In a previous blogpost, we have already shared some insights on crypto regulation following the vote on the MiCA proposal.

However, we also aim to provide a comprehensive professional and legal background to the legislative proposal, so that our clients can be up to date with the latest developments in crypto regulation.

What is MiCA regulation and why is it important for us?

The European Commission has developed MiCA (Markets in Crypto-Assets) to ensure that EU consumers have access to innovative but safe cryptocurrencies without compromising market stability.The protection of crypto users is undoubtedly a key concern, which needs to be balanced with the need for more advanced investment products and the regulatory and financial risks associated with the wider use of stablecoins.

MiCA is the outcome of a process that started in early 2018, following the Bitcoin bull market in 2017. The wave of public interest and investment in cryptocurrencies has led European regulators to take notice of the dangers that unregulated virtual assets may bring to investors and markets, including the risk of money laundering and terrorist financing.

The European Commission’s FinTech Action Plan (published in March 2018), has mandated the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to review the suitability and adaptability of the existing EU financial services regulatory framework for cryptocurrencies.

They found that the majority of crypto assets are not regulated by the legislation of EU financial services and therefore are not affected by provisions on consumer and investor protection and market integrity. As a result, European regulators have started working on a new regulatory framework for cryptocurrency assets, called MiCA, as part of the Digital Finance Package.

Essentially, the MiCA is a regulatory framework that classifies cryptocurrencies into the following categories:

• Asset Referenced Tokens (ARTs – also known as stablecoins)

• e-money tokens.

The MiCA is a comprehensive Union-wide legislative proposal on cryptoassets, which by its nature aims to simplify the regulation of distributed ledger technology (DLT) and virtual assets in the EU, while protecting users and investors. The proposal focuses heavily on the rules for regulating cryptoasset service providers (CASPs) and cryptoasset types, such as stablecoins. In other words, MiCA is the EU’s legislative package for regulating digital assets.

According to the MiCA, stablecoin issuers and CASPs with market volumes above the “significant” thresholds are subject to legal obligations and strict due diligence requirements. The European Commission said that they have tried to be fair “where it was reasonable” and “the requirements that apply to cryptoasset providers are proportional to the risks caused by the services provided”.

Where will MiCA be applied?

The MiCA will apply throughout all Member States of the European Union (EU) once it is approved. It proposes a legal framework for assets, markets and service providers that are not currently regulated at EU level and will allow them to provide licensed services across the EU.

Once it has been approved, the regulation will be directly applicable to all member states, but won’t be required to be implemented in national law.

The regulation will affect all companies that intend to do business in the EU. Enquiries from outside the EU, such as from Singapore, will be considered as regulated activity.

What are the objectives of MiCA?

According to the statement issued by the European Commission, the MiCA legislation has four main objectives:

• Providing legal security for cryptoassets, which are not covered by existing legislation of the EU financial services but there is a clear need for it currently.

• Establishing standard rules for cryptoasset providers and issuers at EU level.

• Replacing the existing national frameworks that apply to crypto-assets not covered by the legislation of EU financial services.

• Establishing specific rules for stablecoins, including if they qualify as e-money.