MiCAR - (part of the Digital finance package strategy)

Latest Developments

On 31 May 2023, Regulation (EU) 2023/1114 on Markets in Crypto-asset (hereinafter MiCAR) was adopted by the European Parliament and the Council, which entered into force on 29 June 2023 and will apply from 30 December 2024.

It aims to create a specific harmonised regulatory framework across EU jurisdictions for issuers and service providers of crypto-asset services and to protect investors and end-users.

The adoption of MiCAR means that, for the first time, fungible and transferable crypto-assets (which are not financial securities or other products covered by financial regulation) will be treated under a single set of rules across the EU.

MiCAR is in fact a regulation of maximum harmonisation, binding in all its elements and directly applicable in all EU member States.

Summary

MiCAR is part of the Digital Finance Package Strategy that aims to address the need to drive and harness digital transformation within the EU financial sector by promoting new opportunities and tackling the risks and benefits to consumers and businesses, while ensuring an integrated and level playing field for existing and new market players.

In general terms, the objectives pursued by the EU co-legislators with Regulation (EU) 2023/1114 can be summarised as follows:

• Providing the legal tools to overcome the regulatory fragmentation in the EU and to regulate in a consistent manner the relations between all participants in the crypto-asset reference markets falling within its scope, bringing operators active in the market for crypto-asset services within the scope of a regulatory and supervisory framework;
• Providing an appropriate (macro and micro) financial risk control "regime" for crypto-asset activities which have so far been deregulated;
• Introducing rules derived from the financial sector to broaden the scope of investment opportunities in a regulated and supervised market; and
• Reducing the risk of regulatory arbitrage between economically similar activities by setting out a precise system of obligations and rights to protect the proper functioning of crypto-asset markets, which could become interoperable with traditional financial markets.

The Regulation on markets in crypto-assets considers the following types of crypto-assets within its scope:

1. e-Money tokens that are intended primarily as a means of payment aimed at stabilising their value by referring only to a single fiat currency. They can only be issued by credit institutions or e-money institutions and are redeemable on demand at the nominal value of the legal tender to which they refer;
2. Asset-Referenced tokens, intended to maintain by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets. They could also be used as a means of payment. They can be issued by a legal entity established in the authorised Union or by a credit institution and their market value is guaranteed by highly liquid financial asset reserves;
3. Utility tokens, intended to provide digital access to a good or service available on distributed ledger technology (DLT), are included in the scope of MiCA only if fungible and transferable.

Non-Fungible Tokens - whose value is attributable to each crypto-asset’s unique characteristics – are excluded from the scope of MiC.

In any case, the European Commission is mandated to prepare a comprehensive assessment of the rules applicable to the NFT market and, if deemed necessary, will present a specific, proportionate and horizontal legislative proposal to create a new regime for NFTs and address emerging risks.

Currencies issued in digital form by the European Central Bank or the central banks of the EU member states (so-called CBDCs) are also excluded from the scope of the MiCAR.

The proposal for Regulation on Markets in Crypto-assets sets out: (1) rules for issuers and offerors of crypto-assets; and (2) rules for entities that provide services related to crypto-assets (exchanges, trading platforms, custodial wallet providers etc.), excluding activities performed exclusively through 'fully' decentralised systems/protocols.

How could it be relevant for you?

MiCAR's primary objective is to create legal certainty for crypto-asset markets within the EU legal framework, pursuing the design of organisational and conduct requirements for participants, accompanied by prudential rules for issuers of certain types of crypto-assets (namely e-money tokens and asset-referenced tokens), introducing specific investor protection provisions and other measures (for example, governance arrangements) aimed at maintaining the integrity of the market itself.

Specifically, MiCAR sets out transparency rules for the offering/issuance and marketing of crypto-assets by their offerors/issuers.

Moreover, MiCAR establishes different ways of legal access to the provision of crypto-asset services, depending on the type of legal entity involved:

1. Through an authorisation procedure reserved for legal persons or other entities (other than financial intermediaries); or
2. A notification mechanism to the competent national authorities for financial intermediaries such as banks, central securities depositories, investment firms, regulated market operators, electronic money institutions, UCITS management companies or alternative investment fund managers;
3. Under a simplified procedure for entities that will be authorised to provide crypto-asset services under national law on 30 December 2024. The simplified procedure will apply to applications for authorisation submitted between 30 December 2024 and 1 July 2026, as provided for in Article 143(6) (option left to individual Member States when transposing the Regulation into national law).

The set of these rules will facilitate the cross-border trading in crypto-assets and simplify the provision of services related to them in the EU through the so-called passport.

This regulatory framework will further push the tokenization of the digital economy, opening up a huge variety of ways to rewrite economic relationships. Tokenisation makes it possible to carry out "peer-to-peer" (P2P) operations by creating, issuing and transferring "digital tokens" (crypto-assets) in a decentralised network (Distributed Ledger Technology systems), protected from the risk of theft, tampering or hacking.

In any number of ways cryptocurrency and digital payments have fast become a popular space in modern society and a household digital asset. Behind the legislation, regulation and investment are the tangible topics of intangible assets that organisations and individuals deal with day-to-day.

Next steps

From the entry into force until the date of full application in December 2024, the ESMA and EBA are fully engaged, with the support of the National Competent Authorities, in preparing technical standards, eventually adopted by the European Commission, as well as guide-lines that specify how the new rules will apply to issuers, offerors and service providers of crypto-assets.

Financial intermediaries wishing to enter the crypto-asset services market should prepare an analytical implementation plan to mitigate the risks of inadequate business model adaptations and allow sufficient time to review policies, processes and procedures to comply with MiCAR.

*Information is accurate up to 27 November 2023