Markets in Crypto-Assets (MiCA) Regulation – long awaited but feared

On the 5^th of October 2022, the Council of the EU sent an official note to the EU Parliament confirming that the final compromise text of the Markets in Crypto-Assets (“MiCA” or the “Regulation”) regulation was ready. The first reading in the EU Parliament is yet to take place, and changes could still be made to the proposed text, but the principal concepts of the regulation will likely remain in place. 

We hope this article helps you understand the current expectations towards MiCA from the Estonian perspective. 

Taking Lessons from the Securities Markets and MiFID II

In broad terms, MiCA intends to provide a framework similar to that for traditional financial instruments, i.e., transferable securities, which are currently regulated by the markets in financial instruments directive. However, MiCA being a regulation and not a directive means that it is to be applied uniformly across the EU – not much room is expected to be given to the Member States to decide on the implementation details. MiCA is expected to lay down uniform rules for:

1. requirements for the issuance, offering to the public, and admission to trading of crypto-assets;
2. the authorisation, supervision, operation, organisation, and governance of crypto-asset service providers and issuers of tokens;
3. protection of the holders of crypto-assets and the clients of crypto-assets service providers;
4. measures to prevent insider dealing, unlawful disclosure of inside information, and market manipulation related to crypto-assets.

More importantly, among others, MiCA will not apply to crypto-assets that are unique and not fungible with other crypto-assets (i.e., NFT) and financial instruments regulated under MiFID (i.e., security tokens). 

New Rules for Offering Tokens to the Public

The new Regulation is expected to define two types of stablecoins:

1. electronic money tokens or e-money tokens are a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency; and
2. asset-referenced tokens are a type of crypto-asset that is not an electronic money token that purports to maintain a stable value by reference to any other value or right or a combination thereof, including one or more official currencies.

MiCA also finally defines utility tokens as a type of crypto-asset that only provides access to a good or a service supplied by the issuer of that token. These changes provide clear definitions of the most prominent crypto-asset types and the legal consequences of issuing and operating services related to them.

General Rules for organising of an offering of crypto-assets

While the offerings of stablecoins will have their specific requirements, an offer of any crypto-assets, other than asset-referenced tokens or e-money tokens, to the public shall be allowed in case the issuer:

1. is a legal person;
2. has drafted a whitepaper;
3. has notified the regulator of the whitepaper;
4. has published the whitepaper;
5. where applicable, has drafted and published the marketing communications.

Unless the offeror intends to admit tokens to trading on a trading platform, the drafting and publishing of a whitepaper and marketing communications will not be obligatory in case of non-public offerings.

For example, from the Crowdfunding Regulation, a retail investor must be guaranteed a 14-day window to exercise the right to withdraw from the agreement to acquire tokens.

The above requirements will not need to be complied with, if:

1. the crypto-assets are offered for free (e.g., airdrops);
2. the crypto-assets are automatically created as a reward for the maintenance of the DLT or the validation of transactions (e.g., staking);
3. the offer concerns a utility token of a good or service which exists or is in operation;
4. the holder of the crypto-assets only has the right to use them in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror (where such a model is used, the offeror will have to notify the regulator if the offer of tokens exceeds EUR 1m in value).

Authorisation and Requirements for Offering Stablecoins

The Regulation sets out a rule which states that only credit institutions (i.e., banks) or persons with authorisation from a competent authority will be allowed to issue asset-referenced tokens. This requirement is only relevant for cases where the average outstanding value of all asset-referenced tokens never exceeds EUR 5m or the offer is addressed solely to qualified investors.

For asset-referenced tokens with a value issued higher than EUR 100 million, the issuer shall be obligated to provide a quarterly report regarding the different parameters of the use of the tokens to their competent authority. The asset-referenced tokens’ issuers will be obligated to prevent the tokens from exceeding the estimated quarterly average number and value of transactions per day (associated with uses as means of exchange) of 1 000 000 transactions and EUR 200 million, respectively.

Issuers of asset-referenced tokens will be obligated to have robust governance mechanisms to ensure that the organisation is led responsibly, transparently, and by reputable individuals. This includes the requirements for: 

• the operation of the tokens (such as processes for guaranteeing the right to redeem tokens at all times, recovery plans in case of failure to comply with the regulations, and more); and
• own funds for at least EUR 350 000; and 
• reserve assets that are to be insulated from the issuer’s estate and are to be entrusted to credit institutions, crypto-asset service providers, or investment firms.

In the case of e-money tokens, e-money institutions will also be allowed to organise an offer. At the same time, a requirement for authorisation is replaced with a requirement for any issuer to publish a whitepaper. Otherwise, e-money tokens are an extension of the existing e-money regulation. An e-money token is a token redeemable at par value with its issuer, which integrates most of the concepts relevant to the asset-referenced tokens described above.

Regulated Crypto-Asset Services

MiCA adopts the term “crypto-asset services,” which will mean any of the services and activities listed below: 

1. the custody and administration of crypto-assets on behalf of third parties;
2. the operation of a trading platform for crypto-assets;
3. the exchange of crypto-assets for funds;
4. the exchange of crypto-assets for other crypto-assets;
5. the execution of orders for crypto-assets on behalf of third parties;
6. placing of crypto-assets; 
7. providing transfer services for crypto-assets on behalf of third parties; 
8. the reception and transmission of orders for crypto-assets on behalf of third parties; 
9. providing advice on crypto-assets; 
10. providing portfolio management on crypto-assets.

These services are provided only after acquiring authorisation from competent authorities or by already licensed market participants such as banks, investment firms, and e-money institutions. This is possible only by following the notification to the competent authorities and being limited to the bounds of their analogous and active license. For example, a licensed e-money institution could operate with e-money tokens, or an investment fund manager could provide crypto-asset services in the EU equivalent to the management of portfolios of investment. 

The service providers that intend to operate exclusively with crypto-assets would have to consider the numerous requirements stemming from the specific service subtype as one of the many examples, the service providers that are authorised for the provision of crypto exchange service (the reception and transmission of orders on behalf of third parties license) shall not receive any remuneration, discount, or non-monetary benefit for routing clients’ orders received from clients to a particular trading platform for crypto-assets or to another crypto-asset service provider. Other rules include requirements to own funds (i.e., liquid funds) of the service providers and more.

Authorisation is not required regarding the custody, administration, and transfer of crypto-assets that are created during activities such as stacking or where the holder of the crypto-assets only has the right to use them in exchange for goods and services in a limited network of merchants unless there exists at least another offer which would not benefit from the exemption or the crypto-asset is admitted to a trading platform.

The Regulation will require authorised service providers to have a registered office in a Member State of the Union where they carry out at least part of their crypto-assets services. They shall have the place of effective management in the Union, and at least one of the directors shall be a resident of the EU.

Where does Estonia stand?

Estonia has become known as one of the more strictly regulated jurisdictions for establishing crypto-related businesses. While the issuance of non-security tokens has yet to be regulated, the authorisation and licensing requirements for providers of the so-called virtual currency services have largely followed the requirements of MiCA. While companies already licensed in Estonia will need to comply with many new obligations to retain the right to provide services, they are already compliant with many others, making it possible for them to enter the new opportunities opened by MiCA sooner than would be possible elsewhere.

Do you need legal help with your crypto project? Check out our legal services for crypto companies. You can see some of our previous work here.