MiCA - unified regulation of cryptocurrencies in Europe

19.05.2021 |

For the MiCA article

MiCA is a package of documents proposed by the European Commission to regulate markets aimed at bringing digital assets out of the gray economy throughout the European Union.

The initiative was adopted by the European Commission on September 24, 2020, as part of a proposed regulatory framework for digital finance. The document itself began to be developed back in 2017, when the popularity of bitcoin and other cryptocurrencies skyrocketed. Under its regulation are any cryptoassets that do not fit the definition of financial instruments, deposits, structured products and other customary instruments that already have legal status in the EU.

According to MiCA, a number of business requirements are introduced for issuers of tokens and cryptocurrencies secured by real assets, as well as for service providers in the digital asset market. It is also proposed to launch tests of its own infrastructure, on the basis of which cryptocurrency and token settlements will be possible. This platform will allow a departure from the requirements of the European Securities and Markets Authority, as well as from the rules established by national regulators for innovative financial assets. It will allow to accumulate experience in the field of distributed ledger technology, transaction accounting and check the impact on the established financial stability.

According to the authors of the document, cryptocurrency assets should be understood as a fairly wide range of products with value or certifying ownership, information about which is stored in a distributed registry or similar technical solution. At the same time, already regulated financial products are completely excluded from this document. The single regulatory regime for the cryptocurrency market will completely replace the already existing national industry laws applied on the territory of the European Union member states, if they encounter contradictions with MiCA.

The package of documents has already received broad support among national regulators. For example, Ireland, where cryptocurrencies are still outside the law, has supported the Markets Commission in its efforts to define a regulatory framework. However, the Irish Central Bank has expressed misgivings about the decision to define digital assets broadly enough. For example, cryptocurrencies without a single issuer could weaken consumer protections, and staplecoins could make it harder to combat money laundering and terrorist financing. According to the Irish, secured cryptocurrencies are quasi-money that should be banned altogether, favoring central bank digital currencies.

The adoption of this package of documents will allow for a radical shift in approach to the regulation of cryptocurrencies throughout the European Union. However, the current proposal is only the first step in a long European lawmaking process; it is likely that the law will undergo many changes by the final version.

If the law is introduced, many activities with digital assets will become licensable. The need to get a permit will appear for:

  • issuers of digital assets;
  • service providers in the cryptocurrency market;
  • exchanges of digital assets;
  • Blockchain platforms to create their own tokens.

The current MiCA sets out general requirements for the latter in terms of outsourcing, asset protection and operating principles. Separately, it stipulates how various digital assets and cryptocurrencies should be exchanged between each other and into fiat currencies.

Types of digital assets and companies under MiCA

In total, the proposal of the European Commission proposes to distinguish eight categories of cryptocurrency services, the activities of which are subject to licensing, reflecting the current situation in the market of innovative assets:

  • Storage and administration of cryptocurrency assets on behalf of third parties;
  • exchange of digital assets for currencies, which are means of payment;
  • exchanging cryptocurrencies with each other;
  • consulting activities in the field of digital assets;
  • issuing cryptoassets on behalf of third parties;
  • organizing issuance of digital assets on demand;
  • organizing the listing of cryptocurrencies on online exchanges;
  • brokerage and exchange services in the cryptocurrency market.

There are three types of digital assets.

| Secured tokens | Secured tokens in MiCA refers to a fairly wide range of digital assets. The implication is that the value of the token will be backed either by multiple fiat currencies, commodities, ordinary securities, or a combination thereof. At the same time, special requirements are imposed on the crypto-asset issuing company, just like other cryptocurrency organizations. | | Digital versions of currencies | Also referred to as e-money tokens, they currently exist in the form of Stablecoins, backed by the currency of one of the world’s central banks, which is legal tender. Digital currencies from the central banks of various countries can also fall under this definition. | Cryptocurrencies | In addition to cryptocurrencies in their usual form, such as bitcoin and ethereum, other cryptocurrencies will also include digital access provision tokens. Unlike the first two categories, this type of digital asset would not require a license to be issued, just approval from the Securities Commission, after which the tokens could be freely distributed.|

It is important to note that the issuers of secured tokens and digital versions of currencies will fall under the control of regulators, to them it is planned to apply increased requirements. For cryptocurrencies, it will be enough to comply with current requirements, such as anti-money laundering and counter-terrorist financing. First of all, such regulatory actions are aimed at maintaining financial stability and ensuring liquidity of digital assets.

Opinion of the European Central Bank on MiCA

Overall, the European Central Bank supported the commission’s initiative. However, it asked for more clarity in cases where the issuer of a digital asset, especially in large volumes, is an existing bank or other financial institution dealing with classic securities. In this case, it is necessary to describe the areas of responsibility, in which case the supervision will be carried out by the Commission and in which by the ECB.

Separately, a proposal was made to characterize more clearly the crypto-assets that may fall under the definition of a financial instrument. In addition, the European regulator asked to tighten controls over the security of stablecoins, where it was proposed to spell out a mechanism for proving liquidity, which would ensure the financial stability of the digital asset.

Future of MiCA

In the future, the bill plans to bring more clarity to the regulation of an area such as crowdfunding. More precise wording, areas of responsibility and regulatory principles are planned to be clarified during the current and next years. MiCA is expected to take effect only in 2024. Until then, the already established rules and regulatory principles will continue in most European Union countries.