European Union: Europe adopts comprehensive crypto legal framework

In brief

After sev­er­al years of intense debate, dur­ing its ses­sion on 16 May 2023, the Euro­pean Coun­cil final­ly approved the Reg­u­la­tion on Mar­kets in Cryp­to-Assets (MiCA).¹ The EU’s first legal frame­work for cryp­to now only requires pub­li­ca­tion in the Offi­cial Jour­nal of the Euro­pean Union, which is expect­ed to hap­pen any time soon. MiCA brings a sub­stan­tial change to the EU reg­u­la­to­ry land­scape, cre­at­ing a har­mo­nized regime in terms of issuance and the pro­vi­sion of ser­vices in rela­tion to cryp­to-assets, con­sis­tent with the inter­na­tion­al reach of this tech­nol­o­gy. Assum­ing that pub­li­ca­tion takes place short­ly, an esti­mat­ed timetable for MiCA’s imple­men­ta­tion would like­ly see the rules on the issuance of asset-ref­er­enced tokens and e‑money tokens apply­ing from June or July 2024, while oth­er pro­vi­sions would apply from approx­i­mate­ly Decem­ber or Jan­u­ary 2025.

While the approved text is now final and mar­ket play­ers know what to expect, many of MiCA’s tech­ni­cal aspects are still sub­ject to fur­ther devel­op­ment and dis­cus­sion over the com­ing months, in rela­tion to which the Euro­pean Com­mis­sion is empow­ered to adopt reg­u­la­to­ry tech­ni­cal standards.

Cryp­to-asset issuers and providers that offer ser­vices in the EU (includ­ing non-EU firms’ cross-bor­der offer­ings) should start prepar­ing now for the new regime. Under­stand­ing whether their offer­ing falls with­in MiCA’s scope and the pre­cise oblig­a­tions to com­ply with is key to avoid­ing busi­ness dis­rup­tion in the tran­si­tion peri­od and beyond.

Our pre­vi­ous brief­ing explored MiCA’s main pro­vi­sions in detail, and high­light­ed some of the key changes com­ing out of the com­pro­mise text when com­pared with ear­li­er versions.

Current EU regime limited to AML and virtual currencies

For EU coun­tries that have not adopt­ed nation­al cryp­to regimes, only EU AML rules have been in force so far, lim­it­ed to cer­tain ser­vices for vir­tu­al cur­ren­cies. Cur­rent AML rules in place only cov­er cus­to­di­an wal­let providers and those engaged in exchange ser­vices between vir­tu­al cur­ren­cies and fiat cur­ren­cies, which are both sub­ject to a light-touch reg­is­tra­tion regime. Oth­er ser­vices for vir­tu­al cur­ren­cies (e.g., advi­so­ry, cryp­to-for-cryp­to exchange, etc.) or any ser­vices relat­ed to oth­er types of cryp­to-assets (that do not qual­i­fy as ‘vir­tu­al cur­ren­cies’) are not sub­ject to an EU-har­mo­nized reg­u­la­to­ry regime, except those for cryp­to-assets that qual­i­fy as finan­cial instru­ments (to which the exist­ing EU finan­cial rules apply).

What is within MiCA’s scope?

MiCA applies to a wide range of cryp­to-assets, defined as “a dig­i­tal rep­re­sen­ta­tion of a val­ue or of a right which may be trans­ferred and stored elec­tron­i­cal­ly, using dis­trib­uted ledger tech­nol­o­gy or sim­i­lar technology.” 

While a spe­cial set of rules apply to asset-ref­er­enced tokens and e‑money tokens, oth­er types of cryp­to-assets and ser­vices remain out of scope (in par­tic­u­lar, cryp­to-assets that qual­i­fy as finan­cial instru­ments and cer­tain non-fun­gi­ble tokens or NFTs). Some decen­tral­ized finance (DeFi) mod­els (e.g., cryp­to-lend­ing, min­ing, etc.) and decen­tral­ized autonomous orga­ni­za­tions (DAOs) are also not express­ly cov­ered by MiCA. 

Giv­en the wide reg­u­la­to­ry scope and flex­i­bil­i­ty in the cre­ation of rights assigned to cryp­to-assets, prop­er­ly defin­ing their nature, and hence the applic­a­ble rules, can often be a major chal­lenge, par­tic­u­lar­ly when seek­ing to remain out­side the def­i­n­i­tion of a secu­ri­ty token.

Authorization for crypto-asset service providers

MiCA sets forth new rules on the pro­vi­sion of cer­tain cryp­to-asset ser­vices (e.g., place­ment, cus­tody, exchange, trans­fer, advi­so­ry, port­fo­lio man­age­ment, etc.), build­ing a reg­u­la­to­ry autho­riza­tion regime sim­i­lar to the one in place for invest­ment firms. Once autho­rized by a com­pe­tent author­i­ty of an EU mem­ber state, the cryp­to-ser­vice provider may oper­ate across the EU (under the so-called ‘pass­port’ regime sim­i­lar to those already in force for oth­er types of finan­cial services). 

Cred­it insti­tu­tions, elec­tron­ic mon­ey insti­tu­tions and invest­ment firms will not have to obtain a sep­a­rate autho­riza­tion under MiCA and will be able to pro­vide cryp­to ser­vices lever­ag­ing and adapt­ing their own authorization.

Crypto issuance and offering rules

MiCA reg­u­lates the offer­ing of cryp­to-assets inspired by the rules of tra­di­tion­al mar­kets, includ­ing the oblig­a­tion to sub­mit a “white paper” to the reg­u­la­tor (equiv­a­lent to a ‘prospec­tus’) for reg­is­tra­tion pri­or to an issuance, requir­ing its approval only for cer­tain types of cryp­to-assets. Excep­tions are pro­vid­ed for lim­it­ed offer­ings to qual­i­fied investors and cer­tain thresh­olds. Offer­ing rules are stricter for the issuance of asset-ref­er­enced tokens (e.g., sta­ble coins) and e‑money tokens because of their high­er risk to the finan­cial sys­tem. Addi­tion­al oblig­a­tions also apply to issuers of asset-ref­er­enced tokens and e‑money tokens that are con­sid­ered “sig­nif­i­cant” (in light of their issuance val­ue, the num­ber of hold­ers and the aver­age num­ber of transactions).

The rules on cryp­to-assets’ issuance (oth­er than e‑money tokens and asset-ref­er­enced tokens) do not apply when: (i) they are offered free of charge (although they are not con­sid­ered free of charge when grant­ed in exchange for per­son­al data); or (ii) they qual­i­fy as util­i­ty tokens that give access to an exist­ing prod­uct or ser­vice, or that can be used only in a lim­it­ed net­work of merchants.

Final­ly, MiCA intro­duces mar­ket abuse rules to pre­vent insid­er deal­ing and mar­ket manip­u­la­tion, and a trans­ac­tion cap on asset-ref­er­enced tokens and e‑money tokens “wide­ly used as a means of exchange.”

Consumer protection

Con­sumer pro­tec­tion remains a pri­or­i­ty. Con­sumers will have a 14-day right of with­draw­al from the trans­ac­tion, exer­cis­able up to the end of the offer peri­od and before the cryp­to-asset is admit­ted to trading. 

MiCA also affords a right of redemp­tion against the issuer of e‑money tokens and asset-ref­er­enced tokens — a very pow­er­ful lev­el of guar­an­tee, sim­i­lar to exist­ing rules for e‑money and open-end­ed invest­ment funds.

Addi­tion­al­ly, insol­ven­cy risks are mit­i­gat­ed by oblig­a­tions to safe­guard funds and assets with a third par­ty, and to have a ‘reserve of assets’ to cov­er the issuer’s lia­bil­i­ties to investors in asset-ref­er­enced tokens.

1 Rat­i­fy­ing the text approved on 20 April 2023 by the Euro­pean Parliament.

Relat­ed con­tent: Euro­pean Union: Cryp­to Reg­u­la­tion – MiCA Takes its (Near) Final Shape