Understanding MiCA: A Comprehensive Guide to Europe's Proposed Regulation on Crypto Assets
MiCA introduces uniform requirements for the issuance, offering and market placement of different types of crypto-assets, as well as creates one of the most encompassing regulatory regimes globally for the operation of crypto-asset service providers and for the performance of crypto-asset related activities.
MiCA will apply not only to entities established in the EU, but also to entities conducting the covered activities in the EU, regardless of their place of origin.
SCOPE OF MiCA
MiCA applies to natural and legal persons and other undertakings which are involved in the issuance, offering to the public and admission to trading of crypto-assets, and in the provision of various services related to crypto-assets in the EU.
The Key Categories Of Requirements Laid Down By Mica Are The Following:
Requirements related to transparency and disclosure as part of the issuance, offering to the public and the admission to trading of crypto-assets on trading platforms;
Authorization and supervision of crypto-asset service providers and issuers of asset-referenced tokens or of electronic money tokens;
Requirements related to the operation, organization and governance crypto-asset service providers, issuers asset-referenced tokens or of electronic money tokens;
Requirements related to the crypto-asset holders protection as part of the issuance, offering to the public and admission to trading thereof; and crypto-asset service providers' client protection;
Requirements related to the prevention of insider dealing, unlawful disclosure of inside information and market manipulation.
REGULATED CRYPTO ASSETS UNDER MiCA
MiCA defines 'crypto asset' as "a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology".
It further distinguishes between three main categories of 'crypto-assets', subjecting each of them to a distinct regulatory regime. The first two generally referring to different types of tokens commonly referred to as ‘stablecoins’, (including algorithmic):
ASSET-REFERENCED TOKENS : crypto-assets, which are not e-money tokens, and which are intended to maintain a stable value by reference to any value or right or combination of the two, including any number of official currencies.
ELECTRONIC MONEY TOKENS OR E-MONEY TOKENS : crypto-assets which are intended to stabilize their value by reference to a single official currency.
ALL OTHER CRYPTO ASSETS : this category includes crypto-assets, which do not fall under the definition of asset referenced tokens or e-money tokens, and covers a wide array of crypto-assets, including utility tokens.
Crypto-assets which fall under existing EU financial services regulations, such as security tokens and deposits, are not subject to the regulation and continue to be regulated under the respective regimes.
REQUIREMENTS FOR ISSUERS OF CRYPTO-ASSETS (OTHER THAN EMTS & ARTS) (“REGULAR TOKENS”)
Under MiCA, the offering of Regular Tokens, which are not EMTs or ARTs, to the public in the EU or their admission to trading on a trading platform for crypto-assets is subject to a wide array of specific requirements, including:
The offering must be made by a legal person;
Drafting a white paper in accordance with content and form requirements set in MiCA;
Notification and publishment of a white paper;
Where applicable, drafting and publishing marketing communications;
Obligations to act honestly, fairly, professionally, act to the best interest of the crypto-asset holders, without conflict of interest, and maintain all systems and security access protocols to appropriate EU standards.
Exemptions for drafting, notification and the publishing of the white paper-
The obligations concerning the drafting, notification and the publishing of the white paper will generally not apply to the following offers:
Offers to less than 150 persons per EU member state;
The total consideration of an offer over a period of 12 months does not exceed EUR 1,000,000;
Offers which are addressed solely to qualified investors and under which only such qualified investors can hold such Regular Tokens.
MiCA imposes on offerors of Regular Tokens an obligation to provide information on the results of the offer of such crypto-assets and safeguarding of funds received during such offers.
MiCA also introduces a right of withdrawal for retail holders, under which retail holders who bought Regular Tokens directly from the offeror or from a crypto-asset service provider which placed such Regular Tokens on behalf of the offeror would be able to withdraw such purchase without cost within 14 calendar days.
Exemptions on offers to the public-
The obligations related to the offers to the public will not apply in the following circumstances:
Airdrops’ and free offerings
Validation or DLT maintenance rewards
Utility token ready for use
Regular Token holder only has the right to use the crypto-asset in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror.
These exemptions will not apply if the offeror or another person has communicated its intention to seek admission to trading in any communication.
Generally, an authorization in relation to the custody, administration and transfer of the crypto-assets covered by the above mentioned exempt situations would not be required, unless there exists at least one other offer which would not fall under such exemptions, or the crypto-asset is admitted to trading platform, or the offeror or another person has communicated its intention to seek admission to trading in any communication.
REQUIREMENTS FOR ISSUERS OF ASSET REFERENCED TOKENS (“ART”)
Offering of ARTs to the public in the EU or seeking admission of ARTs to trading on a trading platform for crypto-assets may only be done by a person established in the EU, which is authorized to do so by a competent authority in their state, or by a properly authorized credit institution which is subject to certain requirements without a need to obtain additional specific authorization.
Exemptions from ART requirements-
Some requirements would generally not apply in the following cases:
The outstanding value of all ARTs never exceeds EUR 5,000,000 over a period of 12 months, and the issuer has no links to network of issuers which are covered by such exemption;
Offers which are addressed solely to qualified investors and under which only such qualified investors can hold such ARTs.
MiCA establishes stringent regulatory requirements for offering and admission to trading on trading platforms of ARTs (especially in comparison to those applicable to the offering of other "regular tokens" such as utility tokens, as detailed above), and includes among others:
A requirement for approval of a white paper by a competent authority;
3% Own funds requirement;
Approval regarding qualifying shareholders;
Requirement to present a wide array of information to the competent authority, including business model, programme of operations, detailed description of governance arrangements, and legal opinion that the crypto-asset does not qualify as an ART or as a crypto-asset which constitutes one of the specified instruments regulated under other financial regulations.
Capital requirements proportionate to the issuance size of the ARTs;
Provision of token holder redemption right;
Requirement to have a registered office in an EU Member State;
If the number of transactions of an ART per day associated to uses as means of exchange is higher than 1 million and their value is higher than EUR 200,000,000, within a single currency area, issuers will be required to stop issuing such ARTs and present to the competent authority a plan for reducing the level of activity.
The offering of interest for holding ARTs (yield generation) is banned under the MiCA regime.
REQUIREMENTS FOR ISSUERS OF ELECTRONIC MONEY TOKENS (“EMT”)
Offering of EMTs to the public in the EU or seeking admission of EMTs to trading on a trading platform for crypto-assets may only be done by properly authorized credit institutions which comply with additional requirements set in MiCA. MiCA applies the provisions of the Electronic Money Directive1 to the issuance and offering of EMTs, for the purpose of which EMTs shall be deemed as 'electronic money'.
In addition to the requirements applicable to the issuance of other electronic money, the following requirements apply to an EMT issuer:
Drafting a white paper, its notification to the competent authority and its publishment;
2% own fund requirement;
Notifying the competent authority prior to the intended date of EMT issuance;
The issuance of EMTs is required to be conducted at par value and on the receipt of funds and provide its holders with the right for redemption of EMTs at par value;
Additional provisions concerning investment of funds received in exchange for EMTs would also apply.
The offering of interest for holding EMTs (yield generation) is banned under the MiCA regime.
SIGNIFICANT EMTS AND ARTS
In addition, MiCA introduces two sub-categories of 'significant e-money tokens' and 'significant asset-referenced tokens', which would be subject to more stringent regulatory requirements (e.g., higher capital, interoperability and liquidity management policy establishment requirements) and supervision than their not 'significant' counterparts (namely, supervision by the European Banking Authority ["EBA"] and local competent authority simultaneously).
EMTs or ARTs may be considered as 'significant' if they meet certain criteria, such as:
High number of token holders;
High value, market capitalization or size of the reserve assets of the issuer;
High number and value of transaction;
The issuer's identity (e.g. provider of core platforms services designated as gatekeeper under the Digital Markets Act; issuer of additional asset-referenced or e-money token; provider of crypto-asset service) and significance of its activities; or
Connectivity with the financial system.
REQUIREMENTS FOR CRYPTO- ASSET SERVICE PROVIDERS (“CASP”)
MiCA sets new mandatory authorization as well as additional regulatory requirements for the covered 'crypto asset services providers' or ‘CASPs’.
Who is a CASP?
Legal person or other undertaking whose occupation or business is the provision of one or more of the following services to third parties, on a professional basis, and are allowed to do so under MiCA:
Custody and administration of crypto-assets;
Operation of a trading platform for crypto-assets;
Exchange of crypto-assets for funds;
Exchange of crypto-assets for other crypto-assets;
Execution of orders for crypto-assets on behalf of third parties;
Placing of crypto-assets;
Transfer services for crypto-assets on behalf of third parties;
Reception and transmission of orders for crypto-assets on behalf of third parties;
Providing advice on crypto-assets;
Providing portfolio management on crypto-assets.
All of these CASPs will need to comply with minimum requirements with respect to their governance, the safekeeping of the assets, complaint handlings, outsourcing, wind-down plans, information disclosure, and last but not least, prudential requirements - CASPs will need to maintain permanent minimum capital (“own funds”) of:
€150k for tradings platforms,
€125k for custodians and exchanges (brokers), and
€50k for all the others.
Key ongoing regulatory requirements applicable to CASPS
Obtaining and maintaining proper CASP authorization.
Having a registered office in an EU Member State in which at least part of the CASP's crypto-asset activities is carried out, as well as having effective management in the EU and at least one director being a resident of the EU.
Establishing and maintaining up-to-date proper and effective policy procedures in place for identifying, preventing, managing and disclosing conflicts of interests, including prominently disclosing conflicts of interest on the CASP's website;
Make pricing, costs and fee policies publicly available in a prominent fashion on the website;
Specific ESG requirements;
Prudential requirements, including specific capital requirements and insurance policy;
CASPs will also be considered as an obligated entity under the AML/CTF laws and be subject to various AML/ CTF-related requirements.
Service-Specific Requirements - In addition, CASP could also be subject to other service-specific requirements, depending on the provided services.
CASPs that are already licensed under national frameworks will benefit from an accelerated and simplified MiCA authorization procedure. They will also have up to 18 months after entry into application (meaning until Q2 2026, 18 months after Q4 2024) to receive the final MiCA license.
CASPs are normally supervised by the national financial supervisors of their home jurisdiction. However, for the largest CASPs with over 15 million active users, the national supervisor will have to notify EU securities supervisor ESMA, which from that point will have a say on key decisions and developments.
DEFI
MiCA applies to businesses - natural & legal persons and “ certain other undertakings”. Other “undertakings” could include entities that are not legally established, but the EU has clarified that decentralized DAOs and protocols are not the target of this recent addition. MiCA recital 22 clarifies that “where crypto-asset services (..) are provided in a fully decentralised manner without any intermediary, they should not fall within the scope of this Regulation”. This core statement is backed up by multiple public statements from key EU officials from the Commission and the Parliament.
However, as always, the devil lies in the details. The same recital states that MiCA applies even “when part of such activities or services is performed in a decentralised manner”.
DeFi projects have two options if they want to stay out of scope.
Prove full decentralization (high bar).
Operate on reverse solicitation basis (not targeting EU customers)
The bars for both will be substantial, as both could blow a hole into MiCA’s impact and scope. Those projects operating out of the EU with EU legal entities or offering an euro-referencing stablecoin may have a particularly hard time.
Nevertheless, all in all, the EU is to be praised for its formal exclusion of true DeFi in the scope of a regulation that targets centralized financial companies.
PASSPORTING
MiCA introduces a 'passporting' mechanism, under which obtaining the required authorization in one EU Member State would allow the holder of such authorization to provide services throughout the entire EU without a need to obtain similar authorizations in other Member States.
Furthermore, the ‘passporting’ mechanism allows offering crypto-assets, which do not fall under the definition of asset-referenced tokens or e-money tokens, or having them admitted to trading in the EU after the publication of the relevant white paper without being subject to additional information Requirements.
REVERSE SOLICITATION
MiCA also introduces the concept of 'reverse solicitation' to the crypto-asset services domain, under which firms established outside of the EU are permitted to provide crypto-asset services to EU clients at the own initiative of such clients without being subject to authorization requirements under MiCA.
ENVIRONMENTAL, SOCIAL AND CORPORATE GOVERNANCE (ESG)
The issuers of crypto-assets are required to disclose and make publicly available information on adverse environmental and climate footprint of such crypto-assets and underlying technology thereof, and CASPs are required to provide disclosures in relation to each crypto-asset with regard to which they provide such services.
CONCLUSION
MiCA is a new EU regulation that applies to individuals, legal entities, and organizations engaged in various activities related to crypto-assets within the EU.
It categorizes crypto-assets into three categories, each subject to a distinct regulatory regime. The regulation imposes specific requirements on issuers of Regular Tokens, which do not fall under EMTs or ARTs, if they are offered to the public in the EU or traded on a crypto-asset trading platform. MiCA imposes strict regulatory requirements for ARTs, which are more stringent than those for other types of tokens, and only authorized credit institutions that comply with the requirements of MiCA can offer EMTs to the public in the EU or seek their admission to a trading platform for crypto-assets.