The EU’s MiCA - the ‘Mini-MiFID’

In our latest blog series, we'll be taking regulatory updates that affect you directly, breaking them down and helping make sense of it all.

First up, we're looking into the new EU crypto regs: MiCA- The 'Mini-MiFID' 

More formally known as: Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Markets in Crypto-assets, and amending Directive (EU) 2019/1937  Link here.

Contents

1. Background
2. Why MiCA? 
3. Acquiring Issuers of Asset-Referenced Tokens (ARTs)
4. Requirements for ART Issuers 
5. Requirements for Crypto-asset Service Providers (CASPs)
6. Crypto-asset White Papers 
7. Requirements for Issuers of Crypto-assets Generally 
8. NFTs (Non-fungible Tokens) 
9. Anti-Money Laundering (AML) 
10. Conclusion

1. Background 

In late June, the Council presidency and the European Parliament reached provisional agreement to introduce the Markets in Crypto-assets (MiCA) directive. 

It’s subject to approval by the Council and the European Parliament which is expected to conclude this year. There would also be a grace period before it comes into force in 2024. 

This may seem slow, but if you take the USA as an example, it is still only tentatively pursuing similar regulation. 

The new regulation will not apply to: 

• Crypto-assets that already qualify as MiFID II financial instruments or structured deposits
• E-money tokens under the EMRs
• Deposits under the DGSD
• Securitisation under the Securitisation Regs (2017/2402)

Some EU countries have already adopted crypto regs, but in most member states, crypto firms operate outside the scope of existing regulation. 

Suffice to say, it is a fragmented market with substantial risk to consumers and investors. 

2. Why MiCA? 

Increasing participation in crypto along with its attendant risk to consumers and investors, meant that broader regulations, despite crypto’s decentralised nature, were inevitable. 

Specifically, the EU’s proposal lists 4 general objectives: 

1. Legal certainty
2. Innovation
3. Consumer and investor protection 
4. Financial stability 

In addition, the proposal outlines: 

• Anti-money laundering and counter terrorist financing requirements 
• A huge focus on stablecoins 

The background to this proposal is the collapse of TerraUST and its token Luna, leading to billions in losses. This may have bolstered the resolve of EU regulators. On the other hand, regulation had already been on the cards for years and had been pushed back due to Covid. 

3. Acquiring Issuers of Asset-Referenced Tokens (ARTs)

At FundApps, for our clients, we’re particularly interested in Article 37, which relates to pre-approval for the acquisition of issuers of asset-referenced tokens, aka stablecoins. 

This will be applicable to anyone who intends to acquire the voting rights, or of the capital held, that would reach or exceed 10%, 20%, 30% or 50%, or so that the issuer would become its subsidiary. 

Subsequently, the person shall likewise have to notify the competent authority where it has taken a decision to reduce a qualifying holding so that the proportion of the voting rights or of the capital held would fall below 10%, 20%, 30% or 50%, or that the issuer would cease to become the person’s subsidiary. 

For acquisition of ART issuers, there will be an assessment process undertaken by the relevant National Competent Authority (NCA). Some key points on timing for the assessment: 

• 2 working days for the NCA to acknowledge 
• 60 working days to assess, using the nascent technical standards 
• NCA can request information and then stop time for 20-30 working days
• NCA can oppose the intended acquisition 
• Where the NCA doesn’t oppose within the timeframe, there is deemed approval 
• NCA can impose limits on how long the acquisition will take and can extend it when appropriate 

If the process drags out, the assessment could take roughly 18 weeks. As to what they’re assessing: 

• Reputation of the person/s acquiring the ART issuer
• Reputation and experience of any person who will direct the business as a result of the acquisition 
• Financial soundness of the acquirer, particularly in relation to the plans for the ART issuer 
• Whether ART issuer can comply, and continue to comply, with MiCA
• Whether there is reasonable grounds to suspect money-laundering or terrorist financing or that the acquisition could increase the risk of it occurring 

FundApps plans to introduce pre-approval and threshold disclosure triggers for ART issuers when MiCA comes into force. 

Sanctions for Contravening Article 37

1. A public statement indicating the natural person or the legal entity responsible and the nature of the infringement;
2. An order requiring the natural person or legal entity responsible to cease the conduct constituting the infringement; 
3. Maximum administrative pecuniary sanctions of at least twice the amount of the profits gained or losses avoided because of the infringement where those can be determined; 
4. In the case of a legal person, maximum administrative pecuniary sanctions of at least 15% of the total annual turnover of that legal person accor ding to the last available financial statements approved by the management body. 

4. Requirements for ART Issuers 

Issuers of ARTs will need to have a registered office in the EU to ensure the proper supervision and monitoring. ARTs will need to be authorised by an NCA. An NCA will refuse authorisation where: 

• Where the prospective issuer’s business model may pose a serious threat to financial stability 
• Monetary policy transmission and monetary sovereignty

Once an issuer has been authorised, they will be able to operate throughout the EU. 

ART issuers will be supervised by the European Banking Authority (EBA), the EBA expects to have 18 full-time staff supervising ‘Significant’ ART issuers. Significant ART issuers will be held to higher standards. However, the Chair of the EBA José Manuel Campa, recently said that hiring specialised staff was a “major concern” due to competition with private industry. 

MiCA will require ART issuers to build up a sufficiently low-risk, liquid reserve, with a 1/1 ratio. Every ART holder will be offered a claim at any time and free of charge by the issuer. 

The development of ARTs based on a non-European currency, as a widely used means of payment, will be constrained to preserve the EU’s monetary sovereignty. 

5. Requirements for Crypto-asset Service Providers (CASPs) 

Crypto-asset services will only be provided by legal entities that have a registered office in the EU and that have been authorised as a CASP by the NCA. The passport will be applicable across the EU without reservations. 

A customer in the EU could at their own initiative seek the services of a CASP outside the EU, if the CASP is not soliciting the customer. Otherwise, they would need to be authorised. 

A short summary of the other requirements that will be imposed: 

• Organisational requirements
• Fit and proper requirements for managers and major shareholders 
• Business continuity plans 
• Internal controls and risk assessments 
• Confidentiality controls 
• Record keeping 
• Market abuse detection and prevention 
• Liability on CASPs and other wallet custodians in the event of hacks or preventable operational failures
• Pre and post-trade transparency requirements 
• Client protections for financial advice 

6. Requirements for Issuers of Crypto-Assets Generally 

All issuers of crypto-assets must be legal entities. If the issuer is incorporated in a non-EU country, they notify the NCA (using a white paper, see below) where they intend to make the offer or where the trading platform in question is located. 

ESMA and the EBA will oversee the monitoring of crypto markets and will have the power to intervene. NCAs will be able to suspend or prohibit a public offer or admission to a trading platform.

Redemptions, or other rights pertaining to ARTs will need to be communicated clearly and enforced rigorously and clear procedures will need to be documented for an orderly wind-down. 

7. Crypto-asset White Papers 

When making a public offer, or seeking admission of crypto-assets onto a trading platform in the EU, the person must notify their NCA and produce a ‘Crypto-asset White Paper’ containing mandatory disclosures including information in relation to: 

• General information on the issuer 
• The project to be carried out with the capital raised 
• The rights and obligations attached to the crypto-assets
• The underlying technology and its related risks 

The information contained in the white paper and any other marketing information must be fair, clear and not misleading. 

For ARTs, there are additional requirements which include information on the: 

• Stabilisation mechanism 
• Investment policy of the reserve of assets 
• Custody arrangements for the reserve assets
• Rights provided to holders 

Where the ART issuers do not offer a direct claim or redemption right on the reserve assets to all holders, the paper must have a clear and unambiguous warning. This should also be included in any marketing content. 

There will continue to be an ongoing requirement to report monthly to holders on: 

• The number of ARTs in circulation 
• The value and composition of reserve assets

Even when a person is exempt from publishing a white paper they still must: 

• Act honestly, fairly, and professionally 
• Identify, prevent, manage and disclose conflicts of interest 
• Have effective administrative arrangements to ensure their systems and security protocols meet EU standards 

8. NFTs (Non-fungible Tokens) 

Not included in this proposal, but that doesn’t mean they won’t look at it later: “Within 18 months the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate and horizontal legislative proposal to create a regime for NFTs and address the emerging risks of such new market.”

9. Anti-Money Laundering (AML) 

In parallel to MiCA, the EU is introducing the Transfer of Funds Regulation (TFR) to adopt the Crypto Travel Rule introduced by the Financial Action Task Force (FATF). 

To avoid any overlaps with updated regulation on AML, which will now also cover crypto-assets, MiCA does not duplicate the AML provisions as set out in the newly updated transfer of funds rule. However, MiCA requires that the EBA will be tasked with maintaining a public register of non-compliant CASPs.  

CASPs whose parent company is in a country listed on the EU list of third countries considered at high risk for anti-money laundering activities, as well as on the EU list of non-cooperative jurisdictions for tax purposes, will be required to implement enhanced checks in line with the EU AML framework. Tougher requirements may also be applied to shareholders and to the management of CASPs.

10. Conclusion

MiCA represents the most substantial piece of crypto regulation ever, with many of the same requirements that apply to the rest of the financial services industry. In fact, the definition will change so that crypto-asset services will be considered ‘financial services’ as defined under the directive relating to distance marketing of consumer financial services. 

The hammer will fall particularly hard on stablecoin issuers with increased oversight on nearly everything they do, most importantly, the composition of their investment portfolios which constitute the reserves underlying the coin’s value. 

FundApps plans to introduce pre-approval and threshold disclosure triggers for ART issuers when MiCA comes into force in 2024.