower than 1 billion euros;
  3. The threshold for the number and value of transactions in that ART shall not be less than 500.000 transactions a day or 100 million euros per day;
  4. The threshold for the number of Member States in which the ART is used, including for cross-border payments and credit transfers, or in which third party entities are established, is not lower than seven.

 

If your stablecoin qualifies as significant, additional requirements apply with respect to the following:

  1. The remuneration policy;
  2. The safekeeping;
  3. Liquidity management; and
  4. The governance arrangements.

 

3.2 My company issues crypto-assets that are not stable coins

If your company issues a crypto-asset that is not a stable coin, there is no license requirement. However, you must meet the following conditions:

  1. Your company must be a legal entity;
  2. Your company must draw up a white paper;
  3. Your company must provide this white paper to the regulator;
  4. Your company must publish a white paper;

 

The obligations under B, C and D do not apply in the following cases:

  1. The crypto-assets are offered free of charge;
  2. The crypto-assets are automatically created by mining;
  3. The crypto-assets are unique and not fungible with other crypto-assets (NFT);
  4. The crypto-assets are offered to less than 150 individuals;
  5. The offer does not exceed €1.000.000 or an equivalent over a 12-month period; or
  6. The offer to the public of crypto-assets is only addressed to qualified investors and the crypto-assets may only be held by such qualified investors.

4. My company provides services related to crypto-assets. Does MiCA apply to me?

If your company provides services in the crypto sector, you may qualify as a CASP. One of the tokens you provide these services to must qualify as a crypto-asset, and the service you provide must qualify as one of the following:

  1. The custody and administration of crypto-assets on behalf of third parties;
  2. The operation of a trading platform for crypto-assets;
  3. The exchange of crypto-assets for fiat currency that is legal tender;
  4. The exchange of crypto-assets on behalf of third parties;
  5. Placing of crypto-assets;
  6. The reception and transmission of order for crypto-assets on behalf of third parties;
  7. Providing advice on crypto-assets.

 

If you qualify as a CASP, you must obtain a license from the regulator. This license is then valid for the entire EU. For this, your company must be a legal entity established in the EU. If your company wishes to offer these services in several Member States, the following information must be submitted to the local regulator:

  1. A list of the Member States in which the CASP intends to offer the services;
  2. The commencement date of the intended provision of the services;
  3. A list of all other activities carried out by the CASP that are not covered by MiCA.

 

MiCA includes a number of rules that apply to all CASPs, such as organisational requirements and prudential requirements. In addition, specific requirements are included per service that can be offered by a CASP. MiCA also distinguishes between three classes of CASPs. Based on this, minimum capital requirements are set for a CASP.

 

4.1 Custody and administration of crypto-assets on behalf of third parties

When your company provides custody and administration services on behalf of third parties, there are a number of rules that must be met:

  1. The CASP enters into an agreement with the client that specifies their duties and responsibilities;
  2. The CASP keeps a register of each position opened on behalf of a client;
  3. The CASP shall establish a custody policy, which shall ensure that crypto-assets will not be lost through fraud, cyber-threats or negligence;
  4. The CASP shall provide its clients with a position statement at least every three months;
  5. The CASP shall maintain segregated assets.

 

The custody and administration of crypto-assets is a Class 2 service. This means that the CASP must have a minimum capital of €125.000.

 

4.2 Operating a trading platform for crypto-assets

When your company operates a trading platform for crypto-assets, there are a number of rules that must be met:

  1. The CASP establishes operating rules;
  2. The CASP does not trade on its own trading platform for its own account;
  3. The CASP has effective systems, procedures and arrangements to ensure resilience, sufficient capacity and order rejection;
  4. The CASP makes any bid and ask prices and the depth of trading interests public through its own systems;
  5. The CASP completes settlement of transactions on the same day as they are executed;
  6. The CASP maintains transparent fee structures;

 

The operation of a trading platform is a Class 3 service. This means that the CASP must have a minimum capital of €150.000.

 

4.3 Exchanging crypto-assets for fiduciary currency or other crypto-assets;

When your company exchanges crypto-assets for fiduciary currency or other crypto-assets, there are a number of rules that must be met:

  1. The CASP establishes a non-discriminatory policy regarding client acceptance and conditions;
  2. The CASP publishes a firm price or a method of determining the price;
  3. The CASP executes orders at the prices displayed at the time of reception;
  4. The CASP makes public the details of orders and transactions.

 

The exchange of crypto-assets for fiduciary currency or other crypto-assets is a Class 3 service. This means that the CASP must have a minimum capital of €150.000.

 

4.4 Execution of orders for crypto-assets on behalf of third parties

When your firm executes orders for crypto-assets on behalf of third parties, there are a number of rules that must be met:

  1. The CASP shall take all necessary steps to obtain the best possible result for its clients, unless the CASP executes orders in accordance with specific instructions from its client;
  2. The CASP establishes and implements effective execution arrangements;
  3. The CASP provides appropriate and clear information to its clients about its order execution policy and any significant changes thereto.

 

The execution of orders for crypto-assets is a Class 1 service. This means that the CASP must have a minimum capital of €50.000.

 

4.5 Placing of crypto-assets

When your company places crypto-assets, there are a number of rules that must be followed:

  1. The CASP shall communicate information to the issuer, before they enter into a contract, regarding:
    1. The type of placement considered;
    2. The amount of transaction fees involved in the proposed operation;
    3. The timing, process and price; and
    4. Information about the targeted purchasers.
  2. The CASP shall obtain the issuer’s consent in relation to the above points prior to the placement;
  3. The CASP shall include in the conflict of interest rules specific information relating to the following situations:
    1. The CASP places the crypto-assets with its own clients;
    2. The proposed price for the placement is over- or underestimated.

 

Placement of crypto-assets is a Class 1 service. This means that the CASP must have a minimum capital of €50.000.

 

4.6 Receiving and transmitting orders for crypto-assets on behalf of third parties

When your company transmits orders involving crypto-assets, there are a number of rules which must be complied with:

  1. The CASP shall establish and implement procedures that provide for the prompt and accurate transmission of client orders;
  2. The CASP does not receive any renumeration, discount or non-monetary benefit for transmitting to a particular trading platform or CASP;
  3. The CASP does not misuse information about pending orders and takes all reasonable steps to prevent misuses of such information.

 

The receipt and transmission of orders for crypto-assets is a Class 1 service. This means that the CASP must have a minimum capital of €50.000.

 

4.7 Advice on crypto-assets

When your company provides advice on crypto-assets, there are a number of rules that must be met:

  1. The CASP only recommends crypto-assets if it is in the best interests of its client;
  2. The CASP shall ensure that natural persons providing advice or information on its behalf have the necessary knowledge and experience;
  3. The CASP shall seek information on the client’s knowledge and experience with crypto-assets, on the client’s objectives, on the client’s financial situation and on a basic understanding of the risks associated with crypto-assets;
  4. The CASP shall warn the client that the value of crypto-assets may fluctuate;
  5. The CASP informs clients that crypto-assets may be unsuitable for them and warns them of the risks if the CASP believes that the client has insufficient knowledge;
  6. The CASP shall review its assessments for each client every two years;
  7. The CASp provides client with a summary of the advice provided to that client.

 

Advice on crypto-assets is a Class 1 service. This means that the CASP must have a minimum capital of €50.000.

5. Preventing market abuse in relation to crypto-assets

In addition to rules relating to the issuance of crypto-assets and CASPs, MiCA also contains rules to prevent market abuse. This concerns crypto-assets that have been admitted to trading on a trading platform, or for which a request for admission has been made. Four forms of market abuse can be distinguished:

  1. Disclosure of inside information
  2. Insider dealing;
  3. Unlawful disclosure of inside information; and
  4. Market manipulation.

 

The supervisory authority can impose a sanction if one of these forms of market abuse is violate. For a legal entity this is a maximum of €5.000.000 or 3% of the annual turnover. The maximum penalty for natural persons is €700.000.

 

5.1 Disclosure of inside information

Inside information is non-public information that is concrete and that directly or indirectly concerns an issuer of crypto-assets, or these crypto-assets themselves. This information must not have been disclosed to the public and disclosure must have a significant effect on the price. The issuer of a crypto-assets should disclose this inside information as soon as possible. This can only be delayed if the following conditions are met:

  1. Immediate disclosure would likely harm the legitimate interests of the issuer;
  2. It is not likely that the public would be misled by the delay;
  3. The issuer is able to ensure the confidentiality of that information.

 

5.2 Insider trading

Insider information may not be used to acquire or dispose of the crypto-assets to which it relates. This applies to both the crypto-assets held by the holder and to crypto-assets held by another person. A person who possesses inside information may also not make recommendations to another person about the crypto-assets concerned.

 

5.3 Unlawful disclosure of inside information

A person who possesses inside information may not disclose it to another person unless this is in the course of the performance of his work, profession or duties.

 

5.4 Market manipulation

Market manipulation in relation to crypto-assets has in recent years had a significant negative impact on the perception of crypto-assets and blockchain projects, through so-called ‘pump and dumps’ and other practices. There are several forms of market manipulation:

  1. Entering into a transaction, placing an order or any other conduct that:
    1. Provides false or misleading signals regarding the supply of, demand for or price of a crypto-assets;
    2. Actually causing or likely to cause the price of one or more crypto-assets to reach an abnormal or artificial level.
      These actions are prohibited, unless it is proven that there were other justified reasons for doing so.
  1. Entering into a transaction, placing an order or any other behavior involving fraud or deception;
  2. Dissemination of information which is false or misleading as to the supply of, demand for or price of a crypto-asset.

6. Which regulator do I have to deal with?

From a European perspective, the EBA (‘European Banking Authority’) and ESMA (‘European Securities and Markets Authority’) supervise compliance with MiCA. The national competent authorities are the AFM and DNB. The national supervisor issues the licenses and supervises compliance with the licensing conditions and other requirements. EBA and ESMA supervise the national supervisors.

7. Q&A

Q: MiCA is currently still a proposal, does this mean that many changes will still be made?

A: After a proposal for a regulation, like in this case MiCA, is published, there are still a number of steps to be taken. Both the European Parliament and the Council of the European Union will have the opportunity to make changes to the legislative text. So there may still be adjustments to the text of the proposal, although there is no reason to believe that very much will be adjusted.

 

Q: I am already authorised under MiFID II, do I need to get an authorisation under MiCA as well?

A: There is currently no provision stating that firms which are already authorised under MIFID II will not need authorisation under MiCA. This means that these firms will have to obtain a license under MiCA if they are going to issue stable coins or provide regulated services with respect to crypto-assets.

 

Q: When does my firm offer services ‘in Europe’?

A: The regulator is quick to assume that services are offered ‘in Europe’. Only when a firm is established outside Europe, and the services are exclusively provided at the initiative of the European user, there is no provision of services ‘in Europe’.

 

Q: What is the difference between a CASP and a VASP?

A: Since 2019, the term VASP (Virtual Asset Service Provider) has been used within the EU. This term was introduced by the Financial Action Task Force (FATF). The term CASP, which is now being introduced with MiCA, shows many similarities to the term VASP, but is broader and therefore covers more firms.

 

Q: I already have a registration with DNB based on the Wwft, what will happen to this?

A: In addition to the MiCA proposal, the Commission has also made proposals for new anti money laundering and terrorist financing (prevention) regulations. In these regulations, the registration requirement for exchanging cryptocurrency and fiat money and the provision of a custodial wallet will lapse. That registration will be replaced by a license under MiCA.

 

Q: I offer my services in multiple Member States, do I need to apply for multiple licenses?

A: There is a so called ‘passport regime’ for MiCA. This means that obtaining an authorization in one Member State allows the services to be offered in other Member States as well.

 

Q: How do NFTs fall within the framework of MiCA?

A: NFTs fall under the umbrella of ‘crypto-assets other than ART or EMT’. This means that there could only be a requirement to publish a whitepaper. However, NFTs are exempt from this, as crypto-assets that are non ‘fungible’ do not have to prepare a whitepaper.

 

Q: Are non-custodial wallets regulated under MiCA?

A: No. Only the custody and management of crypto-assets on behalf of third parties is regulated under MiCA. Non-custodial wallets allow users to store their own private keys and are therefore not regulated under MiCA.

 

Q: Are trading bots regulated under MiCA?

A: Depending on the circumstances of the case, it is possible that certain trading bots may be regulated as CASPs. This is the case if it involves receiving and transmitting orders or providing advice on crypto-assets. To qualify as advice, it is important that the bot makes recommendations that are personalized to a specific consumer.

 

Q: Is portfolio management regulated under MiCA?

A: No. However, collective investment schemes that invest in crypto-assets should be aware that they may be regulated as an alternative investment fund (AIF) under the AIFMD. In principle, managers of AIFs are subject to a licensing requirement. Under certain circumstances they can make us of an exemption, the so-called ‘light regime’. Under the light regime, only a registration with the AFM is required and thus no license.

Download the MiCA Whitepaper.

The European Commission published the Markets in Crypto Assets (MiCA) regulation in September 2020. The aim is to regulate the crypto market within the EU. In the MiCA Whitepaper, we therefore extensively discuss various topics that may be of importance to issuers and crypto-asset service providers.

Download Whitepaper MiCA