EU Markets in Crypto Assets Regulation (MiCAR)
How the European Union is regulating the Crypto- Asset industry \\ unveiling Cyprus as the gateway to the European Market
What is MiCAR?
MiCAR is an upcoming European Union Regulation, designed to establish a harmonised legal framework for crypto-assets that do not currently fall under any regulatory framework, crypto-asset issuers and crypto-asset service providers (CASPs). Having recently been signed into law, MiCAR will soon be published in the EU Official Journal and enter into force 20 days following publication. Certain provisions relating to stablecoins will apply from July 2024, while the remaining provisions will apply from January 2025.
This regulatory framework will bring legal certainty and restore trust among market participants operating in the crypto industry, a previously considered grey area. MiCAR is set to achieve for crypto what other EU financial services frameworks, such as MiFID II, have achieved for investment firms, as it ushers in a new era of comprehensive disclosures, governance and licensing. Further, MiCAR seeks to foster innovation while ensuring a high-level of consumer protection, market integrity and financial stability. MiCAR will create a level playing field for all crypto-asset providers, as crypto-assets entailing lower risks will be subject to less stringent rules, while those entailing higher risks will be subject to stricter rules.
If you are a market participant offering crypto-asset services and want to ensure compliance with MiCAR, continue reading to learn about the steps you should take to stay ahead of your competitors.
Overview of the MiCAR framework
This framework encompasses the following key elements:
Regulation of crypto-asset issuance and trading: MiCAR governs the process of issuing and trading crypto-assets, imposing requirements for transparency and disclosure.
Licensing of CASPs: MiCAR introduces a licensing regime for CASPs allowing them to passport their services and to access the EU market.
Regulatory obligations for issuers and CASPs: MiCAR clarifies the regulatory responsibilities applicable to issuers of ARTs, issuers of EMTs, and CASPs, establishing rigorous consumer protection rules covering the issuance, trading, exchange, and custody of crypto-assets.
Market confidence and integrity: MiCAR enhances confidence in the crypto-asset market by implementing a market abuse regime, which prohibits activities such as market manipulation and insider dealing.
Powers and Cooperation of Competent Authorities: MiCAR defines the powers of competent authorities, including the framework for cooperation and the enforcement of fines and periodic penalty payments when necessary.
Scope of application of MiCAR
MiCAR applies to:
Issuers of crypto-assets, who are usually the offerors as well, which refers to any natural or legal person, or other undertaking, offering to the public any type of crypto-assets or seeks admission of crypto-assets to a trading platform for crypto-assets;
CASPs, which refers to any legal person or other undertaking whose occupation or business is the provision of crypto-asset services on a professional basis. (e.g. crypto-asset wallet providers, exchanges, and custodians);
any person, in respect of acts that concern crypto-assets that are admitted to trading or in respect of which a request for admission to trading has been made.
Categories of crypto-assets falling within the scope of MiCAR
Crypto-assets are broadly defined in MiCAR as “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology”.
MiCAR distinguishes between three categories of crypto-assets:
Asset-referenced tokens (ARTs) which are crypto-assets that are not electronic money tokens and that purport to maintain a stable value (that is, stablecoins) by referencing to any other value or right or a combination thereof, including one or more official currencies;
Electronic money tokens (or e-money tokens) (EMTs) and which are crypto-assets that purport to maintain a stable value (that is, stablecoins) by referencing to the value of one official currency;
Crypto-assets other than ARTs or EMTs, a catch-all category which covers a wide range of crypto-assets, including utility tokens and crypto-assets not pegged to any fiat currency such as Bitcoin or Ether.
As a first step, market participants shall carefully determine whether their tokens fall within the definition of "crypto-assets", as defined by MiCAR, or if they fall under other regulations. Please refer to section below on what is not covered under MiCAR.
Then, market participants will need to determine the category under which their token falls among the three categories mentioned above in order to ascertain the requirements applicable to both the issuer and the crypto-asset itself. MiCAR imposes specific obligations on EMTs and ARTs. In cases where a crypto-asset does not meet the criteria for either of these two categories, a ‘general’ regime for all other crypto-assets applies.
What is not covered under MiCAR?
As a general rule, MiCAR will apply to crypto-assets that are not captured by existing legislation. Some of the crypto-assets or crypto-asset related services not caught by MiCAR include:
crypto-assets that qualify as financial instruments under Directive EU/2014/65 (MiFID II);
crypto-assets that are unique and non-fungible with other crypto-assets (so-called non- fungible tokens (NFTs)) e.g. digital art and collectibles. However, not all NFTs fall out of scope of MiCAR. For example, the fractional parts of NFTs should not necessarily be considered unique and non-fungible or where a crypto-asset has a unique identifier may not be enough to classify it as unique and non-fungible. *
central bank digital currencies (CBDCs) issued by the European Central Bank (ECB) and digital assets issued by national central banks of Member States when acting in their capacity as monetary authorities;
crypto-assets services “provided in a fully decentralised manner without any intermediary” i.e. decentralised finance;
deposits or structured deposits as per Directive 2014/49/EU (DGSD);
pension products; and
funds as per Directive 2015/2366/EU (PSD2)
*It is noted that 18 months following entry into force, the European Commission will re-assess the need of extending MiCAR’s scope to regulate, among other things, NFTs. It is further noted that the European Commission may adopt technical standards and delegated acts to further clarify certain elements of MiCAR.
General regime for crypto-assets other than ARTs or EMTs
The general regime of MiCAR regulates the offering of crypto-assets, other than ARTs or EMTs and that will for the most part concern utility tokens. Utility tokens are only intended to provide access to a good or a service supplied by the issuer of that token.
Issuers of crypto-assets other than ARTs or EMTs shall, among other things:
be legal entities;
draft, notify regulators of, and publish on their website a white paper which shall contain a range of information, including who is the offeror and the issuer, it shall describe the crypto-asset, the rights and obligations attached to it, its underlying technology and the risks associated with it (e.g. environmental impact); and
act honestly, fairly, professionally, communicate in a fair, clear and not misleading manner, manage conflicts of interest, maintain systems and security access protocols and act in the best interests of the crypto-asset holders.
Regime for ARTs
Aside from the above-mentioned requirements, issuers of ARTs shall, among other things:
be established in the EU;
be authorised by the National Competent Authority in their Member State;
include in their white paper additional information as set forth above, such as, information on the financial condition of the issuer and such white paper shall be approved by the relevant National Competent Authority; and
comply with requirements relating to monitoring, issuance restrictions, marketing communications, are required to provide certain information to holders of ARTs, have in place a complaint handling procedure, conflicts of interest mechanisms, governance arrangements, capital requirements, an obligating to have segregated reserve of assets and are subject to custody requirements.
Regime for EMTs
Just like ARTs, EMTs are subject to additional requirements, some of which are similar to those applicable to ARTs. However, given that EMTs are deemed to be electronic money for the purposes of the E-money Directive 2009/110/EC (EMD), they shall also comply with relevant EMD obligations.
Issuers of EMTs are subject to requirements including:
being authorised as credit institutions or electronic money institutions pursuant to EMD;
their white paper shall include additional information than that in the general regime and shall be approved by the relevant National Competent Authority; and
shall offer to EMT holders a claim on the issuer to redeem their EMTs (i.e. redemption right) at par value.
Additional rules for significant ARTs & EMTs
A range of more stringent provisions will apply to EMTs and ARTs classified by the European Banking Authority (EBA) as ‘significant’ as they may pose greater risks to financial stability.
The criteria used to determine whether an EMT or ART is significant include the size of their customer base, the size of the issuer’s reserve, the daily number and value of transactions or the interconnectedness of the crypto-asset with the financial system. Crypto-assets classified as significant will be subject to EBA supervision.
Issuers of significant ARTs and EMTs shall comply with additional requirements, such as:
maintaining higher levels of liquidity;
recovery and redemption planning;
implementing a remuneration policy;
having in place a liquidity management policy and relevant procedures.
What are the key requirements for CASPs under MiCAR?
CASPs engaging in the provision of crypto-asset services ranging from custody and administration of crypto-assets on behalf of third parties to providing advice on crypto-assets will now need to, among other things:
maintain a minimum capital of €50,000, €125,000 or €150,000, depending on the service for which they are authorised;
have a registered office in an EU Member State where they carry at least part of their crypto-asset services;
be authorised by the relevant National Competent Authority;
have an effective place of management in the EU;
have at least one director residing in the EU;
abide by governance and operational requirements;
have internal control mechanisms, policies and procedures in place allowing them to identify, assess and manage risks;
follow rules on safekeeping;
manage conflicts of interest; and
establish a complaint handling procedure
More importantly, MiCAR will establish the ‘EU passporting’ system allowing authorised CASPs to provide their services across the EU member states. However, as MiCAR does not include a third-country regime, persons or other undertakings located in third countries will need to be authorised as an EU CASP to be able to offer crypto-asset services within the EU.
CASPs having at least 15 million active users in one year on average in the EU must notify their National Competent Authority within two months of meeting such threshold. Such CASPs will be considered as significant CASPs and will be subject to increased oversight by the European Securities and Markets Authority (ESMA).
Travel Rule relating to crypto-assets
CASPs will also be subject to the EU Transfer of Funds Regulation (TFR), which has also recently received approval by the European Parliament and the European Council. The TFR extends the scope of the so-called ‘travel rule’ designed by the Financial Action Task Force (FATF) which will now go beyond wire transfers to include transfers of crypto-assets. This means that CASPs will need to accompany transfers of crypto-assets with information regarding the originator (i.e. person intending to transfer crypto-assets) and the beneficiary (i.e. person intended to be the recipient of the transfer) and retain such information for five years or more if needed.
The idea behind this requirement lies in making transfers of crypto-assets traceable, facilitating the prevention, detection and investigation of money laundering and terrorist financing, as well as the implementation of restrictive measures.
Market Abuse Regime under MiCAR
MiCAR also establishes a bespoke market abuse regime to guarantee market integrity that will cover, among other thigs:
requirements relating to the disclosure of inside information;
the prohibition of insider dealing;
the prohibition of unlawful disclosure of inside information;
the prohibition of market manipulation;
requirements for persons professionally arranging or executing transactions in crypto-assets for the prevention and detection of market abuse
What should you be aware of if you are offering or intend to offer CASP services in the EU (whether from the EU or from outside the EU into the EU)?
It is advisable you conduct a thorough examination of the degree to which your operations fall under MiCAR. Additionally, you should assess the potential benefits of pursuing authorisation in your home EU country (if you are based in the EU) or another suitable member state before MiCAR comes into effect. This proactive approach allows you to take advantage of transitional provisions and minimise any potential delays that may arise after MiCAR implementation. It is important to note that obtaining authorisations can be a time-consuming process, requiring several months to complete. Therefore, companies interested in pursuing this option should act promptly.
Cyprus, an ideal EU Jurisdiction for CASP Registration and Licensing under the Pre-MiCAR Regime
Cyprus has positioned itself as an attractive EU jurisdiction for crypto-asset service providers (CASPs) seeking to establish their presence and obtain MiCAR licensing. In anticipation of MiCAR, Cyprus introduced its own crypto-asset service providers registration regime in 2021, aligned with the requirements of the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007, as amended (AML/CFT Law), which incorporates the provisions of the EU's Fifth Money Laundering Directive 2018/843 (5AMLD).
Under the AML/CFT Law, CASPs intending to engage in various crypto-asset activities within or from Cyprus must register with the Cyprus Securities and Exchange Commission (CySEC). The registration process mandates, among others, that CASPs maintain their operations within Cyprus and have a minimum of four directors, two of whom must be executives based in Cyprus. These directors are required to meet the adequacy test in terms of skills and experience.
It is worth noting that CASPs already authorised in Cyprus before the implementation of MiCAR will have the opportunity to convert their existing CySEC registration into an EU-wide MiCAR license, subject to the applicable transitional arrangements. This conversion will empower them to expand their services not only within Cyprus but also to passport their license across the entire EU market, providing access to a broader customer base and enhancing market competitiveness.
Cyprus offers an ideal environment for CASPs looking to establish their headquarters in the EU. With its status as an established and growing tech hub, Cyprus provides a favourable ecosystem for the crypto industry. Furthermore, the jurisdiction boasts numerous advantages, including tax benefits both at a company level and for its staff relocating to Cyprus. For further details on living and working in Cyprus and the benefits of the IP box regime applicable for technology companies, we encourage you to refer to our dedicated articles on our website.
By choosing Cyprus as a base for operations and obtaining licensing under the pre-MiCAR regime, CASPs can position themselves strategically within the EU's regulatory framework while capitalising on the jurisdiction's favourable business environment and its potential for growth in the crypto industry.
For more information
Although MiCAR will become fully applicable in 2025, with some provisions becoming applicable in 2024, market participants are urged to act now.
If you want to learn more about what MiCAR means for you and how you can start preparing for it, contact us.
The above article is based on the most recent text of MiCAR published by the European Parliament and the European Council on May 16th 2023.