The EU’s MiCA Races to Create a Regulatory Superhighway

The European Union (EU) is racing toward a regulatory Autobahn for crypto, where businesses can transact across EU borders at F1 speeds without having to obtain a license in each member state — think of it as a 27-member country regulatory fast pass for digital assets.

The Markets in Crypto-Assets (MiCA) is the EU’s attempt at a comprehensive legal and regulatory framework for “crypto-assets” defined as “digital representations of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” What do crypto-asset service providers (CASPs) — defined by MiCA as “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis” — need to know as the EU speeds down the MiCA race track? Here's our take on key points to know:

What does MiCA regulate?

The EU’s cross-continent plan defines three subcategories of crypto assets that it intends to regulate. The first is asset-referenced tokens such as libra, the now defunct stablecoin proposed by Facebook in 2019 that was tied to a basket of global currencies. As pointed out by Coindesk, MiCA “devotes a full 26 of its 168 pages,” to this subcategory — a possible hangover from Libra’s 2019 launch which left global regulators scrambling to address challenges associated with the release of a digital assets which the reach of billions of Facebook users and backed by the world’s leading companies.

The second type of crypto-assets covered is the “e-money token,” which is a stablecoin pegged to the value of a fiat currency like the U.S. dollar. Examples of these include dollar-backed USDC and USDT.

The third category of regulated crypto-asset is the “utility token,” which is intended to provide digital access to a good or service and is only accepted by the issuer of that token. This category, which MiCA calls “crypto-assets other than tokens referring to assets or electronic money tokens,” corresponds to crypto assets intended to provide digital access to a good or service, available on a blockchain, and which are only accepted by the issuer of this token (“utility tokens”). These “utility tokens” have a non-financial purpose related to the operation of a digital platform and digital services and should be considered as a special type of crypto asset. These may include cryptocurrencies such as Bitcoin and ETH.For each of these three categories MiCA sets forth rules of the road that CASPs must follow in order to ensure transparency, consumer protection, and mitigate risks of market abuse. Essentially for each of these categories, MiCA prohibits a CASP from offering to the public or seeking admission to trading on a trading venue crypto assets unless the issuer is a legal entity and a white paper complying with the regulation has been prepared, notified to the relevant local regulatory authority and published. The white paper must contain the core information on the characteristics, rights and obligations, and underlying technology and project.

What does MiCA not regulate?

While MiCA encompasses cryptocurrencies like bitcoin and ether broadly, along with stablecoins, it does not in its current form apply to central bank digital currencies (CBDCs) nor does it regulate security tokens that might qualify as securities or other financial instruments. While there has been discussion of emerging technologies such as decentralized finance (DeFi) and non-fungible tokens (NFTs) EU officials continue debating the possible inclusion of these hot topics in crypto regulation.

Passporting and the regulatory Autobahn

Under MiCA, CASPs must obtain approval from regulatory authorities in an EU country. Once local authorities have approved a crypto business according to EU regulations, they would then be able to extend operations to other EU countries without having to obtain additional licenses — so-called “passporting.” So, what must a CASP do to get that checkered flag? An exchange will face a capital requirement of E150,000 (a custodian has a slightly less E125,000 requirement), and create policies and procedures for allowing or suspending the trading of crypto-assets on its platform. The trading of privacy-enhanced cryptocurrencies such as Monero are prohibited under MiCA and the legislation focuses on the need to mitigate the risks of insider trading and market manipulation.

MiCA and anti-money laundering

Interestingly, MiCA does not address anti-money laundering (AML) related challenges, but instead leaves those to the Financial Action Task Force (FATF) — the global AML standard setting body. In MiCA’s consideration 8, drafters explain, “Any legislation adopted in the field of crypto-assets should be specific, future-proof and be able to keep pace with innovation and technological developments . . . Such legislation should also contribute to the objective of combating money laundering and the financing of terrorism. Any definition of ‘crypto-assets’ should therefore correspond to the definition of ‘virtual assets’ set out in the recommendations of the Financial Action Task Force (FATF).” Check out TRM’s Insights on FATF’s latest guidance for VASPs and TRM Talks with the chairs of FATF’s virtual asset contact group.

What’s the latest?

Last month MiCA moved along in the legislative process after lawmakers rejected a controversial provision seeking to restrict the use of cryptocurrencies like bitcoin that are based on proof-of-work - essentially the work of crypto miners to run complex algorithms based on the energy costs associated with crypto mining.

The next set of MiCA negotiations — dubbed the trilogues  — began this month and continue. Any agreements reached in the trilogues are informal and need to be formally approved by each of the institutions involved. Issues such as DeFi, NFTs, and even proof-of-work could be revisited, but would have to be formally approved.

So the discussions continue. While MiCA intends to build a European regulatory superhighway where crypto businesses can move at F1 speeds across a passportable regulatory environment, the EU, like the United States, is still far from the checkered flag.