The EU’s Markets in Crypto-Asset Regulation (MiCAR)

RegCORE Client Alert | EU Digital Single Market

QuickTake

On 9 June 2023 the Markets in Crypto-Assets Regulation (MiCAR) was published in the EU’s Official Journal and entered into force on 29 June 2023. MiCAR creates a comprehensive regulatory and supervisory framework for previously unregulated crypto-assets in the European Union (EU). While some provisions begin to apply already from 30 June 2024 on, MiCAR will apply, in its entirety as of 30 December 2024. The adoption of MiCAR concludes a successful legislative process now introducing a new chapter into the EU’s Single Rulebook which will replace a patchwork of individual Member State national frameworks on the regulation of crypto-assets.

The framework will be applicable to crypto-asset service providers (CASPs) and crypto-asset issuers (CAIs) operating in or across the EU. The services governed by MiCAR are largely similar to those falling under the existing body of EU financial regulation (notably MiFID II) and trigger a licensing requirement both for CASPs and CAIs. With several EU-level authorities set to publish numerous further EU-wide applicable technical standardsImplementing technical standards (ITS) and regulatory technical standards (RTS) as stipulated under MiCAR or as required under the “traditional financial services” legislation amended by MiCAR.Show Footnote as stipulated under MiCAR, this new framework’s provisions aim to be technology neutral as well as asset class and jurisdiction agnostic with the overall goal of striking a fair balance between addressing different levels of risk posed by each type of crypto-asset and the need to foster financial innovation.

This Client Alert from PwC Legal’s EU RegCORE provides a condensed overview of the regulatory changes of the new MiCAR regulatory framework and should be read together with EU RegCORE’s Background Briefing on “Mastering MiCAR”. To ensure they continue to maintain adherence to the relevant EU standards and rules, crypto-asset market participants are advised to reflect on whether their own specific activities and business models are captured by MiCAR or whether they fall into traditional financial services legislation or are, otherwise, not regulated at all.

Key Takeaways from MiCAR

MiCAR brings to life a harmonised and EU-wide licensing regime plus a single set of conduct of business rules. This new regime will become gradually applicable, with provisions on asset-referenced tokens (ART) and e-money tokens (EMT) applying already as of 30 June 2024 and other provisions as of 30 December 2024, i.e., 18 months after entry into force. As illustrated in further detail in the Background Briefing, the framework introduced by MiCAR is rather similar to and mimics much of the existing body of EU financial regulation. Indeed, prior to MiCAR, some types of crypto-assets were captured, albeit in part, by existing financial services regulation – i.e., MiFIR/ MiFID – which mainly depends on whether the crypto-asset qualifies as a ‘financial instrument’. With the new regime introduced by MiCAR, tokens are separated in two groups. Currency tokens, utility tokens and stablecoins,in view of their goal of maintaining a stable value in relation to an underlying reference asset, ARTs and EMTs are also referred to as “stablecoins”. For the sake of a clear delineation between crypto-assets (governed by MiCAR) and financial instruments (governed by existing financial services legislation) the European Securities and Markets Authority will issue guidelines on the criteria and conditions on designating digital assets either in-scope or out of scope by 30 December 2024, here.Show Footnote on the one hand, will be subject to MiCAR, while security tokens and token-derivatives, on the other, are subject to the bespoke framework composed of the DLT-Pilot Regime and MiFID II.

MiCAR’s uniform licensing and conduct of business rules apply to natural and legal persons and “certain other undertakings” (such as decentralized autonomous organisations (DAOs) and other decentralized finance (DEFI) operators) that are engaged in the issuance, offer to the public and admission to trading of crypto-assets or that provide services related to crypto-assets in the EU. Correspondingly, MiCAR’s application and respective provisions can be distinguished by those persons that are either: (i) CAIs, and (ii) CASPs. Both CAIs and CASPs will, however, become subject to uniform rules on transparency and disclosure requirements for issuance, public offering and admission to trading as well as a framework on licensing and supervision.

Besides setting out a set of generally applicable requirements which CAIs must satisfy prior to offering crypto-assets (other than ART or EMT, or those that are exempt) to the public or seeking admission to trading of the same in the EU, MiCAR introduces a so-called ‘whitepaper’ framework for minimum disclosure requirements containing a technical description, including the risk factors of the crypto-asset in question. Issuers of ART or EMT will be subject to additional requirements regarding both authorisation and ongoing compliance, especially where the tokens in question are labelled as significant.ARTs and EMTs are deemed significant where they meet, or are likely to meet, certain criteria, including a large customer base, a high market capitalisation, or a large number of transactions. Where they are used by a large number of holders, their use could raise specific challenges in terms of financial stability, transmission of monetary policy or monetary sovereignty.Show Footnote At the same time, MiCAR extends exemptions from the authorisation requirement to already licensed institutionsi.e., those already licensed respectively under CRR/CRD, MiFID/MiFID II, IFR/IFD (such as credit institutions, central securities depositories and investment firms).Show Footnote or where an issuance does not exceed certain thresholds.That is, where an entity, over a 12-month period, issues an average outstanding amount of ARTs/EMTs, as calculated at the end of each calendar day, not exceeding EUR 5 million and the offer is addressed solely to qualified investors and can only be held as such issuers of EMTs.Show Footnote Similarly to CAIs, CASPs are subject to prior authorisation before commencing their operations, although may benefit from an accelerated procedure including a prior notification to the relevant NCA in order to top op their permissions to include activities in scope of MiCAR. Once authorised, however, CASPs are subject both to generally applicableIncluding disclosure, supervision and conduct of business.Show Footnote requirements as well as service-specific requirements, depending on the scope of activities a CASP intends to perform.

In the context of supervising CASPs and CAIs, national competent authorities (NCAs) will act as the font-line supervisors and enforcement agents of both CASPs and CAIs with the goal of ensuring compliance, the promotion of market integrity as well as consumer protection. Accordingly, NCAs will apply a modified supervisory toolbox including using on-site and off-site inspections, thematic reviews, and regular supervisory dialogue to identify, monitor and request remedies to compliance shortcomings of CASPs and/ or CAIs. Supervisory responsibility of issuers of significant ARTs will fall to the EBA while for issuers of significant EMTs the supervisory responsibility will be shared by EBA and the NCAs. Where CASPs have more than 15 million active users in the EU on average over a time period of 12 months they will be classified as significant and ESMA must be kept informed by the relevant NCA – which continues to hold supervisory responsibility – on an ongoing basis about key supervisory developments.

Surprisingly, MiCAR does not provide for a third-country regime which raises the question as to what possibilities MiCAR provides for third-country access to the single EU crypto-asset market. In practice, persons located outside the EU are currently deprived of promoting their services to clients located in the EU. MiCAR merely stipulates the Commission to comment in its evaluation report on whether MiCAR should, eventually, contain an equivalency rule for crypto-asset service providers from third countries, for the introduction of which a legislative proposal would be necessary.

Open questions on crypto-asset services

Although MiCAR undoubtedly symbolises a quantum leap in the right direction, it is not a one-size fits-all cure to the risks in, and ambiguities of the still evolving crypto-asset marketplace. As the first set of provisions become applicable in the summer of 2024, it remains to be seen whether this, certainly vis-à-vis international lawmakers, rapid legislative endeavour will pay dividends as the crypto marketplace continues to evolve.

Non-Fungible Tokens (NFTs) are exempt from the scope of MiCAR. This is because the delineation between crypto-assets covered by the scope of MiCAR/ existing EU financial regulation and those tokens that are “unique” and “not fungible with other crypto-assets” as per Recital 10 of MiCAR, remains unclear. Similar ambiguities currently persist with regards to crypto lending and staking activities as well as decentralized finance (DeFi) and decentralized autonomous organisations (DAOs).

MiCAR expressly tasks the Commission, EBA and ESMA to report to the EP and Council on the status quo of technological developments in the market such as to eventually perform a major overhaul and consequently extend the scope of MiCAR, allowing it to maintain its technology agnostic nature going forward. At the current juncture, MiCAR appears to have performed a regulatory triage of what currently sufficiently resembles traditional financial services activities such as to be able to adopt many of the existing regulatory approaches, while leaving open the regulation of those activities still at an infant stage and as to which the application of current rules would be inadequate.

Key impacts

As this latest addition to the EU Single Rulebook will have a far-reaching impact, with extraterritorial effect and thus influence many market participants, the Commission concedes that initial costs will undoubtedly arise to accommodate the regime smoothly. Some of the key impacts inevitably will concern CASPs and CAIs, as well as investors.
Those firms which, under MiCAR, qualify as a CASP have thus far been operating in a regulatory void and will now have to apply for authorisation. On the flip side, the regime introduced by MiCAR will provide access on a harmonised basis to operate across the EU as a whole. Likewise, issuers of crypto-assets will have to prepare for rising compliance costs while the standardisation of the whitepaper will have to be prepared. Investors themselves will benefit under a set of increased investor protection rules as well as market integrity provisions that collectively reduce the overall risks within the crypto-asset marketplace.

Outlook and next steps

The implementation of MiCAR represents a paradigm shift in filling the regulatory vacuum outside of the existing EU financial regulation in that it establishes the first comprehensive regulatory framework for the crypto-asset marketplace. Not only does it confirm the effectiveness of existing financial regulation in as much as many principles and approaches are reflected in MiCAR, it also underlines the scope and relevance of top-down rulemaking by single-handedly establishing a level playing field by providing regulators and market actors clear boundaries and protecting EU citizens while establishing and driving the world’s largest Single Market for crypto-assets in a safe and viable manner.  To find out more on how to prepare for MiCAR, how to navigate challenges and seize opportunities, please refer to our Background Briefing “Mastering MiCAR” as well as related coverage form our EU RegCORE’s series on the EU’s Digital Single Market, financial services and crypto-assets.

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