Regulation to mitigate risks in digital finance heads towards completion

A key EU initiative to support the potential for innovation and competition in the digital finance sector, while mitigating risks, the proposed Regulation on Markets in Crypto-assets (“MiCA”) was adopted by the Council last October and is due to have a final vote by the European Parliament in April 2023. This constitutes the final steps in the decision-making process on a Regulation which amends the previous EU Directive 2019/1937.

To recall, in September 2020, the European Commission published a proposal for a Regulation on Markets in Crypto-assets as part of the Digital Finance package. The package also includes the proposal for a pilot regime on distributed ledger technology (“DLT”) market infrastructures and a proposal for digital operational resilience (“DORA”).

Crypto-assets are one of the major DLT applications. However, in an unregulated market, consumers and businesses have limited rights to protection. Therefore the forthcoming MiCA Regulation aimes to protect consumers and businesses from some of the risks associated with investing in crypto-assets. In particular, MiCA is designed to create a level playing field for those Member States which do not yet have a crypto regime in place.

So-called “stablecoins” are a type crypto-asset that have emerged with the aim of stabilising the value and exploiting the network effects from firms promoting the assets. Recent developments in the crypto-asset market have attracted the attention of regulators worldwide. In this context, European Commission President Ursula von der Leyen has underlined what she sees as a need for a common approach by Member States on cryptocurrencies to ensure that the EU addresses any risk they may pose to financial stability. While acknowledging the potential risks they may present, the Commission and the Council jointly declared in December 2019 that they “are committed to put in place a framework that will harness the potential opportunities that some crypto-assets may offer”. More recently, the European Parliament has been working on a digital finance report, focusing on crypto-assets. 

Under the terms of the incoming MiCA Regulation, crypto-asset service providers (CASPs) must have an authorisation from national authorities to operate within the EU. National authorities will transmit relevant information regularly to the European Securities and Markets Authority (ESMA) with regard to the largest CASPs. Non-fungible tokens (NFTs), i.e., unique digital identifiers used to certify ownership and authenticity of digital assets such as artworks, music and videos, will be excluded from the scope unless they fall within existing crypto-asset categories. Crypto-asset service providers (CASPs) will have to respect requirements to protect consumers’ wallets. In addition, the European Banking Authority (EBA) will be tasked with maintaining a public register of non-compliant crypto-asset service providers.

Some of the obligations for crypto-assets actors include:

• Crypto-asset service providers, whose parent company is located in countries listed on the EU list of third countries considered at high risk for anti-money laundering activities, or on the EU list of non-cooperative jurisdictions for tax purposes, will be required to implement enhanced checks in line with the EU Anti-Money Laundering framework. Tougher requirements may also be applied to shareholders and to the management of CASPs, notably with regard to their localisation;
• Crypto-asset issuances will be monitored much more closely. Authorisation will be mandatory and much stricter; and
• National Competent Authorities (NCAs) will organise coordinated efforts for the harmonisation of digital finance.

Threeway (“trilogue”) negotiations between the co-legislators (Council, Parliament and Commission) started on 31 March 2022 and ended in a provisional agreement reached in June 2022. The MiCA Regulation was subsequently formally adopted by the Council. Once the European Parliament has completed its vote to adopt the final text in April, the Regulation is expected to enter into force in Q2 2023, after which a phased implementation period of 18 months begins. This means that MiCA will likely take effect no earlier than Q3 2024.

The rules for stablecoins will start applying after a transitional period of 12 months and could hence take effect in Spring 2024. Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) will be adopted, as well as a Delegated Act, for which there is a three-month scrutiny period by the European Parliament.

EU institutions anticipate that many service providers will make use of the simplified authorisation procedure available under MiCA. At the same time, Member States will have to begin implementing the new legislation in their national legal regimes.

For more information, please contact Julia Klingberg