EU Landmark MiCA Regulatory Framework Passes Committee Vote in European Parliament
The European Union (EU) has taken a major step forward in regulating cryptocurrency. On October 5, 2022, the European Council approved and on October 10, 2022, the European Parliament, after a two-year-long debate and drafting process, signed off on the comprehensive Markets in Crypto-Assets (MiCA) regulation (“Regulation) – landmark legislation that hopes to regulate the digital asset space within the union.
European Parliament officials voted 28 to 1 in favor of the legislation. The entire European Parliament will vote on final approval of the legislation later in October. which will, if passed in the next vote, require stricter rules for crypto businesses.
What is the purpose of MiCA?
The MiCA proposal, first introduced to the European Commission in September 2020, aims to bring regulatory clarity, set a regulatory framework, the issuance of cryptocurrencies under the wing of institutional regulation, and establish a first-time licensing regime for crypto-asset service providers among the 27 European Union member states, also to bring the asset class firmly under the supervision of the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA). Following legal and linguistic checks, the Parliament approving the latest version of the text, and publication in the official EU journal, the crypto policies could go into effect as of 2024.
A dedicated and harmonized framework is therefore necessary at the Union level to provide specific rules for crypto-assets, related activities, services and to clarify the applicable legal framework.
This regulation lays down uniform requirements for all crypto-related activities, especially the issuance of cryptocurrencies. Under MiCA, cryptocurrencies are divided into four categories:
- Utility tokens,
- Asset-referenced tokens, and
- Electronic money tokens (e-money).
In particular, the MiCA regulation lays down the following:
- Offering and marketing of crypto-assets;
- Issuance of stablecoins and E-money tokens;
- Licensing rules including operating conditions and reporting requirements for crypto-asset service providers (CASPs);
- Prevention of market abuse and protection of clients of crypto-assets service providers;
- Environmental and climate disclosure requirements; and
- The prevention of money laundering.
The MiCA asks crypto issuers to publish a “crypto-asset white paper” containing information about their project.
Among the requirements that will be placed on crypto-asset service providers (CASPs) under the new rules is legal liability for the companies if they lose their clients’ crypto-assets. The regulation covers all centralized companies in the crypto space, including wallet providers of ‘hosted’ or “custodial” wallets, but not so-called ‘unhosted wallets’ otherwise known as crypto wallets where the private keys are controlled by users.
It also asks ‘stablecoins’ companies to meet capital requirements; such entities will be restricted on how many tokens they can issue if they are not denominated in euros or other currencies used by EU member states. MiCA mandates that stablecoins issuers maintain minimum liquidity and the reserves of stablecoins issuers also must be protected from insolvency.
The regulation requires the European Banking Authority (EBA) to maintain a record of non-compliant crypto-assets service providers. There will also be additional checks in place to ensure that anti-money laundering (AML) rules are adhered to.
Application for authorization shall contain a description of the applicant crypto-asset service provider’s internal control mechanisms, including policies and procedures to comply with the obligations concerning AML/CFT under Directive (EU) 2015/849 of the European Parliament and the Council. Competent authorities shall withdraw the authorization of issuers of asset-referenced tokens if the issuer’s activity poses a serious threat to financial stability, the smooth operation of payment systems, or market integrity or exposes the issuer or the sector to serious risks of money laundering and terrorist financing.
The Regulation includes a 12-18 month adaptation period meant to help companies adjust to the new regulations.
MiCA’s Impact on the Crypto Industry
MiCA supports innovation and fair competition while ensuring a high level of protection for retail holders, as well as market integrity in crypto-asset markets. A union framework should provide for the proportionate treatment of issuers of crypto-assets service providers, thus allowing equal opportunities for market entry and future development.
MiCA may also be just the first in a series of changes coming to the global crypto market. The European regulation may lead to a new era in operations for the major crypto entities. Approval of MiCA indicates another significant step taken by the European authorities to make sure that the crypto market plays by their rule.
Following MiCA, Members of the European Parliament are also voting on the Transfer of Funds Regulation, an anti-money laundering bill – legislation aimed at having compliance standards for crypto-assets to crack down on money laundering. The two regulatory frameworks, if given final approval, would apply to member states within the EU but potentially serve as an example for global lawmakers on crypto.
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