The European Commission recently published a proposal that aims to govern the conduct of financial service providers that deal in cryptoassets. The Markets in Crypto-Assets Regulation (MiCA) is defined as a framework of measures that will be implemented to enable and support digital finance in regards to innovation and competition while mitigating risk for all stakeholders. Work on this regulation framework began in 2018 with the end goal of harmonising the EU’s efforts towards regulating currently out-of-scope cryptoassets.
Instead of disregarding the innovation and rising popularity of cryptoassets, the European Commission has been exploring ways through which they can embrace the digital transformation that is currently taking place in economic markets worldwide. The implementation of MiCA is part of a bigger legislation process under the digital finance package, which consists of proposals around cryptoaassets. The main aim of the digital finance package is to facilitate creation, competitiveness and access to innovative cryptoaassets for trading services customers in Europe while ensuring financial stability and customer protection.
A summary of the regulatory objectives
The proposal also intends to create an environment that will foster innovation around cryptoaassets rather than installation of retrogressive guidelines that will stifle the rise of new technologies. Because there has been increasingly independent policing within European countries, it was necessary for the EU to step in and regulate the digital currencies markets.
What is being regulated?
MiCA intends to regulate every digital representation of value which has the capability of being shared using Distributed Ledger Technology (DLT), disregarding financial instruments that are deemed out-of-scope for existing regulatory framework such as MiFID and EMD. They should fall under the below categories:
- E-money tokens – cryptoassets with a stable value that is based on only one fiat currency whose purpose is to serve as electronic money would. Examples of these are Libra, Euro and USDC.
- Utility tokens – which are issued under a non-financial basis for the purposes of providing a third party with access to a predetermined resource or service. An example of this is a FileCoin Token.
- Cryptoassets – for example Bitcoin, Litecoin and Ripple.
- Asset-reference tokens – whose purpose is to maintain a stable value by referencing one or more currencies that are legal tender such as fiat currency. They can be used as a store of value or a means to purchase goods or services. An example of this is Libra Basket Coin.
What are the new rules that apply to cryptoassets?
Under these proposed regulations, a Crypto-asset Service Provider (CASP) is defined as an entity that is involved in the provision of cryptoasset services to a third party on a professional basis.
Issuers of the cryptoassets are required to publish a definitive white paper and send it to the relevant financial services regulator for review and approval for example the BaFIN in Germany. The issuer of the cryptoasset can only proceed if the proposal is approved.
Service providers that deal with cryptoassets will also be required to seek approval from the relevant regulators in the jurisdiction in which they operate. The regulator requirements include things like minimum capital reserves, security of the infrastructure on which the cryptoasset is offered and corporate governance.
Of course, MiCA also spells out its position regarding issues that affect trading in securities such as insider trading and market manipulation.
Trailblazing in the EU
In essence, MiCA is taking the unbeaten path when it comes to regulation of crypto-assets. While some countries are banning these types of assets, it is commendable to see that the European Union is interested in fostering an environment that will promote innovation and still protect stakeholders. The intended result is to create a transparent and harmonised European crypto-asset market that invites global investors and customers to participate.