Markets in Crypto-Assets Regulation (MiCAR), scope and regulatory content

Regulation (EU) 2023/1114 of the European Parliament and of the Council on markets in crypto-assets (Markets in Crypto-Assets Regulation – MiCAR) was published in the Official Journal of the European Union on 9 June 2023 and entered into force on 29 June 2023. While the rules regarding asset-referenced tokens and e-money tokens set out in Titles III and IV become applicable on June 30, 2024, MiCar as a whole will begin to apply from December 30, 2024. MiCAR lays down uniform rules for the issuance, offer to the public and admission to trading on a trading platform of crypto-assets: requirements of transparency and disclosure, requirements for the authorisation and supervision of crypto asset service providers and issuers of crypto-assets, as well as for their proper business organisation, requirements for the protection of holders of crypto-assets and clients of crypto-asset service providers.

SCOPE – Which crypto-assets fall within the scope of Regulation?

MiCar establishes uniform rules for types of crypto-assets, which are not already regulated by Union legislative acts on financial services.

Some crypto-assets fall within the scope of existing Union legislative acts on financial services, and a full set of Union rules already applies to issuers of such crypto-assets and to firms conducting activities related to such crypto-assets. Therefore, such crypto-assets remain regulated under the existing regulatory framework, regardless of the technology used for their issuance or their transfer. Accordingly, MiCAR expressly excludes from its scope crypto-assets that qualify as one or more of the following: (a) financial instruments, as defined in Directive 2014/65/EU; (b) deposits, as defined in Directive 2014/49/EU, including structured deposits, as defined in Directive 2014/65/EU; (c) funds, as defined in Directive (EU) 2015/2366, except if they qualify as e-money tokens; (d) securitisation positions in the context of a securitisation as defined in Article 2, point (1), of Regulation (EU) 2017/2402; (e) non-life or life insurance products; (f) different pension products, pension schemes and social security schemes.

Also, this Regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets (NFT), including digital art and collectibles.

SCOPE – To which subjects and services does the Regulation apply?

This Regulation applies to natural and legal persons and certain other undertakings 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 Union. Thus, the Regulation governs the rights and obligations of issuers of crypto assets, offerors, persons seeking admission to trading and crypto asset service providers. In terms of subjects, the legal framework of the Regulation is narrowed: only issuers of crypto-assets that fall under the definitions of “asset-referenced tocens” or “e-money tokens” are regulated and are subject to authorization and supervision. Where a crypto-asset has no identifiable issuer, only the crypto-asset service providers are covered by this Regulation

Also, the Regulation governs crypto asset services and activities performed, provided or controlled, directly or indirectly, by these entities, including when part of such activities or services is performed in a decentralised manner.

Where crypto-asset services are provided in a fully decentralised manner without any intermediary, they not fall within the scope of this Regulation. The authorization system that applies to crypto asset services providers does not extend to DeFi (decentralized finance or peer-to-peer financial services on public blockchains) or DOAs (decentralized autonomous organizations).

The lending and borrowing of crypto assets are not foreseen and regulated by the Regulation.

Certain intragroup transactions and public entities are also excluded from the scope of the Regulation, as they do not represent a risk for investor protection and market integrity. Thus, this Regulation does not apply to: (a) persons who provide crypto-asset services exclusively for their parent companies, for their own subsidiaries or for other subsidiaries of their parent companies; (b) a liquidator or an administrator acting in the course of an insolvency procedure;(c) the ECB, central banks of the Member States when acting in their capacity as monetary authorities, or other public authorities of the Member States; (d) the European Investment Bank and its subsidiaries; (e) the European Financial Stability Facility and the European Stability Mechanism; (f) public international organisations.

DEFINING BASIC TERMS

Crypto-assets are defined as a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology. Crypto-assets are a narrower term than “digital assets”. Although they belong to digital assets, the difference is that access to these assets is enabled by using cryptography. Distributed ledger technology or ‘DLT’ means a technology that enables the operation and use of distributed ledgers, which are defined as an information repository that keeps records of transactions and that is shared across, and synchronized between, a set of DLT network nodes using a consensus mechanism. Consensus mechanism implies the rules and procedures by which an agreement is reached, among DLT network nodes, that a transaction is validated, while DLT network node means a device or process that is part of a network and that holds a complete or partial replica of records of all transactions on a distributed ledger.

DIFFERENT TYPES OF CRYPTO-ASSETS

This Regulation classifies crypto-assets into three types, which should be distinguished from one another and subject to different requirements depending on the risks they entail. The classification is based on whether the crypto-assets seek to stabilise their value by reference to other assets (stablecoins).

  1. The first type consists of crypto-assets that aim to stabilise their value by referencing only one official currency. The function of such crypto-assets is very similar to the function of electronic money as defined in Directive 2009/110/EC. Like electronic money, such crypto-assets are electronic surrogates for coins and banknotes and are likely to be used for making payments. Those crypto-assets should be defined in this Regulation as ‘e-money tokens’.
  2. The second type of crypto-assets concerns ‘asset-referenced tokens’, which aim to stabilise their value by referencing another value or right, or a combination thereof, including one or several official currencies. That second type covers all other crypto-assets, other than e-money tokens, whose value is backed by assets, so as to avoid circumvention and to make this Regulation future-proof.
  3. Finally, the third type consists of crypto-assets other than asset-referenced tokens and e-money tokens, and covers a wide variety of crypto-assets, including utility tokens.

E- MONEY TOKENS

A person shall not make an offer to the public or seek admission to trading of an e-money token, within the Union, unless that person is the issuer of such e-money token and:

(a) is authorised as a credit institution or as an electronic money institution; and

(b) has notified a crypto-asset white paper to the competent authority and has published that crypto-asset white paper in accordance with the provisions of the Regulations.

Other persons may offer to the public or seek admission to trading of the e-money token, upon the written consent of the issuer, and under the provisions of the Regulation (Article 48).

According to Regulation, E-money tokens shall be deemed to be electronic money. An e-money token that references an official currency of a Member State shall be deemed to be offered to the public in the Union. Consequently, strict conditions on the issuance of e-money tokens are laid down by the Regulation. Issuers of e-money tokens that offer them to the public or seek their admission to trading on a trading platform for crypto-assets, based on articles 48 to 55 of the MiCAR, must:

  • be authorised as a credit institution under Directive 2013/36/EU or e-money institution under Directive 2009/110/EC;
  • notify their competent authority of the intention to offer to the public those e-money tokens or seek their admission to trading;
  • draw up a crypto-asset white paper, which shall contain all information that is necessary to enable prospective buyers to make an informed purchase decision and understand the risks relating to the offer of e-money tokens, and notify it to their competent authority;
  • publish a crypto-asset white paper and any marketing communication on their website and be liable to a holder of the tokens for information that is not complete, fair or clear, or that is misleading; 
  • issue e-money tokens at par value and on the receipt of funds;
  • redeem e-money tokens, upon request by a holder, at any time and par value, by paying in funds, other than electronic money, the monetary value;
  • safeguard the funds received in exchange for e-money tokens, so that:                                                                                                                          – at least 30 % of the funds received is always deposited in separate accounts in credit institutions;                                                                              – the remaining funds received are invested in secure, low-risk assets that qualify as highly liquid financial instruments with minimal market risk, credit risk and concentration risk, and denominated in the same official currency as the one referenced by the e-money token;
  • establish recovery and redemption plans for use if they are unable to meet their obligations

ASSET-REFERENCED TOKENS

A person shall not make an offer to the public, or seek the admission to trading, of an asset-referenced token, within the Union, unless that person is the issuer of that asset-referenced token and is:

  • legal person or other undertaking, that is established in the Union and
  • has been authorised by the competent authority of its home Member State;
  • or a credit institution, in accordance with the Regulation.

Other persons may offer to the public or seek admission to trading of an asset-referenced token, upon the written consent of the issuer of that asset-referenced token and under the conditions, set by Regulation (Article 16).

Authorisation to offer asset-referenced tokens to the public and to seek their admission to trading

(a) Legal persons or other undertakings that intend to offer to the public or seek admission to trading of asset-referenced tokens shall submit their application for an authorisation, with the prescribed information, and a crypto-asset white paper to the competent authority of their home Member State (Articles 18 -26). A competent authority shall refuse authorisation on objective and demonstrable grounds, including where the business model of the applicant issuer of asset-referenced tokens might pose a serious threat to market integrity, financial stability or the smooth operation of payment systems. A crypto-asset white paper for asset-referenced tokens shall contain the information concerning these tokens, their issuer, the offer to the public or admission to trading, and all other information that is necessary to enable prospective buyers to make an informed purchase decision and understand the risks relating to the offer of asset-referenced tokens. Where an applicant issuer is authorised, its crypto-asset white paper shall be deemed to be approved. The authorisation by the competent authority shall be valid throughout the Union and shall allow the issuer of asset-referenced tokens to offer those crypto-assets on the internal market and to seek admission to trading.

(b) Credit institutions authorised under Directive 2013/36/EU[1] shall not need another authorisation under this Regulation in order to offer or seek admission to trading of asset-referenced tokens. An asset-referenced token issued by a credit institution may be offered to the public or admitted to trading if the credit institution:

– draws up a crypto-asset white paper, submits it for approval by the competent authority of its home Member State in accordance with the prescribed procedure and has the crypto-asset white paper approved by the competent authority;

– notifies the respective competent authority, at least 90 working days before issuing the asset-referenced token for the first time, by providing it with the prescribed information.

Obligations of issuers of asset-referenced tokens

  • MiCAR prescribes in detail the obligations of issuers of asset-referenced tokens that offer them to the public or seek their admission to trading on a trading platform (Articles 27-39). They must:
  • act honestly, fairly and professionally and in the best interests of the holders of asset-referenced tokens;
  • publish the approved crypto-asset white paper and any marketing communication on their website;
  • provide actual and potential holders of the tokens with information that is complete, fair, clear and not misleading;
  • establish and maintain effective and transparent procedures for the prompt, fair and consistent handling of complaints received from holders of asset-referenced tokens and other interested parties;
  • identify, prevent, manage and disclose any conflicts of interest;
  • have robust governance arrangements, including a clear organisational structure with well-defined, transparent and consistent lines of responsibility and effective processes to identify, manage, monitor and report the risks to which they are or to which they might be exposed;
  • at all times, have own funds equal to an amount of at least the highest of the following:  EUR 350 000, 2 % of the average amount of the reserve of assets referred to in Article 36, a quarter of the fixed overheads of the preceding year;
  • constitute and at all times maintain a reserve of assets, which shall be composed and managed in such a way that: the risks associated to the assets referenced by the asset-referenced tokens are covered; and the liquidity risks associated to the permanent rights of redemption of the holders are addressed;
  • have an adequate custody policy for their reserve assets;
  • if invest a part of the reserve of assets, only invest in secure, low-risk assets with minimal market, concentration and credit risk;
  • redeem their asset-referenced tokens at any time upon request of the holders at market value of the referenced assets or by delivering the referenced assets;
  • establish recovery and redemption plans for use if they are unable to meet their obligations.
[1] Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC 

CRYPTO-ASSETS OTHER THAN ASSET-REFERENCED TOKENS OR E-MONEY TOKENS

When it comes to crypto-assets other than asset-referenced tokens or e-money tokens, MiCAR does not regulate the issuance and obligations of the issuer of these tokens, but only offers to the public and admission to trading. Offerors or persons seeking admission to trading of crypto-assets other than asset-referenced tokens and e-money tokens, based on articles 4 to 15 of this Regulation, have the following obligations and responsibilities, i.e., they must:

  • be a legal person;
  • draw up, notify to the competent authority and publish their crypto-asset white paper on their website;
  • draft and publish the marketing communications on their website;
  • communicate with actual and potential holders of the crypto-asset in a fair, clear and non-misleading manner;
  • be liable to a holder of the crypto-asset for any loss incurred due to providing in its crypto-asset white paper information that is not complete, fair or clear or that is misleading
  • act honestly, fairly and professionally;
  • act in the best interests of the holders of such crypto-assets and shall treat them equally;
  • identify, prevent, manage and disclose any conflicts of interest that might arise;
  • maintain all of their systems and security access protocols in conformity with the appropriate Union standards;
  • provide holders of crypto-assets with a right of withdrawal.

AUTHORISATION AND OPERATING CONDITIONS FOR CRYPTO-ASSET SERVICE PROVIDERS

Crypto-asset services, for the purposes of this Regulation,  include any of the following services and activities relating to any crypto-asset:
(a) providing custody and administration of crypto-assets on behalf of clients;
(b) operation of a trading platform for crypto-assets;
(c) exchange of crypto-assets for funds;
(d) exchange of crypto-assets for other crypto-assets;
(e) execution of orders for crypto-assets on behalf of clients;
(f) placing of crypto-assets;
(g) reception and transmission of orders for crypto-assets on behalf of clients;
(h) providing advice on crypto-assets;
(i) providing portfolio management on crypto-assets;
(j) providing transfer services for crypto-assets on behalf of clients (Article 3 (1) (16)).

A person shall not provide crypto-asset services, within the Union, unless that person is:

(a) a legal person or other undertaking that has been authorised by their national authority as a crypto-asset service provider, with a registered office in a Member State where they carry out at least part of their services, effective management and at least one of the directors in the EU; or

(b) a credit institution, central securities depository, investment firm, market operator, electronic money institution, UCITS management company, or an alternative investment fund manager that is allowed to provide crypto-asset services pursuant to Article 60.

Obligations for all crypto-asset providers require them to:

  • act honestly, fairly and professionally in their actual and potential clients’ best interests;
  • provide clients with fair, clear and non-misleading information;
  • not deliberately or negligently mislead clients on the real or perceived advantages of crypto-assets, and warn them of the risks involved;
  • make their pricing, costs and fee policies, and the climate- and environment-related impact of each crypto-asset prominently available on their website;
  • have in place prudential safeguards at least equal to the higher of the following:
  • the permanent minimum capital requirements in Annex IV, or one quarter of the preceding year’s fixed overheads;
  • ensure members of the management body are of good repute and have the knowledge, experience, skills and time to perform their duties effectively;
  • implement policies and procedures to prevent any money laundering, terrorist financing or other offences;
  • keep clients’ crypto-assets and funds separate from other assets and not use them on their own account;
  • establish and maintain effective and transparent procedures to handle clients’ complaints promptly, fairly and consistently;
  • maintain and operate an effective policy to identify, prevent, manage and disclose conflicts of interest;
  • take all reasonable steps to avoid any risk when outsourcing activities;
  • devise a plan for an orderly wind-down of their activities if necessary.