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.
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:
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.
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:
In addition, the proposal outlines:
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.
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:
If the process drags out, the assessment could take roughly 18 weeks. As to what they’re assessing:
FundApps plans to introduce pre-approval and threshold disclosure triggers for ART issuers when MiCA comes into force.
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:
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.
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:
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.
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:
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:
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:
Even when a person is exempt from publishing a white paper they still must:
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.”
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.
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.