Focus on Crypto

Agreement on MICA

The European Parliament and Council reached a provisional agreement on the Markets in Crypto-Assets (“MiCA”) Regulation on 30 June 2022,.

MiCA was first introduced in 2020 on 24 September 2020 by the European Commission as part of the EU’s Digital Finance Package, together with the Digital Operational Resilience Act (DORA) and a DLT Pilot Regime Regulation. It is aimed at creating a regulatory framework for the crypto-asset market in a manner that safeguards financial stability and protects investors while supporting innovation. MiCA will bring crypto-assets, crypto-assets issuers and crypto-asset service providers under a single regulatory framework for the first time. This will ensure that such new technologies and products fall within the scope of financial regulation and operational risk management arrangements of firms active in the European Union (“EU”). It will also bring clarity to related matters in the EU, as some member states already have related national legislation but there had been no specific regulatory framework at the EU level. As a result of MICA the EU is set to become the first major jurisdiction to regulate crypto assets and become the standard-setter for digital topics.

Regulation

Crypto-asset service providers (“CASPs”) will need an authorisation in order to operate within the EU with national authorities being required to issue authorisations within a timeframe of three months and ESMA will monitor related information. Non-fungible tokens (“NFTs”) will be initially excluded from the scope of the regulation except where they fall under existing crypto-asset categories.

Consumer Protection

The proposal covers issuers of both unbacked crypto-assets as well as so-called “stablecoins”, in addition to the trading venues and the wallets where crypto-assets are held. Consumer Protection measures will include subjecting crypto-asset service providers to strong requirements including liability for loss of investors’ crypto-assets. Stablecoin issuers will be required to build up a sufficiently liquid reserve and the rules governing the operation of the reserve will also provide for an adequate minimum liquidity. Furthermore, all so-called “stablecoins” issuers will be required t maintain a presence in the EU and will be supervised by the European Banking Authority (“EBA”). Similarly the development of asset-referenced tokens (“ARTs”) based on non-European currencies will be constrained and subject to regulation. MiCA will also extend safeguards pertaining to market abuse related to any type of transaction or service, notably for market manipulation and insider dealing to the crypto arena.

ESG

Crypto-assets market players will be required to publish information on their environmental and climate footprint. The European Securities and Markets Authority (“ESMA”) will develop draft regulatory technical standards on the content, methodologies and presentation of information related to principal adverse environmental and climate-related impact. The European Commission will provide a report on the environmental impact of crypto-assets and mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work, within two years.

AML

As updated transfer of funds rules were agreed on 29 June which also relate to crypto assets MiCA does not contain duplicative provisions. However, addition measures are provided for. In particular MiCA requires that the European Banking Authority (“EBA”) will be required to maintain a public register of non-compliant crypto-asset service providers. Furthermore crypto-asset service providers with parent companies located in countries listed on the EU list of third countries considered at high risk for anti-money laundering activities or on the EU list of non-cooperative jurisdictions for tax purposes will be required to implement enhanced checks.