Overview and Scope of Application: "Crypto-Assets" - Delving into the fundamentals of MICA and the range of applicable crypto-assets.
A vote on implementing the markets in crypto assets (MiCA) law will take place soon in the European Parliament. The proposal will establish standardized guidelines for cryptoassets at the EU level, giving those assets legal security that is not currently provided by EU law. The policy encourages innovation and the use of crypto assets by improving investor and consumer safety as well as monetary stability. The MiCA places limitations on the creation and utilization of stablecoins, among other things.
Scope of Application: "Crypto-Assets"
MiCA controls access to the secondary market (listings), primary market operations (issuance/public offers), and some services related to cryptocurrencies. Regarding the latter, MiCA offers a list of ten services that are collectively referred to as "crypto-asset services" and are modeled after the list of investment services under Markets in Financial Instruments Directive 2014/65/EU (MiFID II). The list includes services such as the custody and administration of crypto assets on behalf of third parties and the operation of a trading platform.
Introduces a single authorization framework that all EU nations will use. CASPs will now be able to offer their services to all EU countries after receiving authorization in the countries where they are registered. MiCA Regulation would enable regional Web3 enterprises to operate in bigger markets on fewer licenses since national licenses typically only allow activities in the nation in which they are issued.
MiCA does not apply to crypto assets captured by existing financial services legislation (e.g., security tokens qualifying as financial instruments under MiFID II). Further, it does not apply to crypto-assets that are unique and not fungible with other crypto-assets (Art. 2 (2a) MiCA; so-called Non-Fungible Tokens (NFTs). NFTs that are issued "in a large series or collection" could, nevertheless, be viewed as fungible and hence covered by MiCA. NFTs' fractional components do not also fall under the exclusion.
MiCA will be officially approved by the EU Council, published in the EU's Official Journal, and come into effect 20 days after that. MiCA will probably go into force no earlier than Q3 2024 because it will typically start applying after a transitional period of 18 months. The regulations for stablecoins, however, won't apply until after a 12-month transitional period, so they might start to apply in the spring of 2024.
The MiCA governs transactions involving "crypto assets." Any "digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology" (Article 3 (1) No. (2) MiCA) is referred to as a "crypto asset" in the broadest sense. Three subcategories of crypto assets are introduced by MiCA, each of which is subject to a unique set of regulations that are tailored to the risks involved. They are:
i) "Electronic money tokens" or "e-money tokens" (EMTs) are crypto-assets that purport "to maintain a stable value by referencing to the value of one official currency" (Art. 3, nº4 MiCA). Like traditional e-money, EMTs are electronic surrogates for coins and banknotes and are likely to be used for payment purposes.
ii) "Asset-referenced tokens" (ARTs) aim "to maintain a stable value by referencing to any other value or right or a combination thereof, including one or more official currencies" (Art. 3º, n. º3 MiCA). For example, ARTs could be backed by a basket of different fiat currencies, commodities, or crypto assets.
iii) “Utility tokens” The third sub-group is a catch-all category for all other crypto-assets that are not EMTs or ARTs, which thus covers a wide variety of crypto-assets, including non-pegged payment tokens (i.a., cryptocurrencies like Bitcoin or Ether) and utility tokens. MiCA lays down a few specific rules for utility tokens, defined as “a type of crypto asset which is only intended to provide access to a good or a service supplied by the issuer of that token” (Art. 3, n.º 5 MiCA).
Both ARTs and EMTs are stablecoin variations. According to MiCA, the European Banking Authority (EBA) may classify ARTs and EMTs as substantial based on a predetermined set of factors, such as the quantity of investors, market capitalization, gatekeeper position of their issuer, or connectivity with the financial system. Significant ART and EMT issuers are subject to stricter regulations, such as capital requirements, and are often under the supervision of the EBA rather than national authorities. This system is similar to how banks are categorized as systemically significant to satisfy regulators' worries about financial stability.
A graphic outlining the many categories of crypto assets that MiCA considers, as well as how the legislation classifies each one, may be found below.
Decentralized Finance (DeFi) and operations of Decentralized Autonomous Organizations (DAO) are not covered by the regulation, as long as control of the operations is truly decentralized because neither crypto-asset services that "are provided in a fully decentralized manner without any intermediary" nor crypto-assets without a clearly identifiable issuer fall under the purview of MiCA (recital 12a).
