Until recently, a substantial gap existed globally in the scope of financial regulations, specifically concerning numerous crypto-related activities that were not covered by the legacy regulations Efforts have been made by Europe and other countries worldwide to address and fill these gaps.
Hence the Markets in Crypto-Assets (MiCA) Regulation, initiated by the European Commission (EC), stands out as a significant framework within the European Union (EU) aimed at ensuring financial stability, safeguarding investors, and fostering transformation in the crypto asset sector.
Let’s break down key aspects relevant at the time of this article’s publication.
MiCA timeline
- The EC introduced a Proposal for MiCA as part of its digital finance strategy in September 2020;
- The text of the Regulation was approved by the EC’s Economic and Monetary Affairs Committee on October 10, 2022;
- Officially enacted in June 2023, accompanied by three consultation packages for public feedback;
- Bringing member-state legislation into line with the MiCA Regulation by 30 December 2024. However, rules on asset-referenced tokens (Title III) and e-money tokens (Title IV) apply from 30 June 2024.
- The transitional period for the Czech Republic and many other EU Member States is expected to end as late as July 1, 2026.
Note on the Digital Operational Resilience Act (DORA): Alongside MiCA, the Digital Operational Resilience Act (DORA) is also being introduced.DORA aims to create a regulatory framework on digital operational resilience whereby all firms ensure they can withstand all types of ICT-related disruptions and threats, in order to prevent and mitigate cyber threats. DORA has two main objectives: to comprehensively address ICT (Information and Communication Technologies) risk management in the financial services sector and to harmonise the ICT risk management regulations that already exist in individual EU member states. With DORA, the EU aims to establish a universal framework for managing and mitigating ICT risk in the financial sector.
The Act establishes technical standards that financial entities and their critical third-party technology service providers must implement in their ICT systems by 17 January 2025.
Digital Finance Package
- Comprises seven titles covering regulatory aspects, authorisation criteria, minimum requirements, and jurisdictional responsibilities.
- Titles VIII and IX focus on adoption powers and reporting to the European Parliament.
Scope of the Regulation
MiCA’s regulatory scope covers crypto-assets, defining their types and outlining requirements for entities involved in crypto product and service provision.
How Does the MICA Regulation Define Crypto Assets?
The MiCA Regulation provides standards for defining and classifying crypto assets in the European Union. Based on the definition of crypto assets, the Regulation differentiates individual tokens into three subcategories: utility tokens, asset-referenced tokens, and electronic money tokens.
- Utility Token means a digital token providing access to goods or services through digital platforms. It lacks financial purposes and is associated with the token issuer. Unlike asset-referenced or electronic money tokens, a utility token is not tied to a specific asset. Its primary purpose is to ensure the functional use of the blockchain system rather than creating future cash flows.
- Asset-Referenced Token means crypto assets aimed at maintaining value stability by being tied to several fiat currencies, commodities, or other crypto assets. It can be used for payments and savings. For public offerings or trading of such tokens, the token issuer must obtain a licence from the competent authority of their EU member state.
- Electronic Money Token means a crypto asset tied to a fiat currency and intended for stable payments. Unlike asset-referenced tokens, this token is primarily used for purchasing goods and services. The issuer of such a token must comply with banking or electronic money provider licence requirements (depending on the situation) and publish a “White Paper.” Companies dealing with this crypto asset do not need a separate licence, as the issuance of this token is regulated by banking and electronic money legislation. The issuer is also required to publish the “White Paper,” notifying the supervisory authority of their EU member state. Similar to the utility token, the “White Paper” of the electronic money token does not necessarily require approval from competent authorities of their EU member state.
However, despite the Regulation closing the existing regulatory gap regarding crypto assets, it does not affect the regulation of crypto assets already falling under the existing regulatory framework (e.g., MiFID II). Additionally, some non-fungible tokens (NFT) will fall outside the scope of the Regulation.
Exclusions in MiCA
Meanwhile the Regulation expressly excludes crypto-assets that qualify as:
- financial instruments;
- deposits (including structured deposits);
- funds (except if they qualify as e-money tokens);
- securitisation positions; and
- non-life or life insurance contracts, pension products or schemes and social security schemes.
Transitional Period
Transitional period refers to the optional transitional measure under MiCA that grants Member States the ability to allow entities already providing crypto-asset services in their jurisdiction to continue providing those services from 30 December 2024 until as late as 1 July 2026 (depending on the duration chosen by Member States).
Thus, entities providing crypto-asset services active in multiple Member States under local applicable laws must continue to comply with all relevant local laws until the end of the transitional period.
At the same time, the European Securities and Markets Authority (ESMA), an independent EU authority that contributes to safeguarding the stability of the European Union’s financial system, in its report claims that entities providing crypto-asset services are encouraged to apply for a MiCA authorisation as soon as possible to benefit from passporting rights within the EU during the transitional period and engage with National Competent Authorities on questions regarding MiCA’s application to their activities.
Legal Landscape in the Czech Republic
In the wake of MiCA’s endorsement, the legal landscape in Czechia is actively discussing the proposed draft Digital Finance Act (Návrh zákona o implementaci předpisů Evropské unie v oblasti digitálních financí (zákon o digitálních financích). This legislation addresses the provisions of both MiCA and DORA regulations, focusing on the digital operational resilience of the financial sector.
The key provisions of the Digital Finance Act in the Czech Republic include:
- Regulation of rights and obligations of entities subject to directly applicable European Union legislation governing digital operational resilience in the financial sector;
- Regulation of rights and obligations of entities subject to directly applicable European Union legislation governing the crypto-asset market;
- Definition of the Czech National Bank’s (the CNB) responsibilities and authority in the field of digital finance, particularly in supervising compliance with the regulations;
- Alignment with European Union regulations, such as DORA and MiCA.
In general, this Act is expected to govern specific rights and responsibilities applicable to individuals falling under the purview of MiCA. These encompass aspects such as asset reserve, information disclosure obligations, the establishment of the competent authority (to be acted by the CNB), supervisory measures, offences, and more.
It is noteworthy that in all likelihood, across European countries, the National Competent Authority, similar to Czechia, will also likely be represented by the national banks.
Conclusion
In conclusion, the MiCA framework represents a crucial step forward in the European Union’s efforts to regulate the rapidly evolving crypto asset sector. With its comprehensive structure and meticulous delineation of various crypto asset categories, MiCA aims to establish a robust regulatory framework that prioritises financial stability, investor protection, and effective governance.
As we move forward, the effectiveness of the MiCA Regulation in shaping and overseeing the crypto sector will become clearer. It will be interesting to observe how these regulatory norms contribute to the practical regulation of the crypto industry in less than a year from now.
By Dmitry Vyalkov, LLM, lawyer at COREDO