EU crypto-asset regulation coming up for vote

Europe’s long-awaited Markets in Crypto-Assets regulation is finally coming up for a vote this coming Thursday at the European Parliament’s meeting in Strasbourg. Players in the crypto industry around the world, from cryptocurrency to NFT providers are closely parsing the text that will be voted on. 

Luxembourg placed an early bet on crypto with the key support of the CSSF’s market infrastructure and governance department. MiCA has been seen in Luxembourg’s crypto sector as key to dealing with the reputational repercussions of issues like the collapse of the FTX cryptocurrency exchange and the general instability of cryptocurrencies like BitCoin. “Everything that was missing at FTX is going to be rule when MiCA comes,” said Nadia Manzari, now a lawyer at the Schiltz & Schiltz law firm, at an industry event in January. 

The anticipation is also high  overseas. “Things are happening in Europe that are edging the region ahead, and when it comes to embracing the digital economy, the region is preparing for a seismic change in how it uses and thinks about money,” said  US-based Coinbase, “the most trusted  crypto exchange” yesterday on Twitter.

A long, oft-delayed process

The European Commission first introduced a proposal for a regulation on MiCA in September 2020, as part of its digital finance strategy. The full text of the regulation was finalised in October 2022 and was expected to be voted on in December of that year, before the first delay. This pushed back MiCA’s initially-expected application date from  mid-2023. It then met with a subsequent delay from January to April of this year because of delays in translating the rules into the EU’s 24 official languages. 

MiCA when passed will apply directly across the EU without any need for national implementation laws. If Thursday’s vote is positive, it won’t take effect until the end of 2024 because of  an 18-month period to allow member states to implement the rules.

This approach has been taken both to ensure consumer protection and harmonised access to innovative crypto-asset markets across the single market.

Targeting non-regulated crypto

The legislation is meant to cover crypto-assets that are not covered by existing financial service legislation. Much of the regulation is dedicated to regulating and controlling stablecoins and their like. This could include e-money tokens, asset referenced tokens and utility tokens. Crypto-assets offered to the public other than e-money tokens or asset-referenced tokens are also in scope of the regulation.

MiCA will not apply to “crypto-asset services provided in a fully-decentralised manner without any intermediary”. The European Commission will report in 18 months on the “necessity and feasibility of regulating ‘defi’ ”.

The legislation will not apply to unique and non-fungible tokens, but it will apply to fractional NFTs. The legislation requires authorities to adopt a “substance over form approach” when classifying NFTs, as their “de facto features” or their “issuance in a large series” could lead to them being considered money-like which would lead them to be caught by MiCA. 

Foreign-pegged stablecoins

Issuers of asset-referenced tokens (ARTs) & electronic money tokens (EMTs) pegged to a non-EU currency will need to stop issuing their stablecoins if they become too widely used as means of exchange. However, stablecoins used for crypto trading would not be regulated, unless they are used for settlement of transactions in other crypto-assets. MiCA requires stablecoin issuers to hold enough in reserve funds and provide proof of such holdings.

In fact, the separate legal regimes under Mica for ARTs and EMTs under MiCA will do away with the use of “stablecoins” as a legal term. Europe has become concerned that the widespread use of so-called stablecoins could disrupt the state’s  right of to issue currency. 

Anyone issuing crypto assets to third parties may be subject to certain obligations, including the necessity to be authorised to do so, compliance with prudential rules when marketing them, the obligation to act honestly, fairly and professionally towards crypto asset holders, in the areas of conflict management and security access protocols. The rules will depend on various elements including the type of crypto-asset and the amount being offered.

Crypto fund services regulated

Various standard fund services will be regulated under MiCA when they concern crypto-assets themselves covered by MiCA. Both crypto-asset custody and administration on behalf of third parties as well as the provision of advice on crypto-assets are included as qualifying as crypto-asset service providers, which will have to be licensed. Crypto-asset service providers applying to be authorised to benefit from a European passport will have to satisfy certain criteria.

The regime mirrors the existing MiFID and market abuse scheme with respect to satisfying conditions as well as observing and complying with prudential rules.

MiCA will affect the ability of industry players to diversify their business by developing a crypt-asset strategy. The regulation will likely provide a harmonised legal framework with strong safeguards for historically non-regulated crypto-asset as well as for their associated service providers and the consumer.

Cross-cutting legislation 

The regulation will also required miners to disclose their energy consumption,  a compromise proposal intended to satisfy those concerned bout the environment. This followed the decision ruling out the proof-of-work mining ban.

MiCA isn’t happening in a vacuum – the European Commission’s digital finance strategy also relies on the DLT Pilot Regime and the Digital Operational Resilience Act (Dora), with a cross-cutting impact. It is also likely that market players engaging in digital finance will be obliged to observe certain ESG standards.

It is intended to support innovation and fair competition in order to promote the development of crypto-assets through a safe and proportionate framework. It is also intended to protect consumers, investors and market integrity given the risks associated with crypto-assets. Lastly, it is intended to ensure financial stability, by including safeguards to cope with possible risks to financial stability.

Related articles on Investment Officer Luxembourg:

• New regulation offers salvation to crypto hopes
• Apex: EU crypto crack-down ‘not a threat’ to Luxembourg
• Luxembourg’s crypto opportunity demands a collective move