The MiCA Law or Law for Cryptoactive Markets, is a new EU regulation focused on offering a common regulatory framework for the entire financial ecosystem that revolves around blockchain and cryptocurrencies. In short, we are facing what would be the beginning of a truly correct regulation for the crypto space, which would also make the rules of the game very clear for users, service providers and other entities related to the world of tokens and cryptocurrencies.
What is the MiCA Law?
The MiCA Law is the first comprehensive regulation for cryptocurrencies in the EU. Approved on October 10, 2022, the body of the Law consists of more than 100 articles that address issues such as money laundering, KYC, consumer and investor protection, the responsibility of cryptocurrency companies and stablecoins. .
After its approval, it is expected that the states of the Union will have a preparation period until 2024 to flatten the national regulatory path and adapt it to the requirements of MiCA. With this, MiCA would turn the EU into a space with a uniform regulation around cryptocurrencies.
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In general terms, the objective of the MiCA is to regulate the issuance, the offer to the public and the negotiation of crypto assets. As drafted, the Law establishes a global framework that sets the requirements for the operation and governance of the main issuers of crypto assets and CASP service providers (Contracted Application Service Provider or Contracted Application Service Provider). It also makes clear the protection framework for holders of crypto assets and other clients of service providers.
CASPs would not need permission from each EU country to offer their services in jurisdictions within the EU once MiCA comes into force. This certainly reduces the regulatory burden on institutions, allowing any service provider to register in any country of the Union and operate freely in any space within the jurisdiction of the EU.
In addition, MiCA allows the competent authorities of the Member States to supervise CASPs, seeking that they meet the requirements established in the MiCA in order to operate. At the same time, it establishes the possibility of much stricter control for CASPs that exceed 15 million users. These CASPs would be classified as “significant CASPs”, and would be under much more rigorous control.
In addition to this, the European Securities and Markets Authority (ESMA) will have powers of intervention to prohibit or restrict the services of a CASP. This in case there are reasonable doubts about the operations of the CASP. In particular, ESMA may use its intervention powers if the CASP is harming market integrity, financial stability or investor protection.
MICA Objectives
The Law can be broken down into four general objectives, which are:
- Provide legal certainty for crypto assets that are not covered by current EU financial services legislation.
- Replace existing national frameworks applicable to crypto assets not covered by current EU financial services legislation. This seeks to create a common regulatory framework for this type of services in the EU.
- Establish uniform rules for crypto asset service providers and issuers at the EU level.
- Establish specific rules for stablecoins, even when they are traded as electronic money.
A relevant point of this regulation is that non-fungible tokens (NFT) that are individual and different would be excluded from the scope of application of the MiCA. This unless the issuer creates a "collection" of assets for purchase. In addition, MiCA will force the issuing entity of the NFT under its regulatory framework, to issue a "white paper" that explains what exactly the NFT is and how it will work on the blockchain.
Regulations and guarantees within the sector
Another relevant point about MiCA leads us to the protection of EU consumers. Users and consumers of cryptocurrency services will have several elements that will allow them to be better protected against traumatic events such as those experienced in FTX or BlockFI.
To this end, MiCA enables the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to carry out financial intervention actions in the event that they detect operational dangers within service providers under the MiCA regulation.
That said, it is relevant to know that it will be regulated by MiCA:
What will be regulated?
MiCA aims to regulate any digital representation of value or rights that can be shared or stored electronically, using distributed ledger technology (DLT), blockchain or similar.
Crypto assets already defined as financial instruments or electronic money (e-money) under the Markets in Financial Instruments Directive (MiFID) and the Electronic Money Directive (EMD) are outside the scope of MiCA. Thus, MiCA aims to regulate crypto assets not covered as financial instruments by the 2nd Markets in Financial Instruments Directive (MiFID II), which includes the following categories of assets:
- Utility tokens that are issued for non-financial purposes to provide digital access to an application, services, or resources available on DLT networks.
- Asset referenced tokens. In this case, it refers to those tokens that aim to maintain a stable value. “referring to multiple currencies that are legal tender, one or multiple commodities, one or multiple crypto assets, or a basket of such assets”. An example of this would be tokens such as DAI, whose value references the dollar and whose system is supported by a basket of crypto assets in vaults managed by smart contracts.
- Electronic money tokens. In this case, reference is made to crypto assets with a stable value based on a single fiat currency that aims to function in a similar way to electronic money (replacing fiat currency in payments). An example of this case would be the USDT token.
Thus, any entity that offers services related to the above is under the regulatory control of MiCA.
Advertising and promotion of crypto assets
The advertising and promotion of crypto assets will also be regulated at all levels. If a service provider wishes to offer or promote a cryptoactive, it must first publish a technical document or white paper (in English or in the official language of an EU state), which must contain the central information on the characteristics, rights and obligations, underlying technology and other data related to the project.
The whitepaper must be shared with authorities at least 20 days before publication and is not subject to approval. Once published on the issuer's website, it can be marketed throughout the European Economic Area (EEA).
In any case, it will not be necessary to publish a technical document if the offer:
- It is addressed only to qualified investors or less than 150 investors per member state.
- It does not exceed 1 million euros (USD 1,17 million) for 12 months.
- Offer free crypto assets through “airdrops” or another alternative.
- The project issues mining rewards.
- Issues crypto assets that were already available in the EU (excluding stablecoins)
DeFi under the MiCA magnifying glass
MiCA also puts DeFi services under the microscope, especially after its explosive growth from 2019 to the present. DeFi projects will in any event fall into one of two categories, regulated and unregulated. If a company in the EU creates a DeFi service, it must respect the regulations shown in the Law, thus entering the regulated DeFi framework (KYC/AML and respect the rest of the applicable regulations).
In case DeFi is not being developed in the EU, it would enter the non-regulated DeFi sector, which will generate a regulatory arbitrage system. However, the MiCA generation will probably end up pushing similar regulations in other countries, with which this regulatory arbitrage will end up giving way and transforming the ecosystem into a space with regulations with very common points (such as FATF and FAFT).
Conclusions
Certainly MiCA is a law that seeks to create a safer regulatory space for both users and companies. The reality of the ecosystem is that regulations are needed that set clear rules of the game for everyone, in order to generate new projects and promote the growth of the sector, which would lead to an increase in its scope and possibilities.
But it is also true that the Law generates intrusive spaces, such as the fact of regulating operations at all levels and reinforcing the need for traceability and the possibility of locating the identity behind those operations. The latter is something that the community has discussed a lot and has seen as a direct attack on their freedom and privacy, but it is also true that under a more open scheme, the sector could lend itself to illegal actions that nobody wants to be committed.
In any case, MiCA is an initial work in favor of opening clearer paths for the crypto ecosystem, there is still a long way to go and a lot to improve, but it is undoubtedly a positive step towards a more open and accurate regulation for a sector that is transforming the world's finances day after day.
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