Proposed EU Regulation on Markets in Crypto-Assets Approved by European Parliament

On April 20, 2023, the agreed text of the proposed European Markets in Crypto-Assets Regulation was given final approval by the European Parliament. The Regulation is intended to improve legal certainty in the regulatory treatment of crypto-assets, to preserve consumer protection and market integrity in crypto-asset markets and to ensure financial stability. The text must now be formally endorsed by the Council of the European Union and will then be published in the Official Journal of the European Union. It will enter into force 20 days after publication. The majority of the Regulation is expected to apply from around January 2025, with the exception of the provisions regarding asset-referenced token issuers and e-money token issuers, which should apply from around July 2024.

The European Commission's proposal for the Regulation was published in September 2020 as part of the EU's Digital Finance Strategy. The agreed text remains largely as proposed by the European Commission. The European Parliament has also formally endorsed a draft Regulation on information accompanying transfers of funds and crypto-assets (the EU Travel Rule Regulation).

Application of MiCA

The Regulation will replace Member States' existing frameworks for crypto-assets to the extent that they are not otherwise covered by financial services legislation. It sets out specific regimes for issuers of asset-referenced tokens, e-money tokens and other crypto-assets as well as crypto-asset service providers. The European Supervisory Authorities will publish guidelines 18 months after MiCA comes into force on the criteria for crypto-assets to qualify as financial instruments (and therefore fall outside the scope of MiCA, but may then be subject to existing financial services provisions such as MiFID II). National regulators will be entitled to apply to the ESAs for an opinion on the classification of crypto-assets.

Authorization and supervision requirements for crypto-asset service providers

National regulators will have the power to authorize and supervise EU issuers of asset-referenced tokens as well as CASPs that must have their registered office in an EU Member State. Crypto-asset service providers offer "crypto-asset services" to third parties on a professional basis. Crypto-asset services include any of the following activities conducted with respect to crypto-assets: custody and administration, operation of a trading platform, exchange of crypto-assets for funds or other crypto-assets, execution of orders, placing of crypto-assets, transfer services, reception and transmission of orders, advising, and portfolio management. Some firms already subject to financial services legislation will not need a separate authorization to operate as CASPs (e.g., banks regulated under the EU Capital Requirements Directive and e-money issuers registered to distribute e-money under the EU E-Money Directive) but will still need to comply with other CASP requirements.

Significant asset-referenced tokens and e-money issuers (defined by reference to a set of criteria such as number of holders, value or market capitalization of tokens issued and number and value of transactions in the token) will be subject to supervision by both their national regulators and the European Banking Authority, due to the potential risk to financial stability associated with widespread use of those crypto-assets. Significant CASPs (namely, those that have on average at least 15 million active users in one calendar year in the EU) will be supervised by national regulators, who will in turn have to report to the European Securities and Markets Authority about key supervisory developments.

Whitepapers to be published by issuers

Issuers of crypto-assets will need to publish a whitepaper if they wish to offer or market their crypto-assets to the public. Whitepapers relating to asset-referenced tokens should be approved by the national regulator. Issuers of e-money tokens and other crypto-asset issuers need only notify their national regulator of the whitepaper (without the need for approval). National regulators will have the power to suspend or prohibit an offering, or require amendments to the whitepaper, once it has been published. A new provision has been added to the European Commission's proposal that grants EU central banks the power to request withdrawal of authorization to issue asset-referenced tokens that threaten monetary sovereignty and monetary policy. Asset-referenced token issuers will also have to reduce activity in asset-referenced tokens that are "widely used as a means of exchange" (namely, they are used as a means of exchange for more than 1 million transactions at a value of over €200 million per day, within a single currency area).

Under MiCA, issuers, offerors or trading platforms may be liable to crypto-asset holders where information provided in the whitepaper is not complete, clear or fair, or is misleading.

Conduct of business and organizational requirements

MiCA also regulates conduct of business by crypto-asset issuers and CASPs, such as orderly wind-down procedures, conduct requirements and prohibitions on market abuse involving crypto-assets. Those involved in managing CASPs must be fit and proper. National regulators will have the power to take action against CASPs that are subject to shareholder influence which is prejudicial to the sound management of the CASP. CASPs must execute orders on a best execution basis and should have procedures to manage conflicts of interest.

Location

CASPs will need to have their place of effective management in the EU, with at least one director resident in the EU, if they are to offer services within the EU. MiCA will not apply to services provided by third-country CASPs to EU customers via reverse solicitation, provided that the third-country firm does not solicit or advertise its products or services in the EU. This will be the only way in which third-country CASPs can access EU customers. The requirements for invoking the reverse solicitation exception when dealing with EU investors will be narrowed slightly compared to the equivalent provisions under the revised Markets in Financial Instruments Directive. We discussed the MiFID II reverse solicitation regime in our client note, On the Existence of a Pan-European Reverse Solicitation Regime under MiFID II, and Its Importance Following Brexit. The European Commission is to provide an interim report within two years of MiCA entering into force assessing whether an equivalence regime should be introduced for CASPs, and asset-referenced token and e-money token issuers.

Issuers and offerors of crypto-assets and e-money tokens do not need to be located in the EU or be EU-authorized. However, issuers of asset-referenced tokens will need to be established in the EU and have EU authorization before issuing an asset-referenced token.

Environmental provisions

New provisions have been added to the European Commission's original proposal regarding the environmental impact of "consensus mechanisms" (the process used for validating crypto-asset transactions, such as Proof of Work or Proof of Stake). All crypto-asset white papers will need to include information on the principal adverse environmental and climate-related impact of the consensus mechanism that is used to issue the crypto-asset. CASPs will also have to publish such information on their websites in relation to each crypto-asset for which they offer services. CASPs will be entitled to use information from the crypto-asset white paper. The European Securities and Markets Authority will publish draft regulatory technical standards on the methodologies and presentation of such information 12 months after the Regulation enters into force.

In contrast to the EU, the U.K. has staggered its regulation of crypto-assets, focusing first on stablecoin issuers and providers of certain related services under the Financial Services and Markets Bill. The FSMB is currently at Report Stage in the House of Lords and is expected to pass into law in the course of 2023. The U.K. has separately published a consultation on its broader proposals for crypto-asset regulation, which will cover activities conducted in relation to crypto-assets other than stablecoins.

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