15 Nov MiCA – Reasons and Objectives
As mentioned in the introductory part of this series, the Markets in Crypto-Assets (MiCA) proposal is part of the Digital Finance Package, which aims to support digital finance innovation by providing legal certainty for token issuers and related service providers, while simultaneously mitigating the risks associated with the digital ledger technology (DLT). However, the Digital Finance Package is not an isolated, self-standing piece of EU policy strategy. On the contrary, the draft Regulation responds to a number of legal analysis reports and public consultations, identifying particular risks and opportunities that have to be addressed to promote capital markets innovation and ensure crypto-assets are safe for investors and the overall economy. It is this body of present and potential issues that should be considered as the actual reason for the MiCA proposal.
2. Increasing the Scope of EU Financial Regulation
In January 2019, two reports were issued by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), which examined the applicability of existing EU financial legislation to emerging forms of crypto-assets. The EBA focused its advice on the issue of whether virtual currencies legally qualify as electronic money under the second Electronic Money Directive (EMD2) and consequently whether they fall under its scope. It was found that since most cryptocurrencies do not satisfy the definition of e-money under EMD2, which notably requires that such digital assets can be redeemed from their issuers, they are also not subject to any of the issuer licensing requirements contained in the Directive. Similarly, ESMA’s assessment concluded that while some crypto-assets that grant profit and/or voting rights to investors could qualify as financial instruments (e.g. securities, bonds, derivatives, etc.) and fall within the scope of existing financial rules, the majority of blockchain based products do not. As a result, both supervising authorities expressed concerns that traditional consumer protection measures, such as disclosing crypto-asset inherent risks within marketing communications, establishing adequate cyber security mechanisms to prevent the theft of digital assets, and setting up of appropriate arrangements to mitigate conflicts of interests and prevent artificial market price movements, could be bypassed by token issuers, crypto exchanges and custodian wallet providers. Their recommendations called for increased legislative uniformity and institutional cooperation at the EU and international levels.
3. Regulating Stablecoins
The advent of stablecoins and their potential implications on financial stability was yet another factor that attracted the attention of public authorities. In an October 2019 report called ‘Investigating the impact of global stablecoins’, the Financial Stability Board (FSB) assessed a number of possible issues that could arise if a stablecoin asset reaches a level of global adoption, thus becoming a global stablecoin (GSC). As an increasing amount of people begin to store wealth digitally by investing money in GSCs, any unpredicted and unwanted price fluctuations would have significant effects on its users’ wealth. Such events would have direct effect on spending decisions and overall economic activity. Therefore, it is imperative to establish legally binding stabilization mechanisms, such as adequate asset-backing, good liquidity and independent auditing in order to maintain public confidence in stablecoins. Additionally, should a GSC become the preferred store of value, the ability of banks to amass retail deposits will decline. Besides pressuring financial institutions to resort to riskier forms of funding, such as wholesale funding, a GSC could also seriously undermine the effects of monetary policy and the ability of governments to control inflation by adjusting base interest rates. This is the reason why MiCA seeks to make licensing as credit or electronic money institutions mandatory for issuers of e-money tokens and prohibit issuers of all types of stablecoins (e-money or asset-referenced) from offering interest rates on their tokens.
4. Supporting Innovation
And finally, providing legal certainty with regards to crypto-assets was deemed necessary to enable Europeans to benefit from the full potential of this innovative digital finance technology. Full implementation of DLT on capital markets could bring numerous efficiencies, especially with regards to clearing and settlement procedures, which currently rely on constant back-and-forth information exchange between intermediary and supervising institutions. In contrast, a DLT-based market infrastructure could enable a transition from linear to networked model of information sharing, in which overseeing entities and authorized service providers will have a direct, real-time access to everything happening on the DLT network. Yet, in order to achieve widespread adoption, a DLT-based financial markets infrastructure must benefit from sufficient public confidence, which will only develop by making blockchain products more familiar and safe for consumers. Currently, virtual currencies are primarily used by companies as alternative instruments for raising capital. Consequently, the first step towards improving knowledge of crypto-assets among more risk-averse investors is to implement legislation that adequately guarantees their financial expectations. Confidence in the legality of crypto-assets would serve as a future benchmark for realizing the potential benefits that they could have for capital markets as a whole.
The objectives set by the MiCA draft Regulation reflect the above mentioned concerns and new possibilities that increased usage of crypto-assets may bring. First, MiCA will put in place a framework that ensures legal coverage for all crypto-assets, even those that do not constitute securities or e-money under existing Directives. Second, MiCA aims to support innovation in the industry and improve consumer and investor protection by establishing safeguards against common financial risks and preventing abusive or misleading market practices that disturb fair competition and erode the integrity of cryptocurrency markets. And lastly, the upcoming Regulation will pay particular attention to stablecoins, which do not pose any current threats to financial stability due to their limited degree of adoption, but could in theory disrupt government monetary policy. Although, more burdensome for issuers and crypto-asset service providers, the new rules are expected to increase the overall reception of crypto products, channeling more funds into this developing technology sector.
Series of blogs ‘MiCA’
The draft Markets in Crypto-Assets (MiCA) Regulation was released by the European Commission in September 2020. As with most markets-focused regulations, one of MiCA’s priorities is to limit the potential risks to the consumer. But the EC’s proposal also aims to address certain issues that it sees as hindering the EU crypto-asset sector.
Watsonlaw will publish a series of blogs about MiCA over the coming weeks.
The following topics are covered:
MiCA – Introduction to the Markets in Crypto-Assets Regulation
MiCA – Reasons and Objectives
MiCA – Choice of Legislative Instrument and Scope
MiCA – Offering of Crypto-Assets and Admission to Trading
MiCA – Offering and Admission to Trading of Asset-referenced and E-money Tokens
MiCA – Regulation of Crypto-asset Service Providers
Market Abuse Prevention under MiCA
If you have any questions about the MiCA, please contact new tech expert Willem-Jan Smits or Camiel Vermeulen. Our cryptoteam has extensive knowledge of the crypto- asset sector and are ready to help you.