MiCA – A new European regulation is coming

The European Council, an institution of the European Union (EU), reached an agreement last month on MiCA’s final proposal: ??????Regulation on Markets in Crypto Assets??????? . This new European regulation further tightens the regulations for crypto companies and the crypto market itself. We will explore the background and what impact MiCA may have in this article.

Background

To better understand the matter, let’s first explain the difference between regulations and directives. Both are legislative instruments of the EU). Regulations have direct effect and take precedence over the national law of the EU Member States. Directives do not have direct effect and must be implemented in national regulations. Directives can contain minimum or maximum harmonisation. In the case of minimum harmonisation, the Member States must at least comply with the standards set by the directive in their national implementation of the directive. In the case of maximum harmonisation, the Member States may not make the standards set by the directive more stringent.

In addition, guidelines must be implemented in national regulations in a timely manner. If a member state does not implement a directive in time, a so-called infringement procedure is initiated by the European Commission. The Netherlands has been regularly subject to such procedures. For example, on 12 February 2020, the Netherlands was reprimanded by Brussels for not implementing the fifth anti-money laundering directive (AMLD5) in time.

AMLD5 aimed to bring ??????the gatekeepers to virtual currencies??????? under anti-money laundering regulations. These were firstly ‘providers of exchange between virtual currencies and fiat currencies’ and secondly ‘providers of custodian wallets’. On May 21, 2020, the Implementation Act Amendment Fourth Anti-Money Laundering Directive (AMLD5) entered into force. Since then, providers of crypto services (hereinafter: crypto companies), including Bitonic, have been subject to integrity supervision by De Nederlandsche Bank (DNB).

On September 24, 2020, the European Commission came up with a package of new regulations. The package is collectively called: ???? ??Digital Finance Package?? ?????. The package should create more space for – and boost – the potential that digital financial services offer in terms of innovation and competition, while mitigating risks. The package includes three legislative proposals on: market in crypto assets (MiCA), digital operational resilience (DORA) and distributed ledger technology (DLT).

The European regulation, MiCA, pursues four objectives, namely: promoting legal certainty within the EU, stimulating innovation, regulating consumer protection and market integrity rules, and guaranteeing financial stability. MiCA creates a common regulatory framework for all crypto assets, including crypto assets that currently fall outside financial law legislation. In addition, stablecoins are highly regulated and MiCA includes a licensing regime that applies to crypto companies. The crypto companies will have to comply with behavioral supervision and prudential requirements, among other things.

The licensing regime

Chapter 1 of Title V of MiCA contains the provisions regarding the licensing regime. Article 53 paragraph 1 MiCA contains the licensing obligation for crypto companies and reads as follows:

??????Crypto-asset services are only offered by legal entities that have a registered office in a Member State of the Union and that have obtained a license as a provider of crypto-asset services in accordance with Article 55.?? ?? Providers of crypto-asset services must comply with their license conditions at all times.?? ?? Someone who is not a provider of crypto-asset services may not use any name or company name or publish any advertisements or use any other process which suggests that he or she is licensed as a provider of crypto-asset services or which threatens to cause confusion in this regard ‘.

The above article talks about ??????crypto asset services???????. But what services does this mean? For this we have to go back to article 3 MiCA, the definition provision of the regulation. The definitions in MiCA are incidentally inspired by the definitions used by the Financial Action Task Force (FATF), a worldwide intergovernmental watchdog that must combat money laundering and terrorist financing, but these have been drawn much broader. As described above, article 3 paragraph 1 sub 9 MiCA contains the enumeration of ??????crypto asset services???????. All services and activities related to crypto-assets listed below are included:

(a) ???????????? custody and management of crypto-assets on behalf of third parties;

(b) ?????????? the operation of a crypto-asset trading platform;

(c) ???????????? exchanging crypto-assets for a fiat currency that is legal tender;

(d) ?????????? exchanging crypto-assets for other crypto-assets;

(e) ???????????? the execution of orders for crypto-assets on behalf of third parties;

(f) placing crypto assets;

(g) ?????????? receiving and transmitting orders for crypto-assets on behalf of third parties;

(h) ?????????? advisory services on crypto-assets.

What stands out? Part (a) and (c) could also be found in AMLD5. The rest has therefore been added, which has closed the regulatory framework for crypto assets quite a bit. How part (d) relates to decentralized finance (DeFi) remains to be seen. It is also striking that trading platforms under part (b) will also fall under the licensing regime, which is only logical.

The license will have to be requested from the regulator in the EU member state where the crypto company is located. Although crypto companies in the Netherlands are currently under integrity supervision by DNB, it is obvious that the Netherlands Authority for the Financial Markets (AFM) will grant the MiCA license. This in view of the agreements between investment firms and crypto companies and the fact that ESMA, the European authority for securities and markets, will keep a register of licensed crypto companies (article 57 MiCA).

What is also worth mentioning is that all licensed crypto companies will soon be able to offer their services in all EU Member States by using the ??????European passport???????. After all, the starting point of the European passport is that a license granted by one Member State can be used in another Member State to enter the market without having to apply for a new license in that Member State. The passport procedure will have to be followed for this (art. 58 MiCA).??

Would you like to read more about MiCA? Read the explanation sent to the Dutch parliament here.

Possible impact MiCA

Now that the European Council has reached an agreement on MiCA’s final proposal, negotiations with the European Parliament will start, whereby the parliament and the European Council will reach a compromise. The compromise is expected to be concluded in the first quarter of 2022. It will then take at least 18 months before MiCA actually takes effect. The impact of the regulation will therefore take some time to materialise.

Regulation – in particular MiCA – is controversial for an industry that knows no national boundaries and innovates at a rapid pace, but the introduction of a common regulatory framework in EU member states will ensure consumer and investor protection, legitimacy, legal certainty and a level playing field.

Disclaimer. This article takes a very general approach to MiCA and is based on information available at the time of writing the article. No rights can therefore be derived from the content of this article.

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