MiCAR Regulation: What it means for crypto | IT-Medienrecht

MiCAR: Understanding the EU Markets in Crypto-Assets Regulation and its Impact

The new EU Markets in Crypto-Assets Regulation (MiCAR) was published in the Official Journal of the European Union on June 9, 2023, and entered into force on June 29, 2023. However, most of its provisions will only become applicable after a transitional period of 12 to 18 months. Nevertheless, market participants should already familiarize themselves with these new rules and prepare for their implementation.

In Germany, MiCAR is being implemented through two new laws: the Financial Markets Digitization Act (FinmadiG) and the Crypto Markets Supervision Act (KMAG). The FinmadiG accompanies MiCAR’s implementation by making necessary amendments to existing laws, such as the Money Laundering Act and the Banking Act.

The KMAG, in turn, regulates the supervisory activities of the competent authorities. It designates the Federal Financial Supervisory Authority (BaFin) as the competent supervisory authority for MiCAR regulations in Germany. BaFin will be responsible for monitoring these regulations and will be granted the necessary powers, such as intervening against unauthorized transactions.

While the KMAG is still in the legislative process, the “MiCAR Application Ordinance” aims to enable companies to submit applications under MiCAR early. This allows them to provide crypto asset services under the new legal framework in a timely manner. Notably, the term “crypto assets” in MiCAR differs from the previous “crypto assets” in the German Banking Act (KWG), which have been renamed “cryptographic instruments.”

Furthermore, the KWG’s crypto custody business will become a “qualified crypto custody business.” The German Money Laundering Act (GwG) now includes providers of crypto asset services, as defined by MiCAR, as obligated parties under money laundering law.

What Does MiCAR Regulate?

MiCAR establishes the first comprehensive regulatory and supervisory framework for previously unregulated crypto assets within the European Union. These uniform licensing and conduct rules apply to a broad spectrum of market participants.

Specifically, MiCAR regulates:

• Natural and Legal Persons Involved in Crypto Asset Issuance: This includes companies that issue and publicly offer crypto assets, such as utility tokens, value-referenced tokens (ARTs), or e-money tokens (EMTs).
• Certain Other Entities: This category encompasses decentralized autonomous organizations (DAOs) and other Decentralized Finance (DeFi) operators, to the extent that they are at least partially involved in providing crypto services. Purely decentralized DeFi activities without intermediaries are generally not covered by MiCAR.
• Crypto-Asset Service Providers (CASPs): These include entities offering services such as the custody and management of crypto assets for clients, the operation of trading platforms, the exchange between crypto assets and fiat currencies, or the execution of orders for crypto assets on behalf of clients.

In the future, all these players will be subject to harmonized EU-wide requirements. These requirements cover licensing, business organization, consumer protection, market integrity, and supervision. This applies if they issue crypto assets, offer them to the public, or provide crypto services within the EU.

The regulation aims to create a level playing field, prevent regulatory arbitrage, and strengthen investor protection. However, certain entities are excluded from MiCAR’s scope. These include central banks, public authorities of Member States, the European Investment Bank and its subsidiaries, as well as some already regulated financial institutions like credit institutions and investment firms, but only if they provide crypto services exclusively to group companies.

Which Crypto Assets Fall Under MiCAR?

MiCAR differentiates between three categories of tokens not currently covered by existing regulatory frameworks:

1. Asset-Referenced Tokens (ARTs)

ARTs are tokens designed to maintain a stable value in relation to an underlying reference. This reference could be currencies, commodities, or other crypto assets. They serve as a means of payment or store of value without having the status of legal tender.

Examples include stablecoins linked to fiat currency baskets or commodities. Issuers of ARTs must meet special requirements, including:

• Authorization by the competent authority.
• Publication of a white paper.
• Liquidity and capital requirements.
• Requirements for the custody of the reference assets.

2. E-Money Tokens (EMTs)

EMTs are tokens designed to maintain a stable value in relation to a single fiat currency, such as the euro or US dollar. They qualify as e-money under the Second E-Money Directive (EMD2). Issuers of EMTs require an e-money license and must meet EMD2 requirements, along with additional MiCAR mandates.

These mandates include specific rules for the custody of the reference currency and the redemption of tokens.

3. Utility Tokens

Utility tokens are crypto assets used solely to grant digital access to a good or service provided by the issuer. They do not confer any other rights on the holders against the issuer. Utility tokens are subject to the lowest requirements under MiCAR.

Issuers only have to publish a white paper and comply with certain information and marketing rules. For more details on different token types, you can read our article on Security Tokens and Utility Tokens.

However, MiCAR does not cover, for example:

• Security tokens that are considered financial instruments under MiFID II. These remain subject to existing capital market regulations, such as the Prospectus Regulation.
• Unique, non-fungible tokens (NFTs), which are not crypto assets within MiCAR’s definition due to their uniqueness and non-exchangeability. Nevertheless, series of NFTs or fractional NFTs may qualify as crypto assets if they are sufficiently standardized and fungible.
• Crypto assets already covered by other EU regulations, such as deposits, funds (except for e-money tokens), securitization positions, or insurance products.

MiCAR thus establishes, for the first time, a comprehensive taxonomy and a set of rules for previously largely unregulated token types that did not fit into existing regulatory frameworks. The differentiation between ARTs, EMTs, and utility tokens, along with the risk-adjusted requirements, aims to ensure appropriate investor and consumer protection while fostering innovation.

What Obligations Apply to Issuers?

Issuers of ARTs and EMTs must meet the following regulatory obligations from June 30, 2024:

Authorization and White Paper Publication

1. Authorization by the competent national authority and publication of a white paper with information on the respective ART/EMT for investors:
   • The white paper must contain detailed information on the issuer, the project, and the rights, risks, and costs associated with the ART/EMT and its underlying technology.
   • This white paper must be notified to the supervisory authority and published on the issuer’s website.

Conduct and Governance Requirements

2. Conduct and governance requirements in relation to marketing, disclosure of information, and dealing with conflicts of interest:
   • Issuers must act honestly, fairly, and professionally, always in the best interests of their clients.
   • They must identify, disclose, and either avoid or manage conflicts of interest effectively.
   • Marketing communications must be clearly identifiable as such and must not be misleading.
   • Issuers need to establish sound governance arrangements, including a clear organizational structure, competent managers, and robust business continuity plans.

Liquidity and Redemption Requirements

3. Regulatory requirements to ensure sufficient liquidity and the ability to meet redemption requests:
   • Issuers of ARTs/EMTs must consistently hold own funds of at least EUR 350,000, 2% of the average amount of reserve assets, or one quarter of the previous year’s fixed costs, whichever is higher.
   • They must maintain reserves of assets that are legally and operationally separate from their portfolio, managed according to specific custody rules.
   • Issuers are required to set up redemption and liquidity plans to ensure the smooth redemption of tokens.

Issuers of EMTs are subject to additional requirements:

• They must be licensed as e-money institutions or credit institutions.
• EMTs must be issued at par value upon receipt of funds.
• Holders can redeem their EMTs at any time at face value, either in cash or via bank transfer.
• No fees may be charged for redemption.
• Funds from EMTs may only be invested in safe, low-risk investments or deposited in trust accounts.

Issuers of utility tokens and other crypto assets will face transparency and disclosure requirements for their issuance, public offering, and admission to trading from December 30, 2024. They must also publish a white paper, though it requires less extensive information than those for ARTs/EMTs.

What Do Crypto Asset Service Providers (CASPs) Need to Consider?

Crypto-asset service providers (CASPs) will require a license to operate in the EU from December 30, 2024. The crypto services covered by MiCAR include, among others:

Key Crypto Services Under MiCAR

• Custody and Management: CASPs providing custody services must take reasonable precautions to protect clients’ ownership rights to crypto assets, including segregating client assets.
• Operation of Trading Platforms: Operators of trading platforms must define transparent rules for the trading and admission of crypto assets and implement systems to detect market abuse.
• Exchange Services: CASPs offering exchange of crypto assets for money or other crypto assets must ensure fair and transparent prices and actively avoid conflicts of interest.
• Order Execution: CASPs must execute orders on the best possible terms for the client and take precautions against conflicts of interest.
• Placement of Crypto Assets: CASPs placing crypto assets on behalf of issuers must disclose and avoid conflicts of interest, performing appropriate due diligence.
• Accepting and Transmitting Orders: CASPs must have systems and procedures in place to correctly and expeditiously process and transmit orders to other CASPs or trading venues.
• Advice on Crypto Assets: CASPs offering investment advice on crypto assets must assess suitability and appropriateness for each client, disclosing any conflicts of interest.

Comprehensive Requirements for CASPs

CASPs are subject to comprehensive anti-money laundering, supervisory, and conduct requirements:

• They must implement robust governance arrangements, effective procedures to prevent money laundering and terrorist financing, and appropriate internal control mechanisms.
• They are required to maintain high standards for the security of IT systems, record-keeping, and the protection of client funds and assets.
• CASPs must identify, avoid, or manage conflicts of interest and act fairly and transparently towards clients.
• Furthermore, they must report regularly to the competent authority and report violations of MiCAR or other relevant regulations.

The authorization as a CASP is valid throughout the EU, enabling the cross-border provision of crypto services. However, Member States may impose additional requirements on CASPs operating on their territory, provided these requirements are proportionate and non-discriminatory.

What Happens Next: Implementation and Outlook for MiCAR

The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) are actively developing the regulatory and implementing technical standards and guidelines that will further clarify MiCAR’s application.

ESMA has already published two final reports on MiCAR:

• The first report, from March 2024, contains proposals on information regarding CASP authorization, the notification of financial companies wishing to provide crypto services, the assessment of intended acquisitions of interests in CASPs, and handling client complaints.
• The second report, from May 2024, addresses rules on conflicts of interest for CASPs.

Similarly, the EBA has submitted several final drafts of regulatory technical standards and guidelines on MiCAR. These relate to capital requirements, liquidity requirements, and recovery plans for issuers of ARTs and EMTs. They also cover information on assessing qualifying holdings in ART issuers and the procedure for approving white papers for ARTs issued by credit institutions.

In May 2024, the European Commission also adopted delegated regulations on MiCAR. These define aspects such as fees charged by the EBA, criteria for classifying ARTs and EMTs as significant, and criteria for the exercise of supervisory authorities’ intervention powers.

The initial public consultations on these Level 2 and Level 3 measures represent important milestones in the implementation of the MiCAR framework. They aim to provide clarity and predictability, foster fair competition among market participants, and ensure a safer environment for investors across the EU. These developments are crucial for startups and innovative business models operating in the crypto space.

Conclusion

MiCAR represents a monumental shift in the regulation of crypto assets within the EU, establishing a clear framework for token categories like ARTs, EMTs, and utility tokens, as well as for CASPs. While implementation phases are ongoing, market participants are urged to proactively prepare for these new requirements. Early engagement ensures compliance, fosters investor protection, and supports innovation in the evolving crypto landscape.

As a tech-savvy lawyer who closely follows the developments surrounding MiCAR, I strongly recommend that startups and crypto companies familiarize themselves with the new rules early. Engaging in dialogue with relevant authorities is crucial for a smooth transition and to avoid unforeseen challenges. Supervisory authorities have made it clear that the EU will not tolerate non-compliant crypto providers.

I will continue to monitor and report on further developments related to MiCAR, particularly the adoption of outstanding technical standards and guidelines, and the preparations of market participants and supervisory authorities.

If you, as a startup or crypto company, have questions about MiCAR’s implementation or need support in applying for authorization as a CASP or issuer, I am ready to assist. Together, we can navigate this new legal framework, leverage opportunities, and efficiently meet your compliance requirements. Feel free to get in touch – I look forward to accompanying you on your journey into the exciting world of MiCAR!