What is Markets in Crypto Assets (MiCA)?

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Learn Crypto Oct 26 · 13 min read

Late in June 2022, European Union officials managed to agree on a provisional version of the Markets in Crypto Assets (MiCA) framework. The world’s third broadest economy produced a piece of European crypto assets regulation – a landmark moment in the legal recognition of the legitimacy of cryptocurrency and crypto assets investment. The implications of that were examined in this Learn Crypto article: “What is the Threat of Crypto from Regulation?”.

In October 2022, the European Union (EU) came to agree upon the full legal text of this MiCA legislation, including an additional law that would spell out the identification processes of those using crypto to make payments. This article discusses that.

What comes before European Parliament approval

Of course, that is yet to come into effect. That is to say, the regulation still needs to be approved by the EU Council and the Parliament. Following such approval, if granted, there will be a grace period before entering into force in 2024.  

Such regulatory approaches are likely to influence changes in other countries or regions as well. Interestingly, MiCA’s provisional text intensely focuses on stablecoins which seems like a logical step after the Terra/Luna market crash and the Tether affair. The consequences of the fast-moving EU crypto-regulation are linked to the probability of a global export of the European-style crypto regulation without checking out whether ‘one-size-fits-all'. On the other hand, after the downfall of stablecoins, it was evident that particular safeguards should be put in place in order to protect investors and users. 

The EU may be the first one to jump on the regulatory bandwagon, but others have been playing catch-up. The International Monetary Fund published its global financial stability report and called out cryptocurrencies for putting global financial stability at stake. The IMF singled out threats that crypto poses for national currencies, capital flows, money laundering risks, and bank disintermediation. The last one refers to one of crypto’s major advantages, namely removing the intermediary from the financial picture. Another large economy has not been resting as well. In March 2022, Joe Biden issued an Executive order on ensuring the responsible development of digital assets, and therefore, asked Federal Agencies to report back on the crypto industry, specifically on consumer/investor protection, financial stability, illegal activity, innovation, competitiveness, and financial inclusion. Obviously, all broad economies have been moving in the same regulatory direction. 

Before explaining the novel crypto regulation, we should reflect on the interplay between crypto and regulation in general. Regulation of the crypto nature has been broadly considered a threat by the crypto community. Namely, the core values standing behind crypto are decentralization, transparency, and sovereignty. Traditional financial institutions have been subjected through years to political whims, and crypto provided a decent alternative by offering to remove the middleman and allow users to take back control over their funds and data. In the eyes of regulators, crypto has been viewed as a tool for creating financial instability and illicit conduct, such as fraud and money laundering. The question that pops out is whether regulations could lead to crypto losing its core values, and the movement’s driving ethos to level the playing field.  

Before the stablecoin debacle, states mostly focused on the environmental aspects of crypto. The published versions of regulations globally will depend on the severity of the threat crypto poses for large economies in terms of how much countries could gain in the aspect of the sovereignty of monetary policy and their position in the crypto environment. Now let’s get down to MiCA. In this text, you will learn about the main characteristics of the EU crypto regulation and the legislation’s focus on stablecoins. Most importantly, we will deal with the manner in which it will affect the industry in Europe and crypto users as individuals. 

There is no simple answer to what is MiCA; MiCA is an extensive regulation that emerged as an answer to the question of what should have been done in order to avoid most legal problems stablecoins caused. While some parts indirectly reference the Tether scam case, the regulation is mostly concerned with simply ‘regulating’, namely raising new crypto asset service providers as obedient children of the digitalized EU’s internal market. Interestingly, the regulation singled out the threat asset-referenced tokens pose to monetary policy and sovereignty in light of central banks being able to act on such threats immediately. However, MiCA is not all about taking the DEFI reins since there are many industry and consumer-related benefits on the table as well.

MiCA’s main characteristics 

In contrast to the International Monetary Fund’s report on how crypto is putting the whole global financial situation at stake, EU officials think that there is no room for panic yet. As stated, the crypto-asset market is still modest in size and therefore, doesn’t pose a threat to financial stability at the moment. Having said that, leaving the field unregulated or semi-regulated could hinder the development of the crypto market and leave holders of digital assets exposed to a number of risks that are not covered by the Union’s consumer protection rules.  

1. Reasons and Objectives behind the new regulatory framework: crypto asset service providers at play 

The novel legislative proposal on crypto-assets was developed to introduce the distributed ledger technology and digital asset regulation to the EU whilst safeguarding investors and users. As mentioned above, the first-ever licensing regime for crypto exchanges and wallets emerged with a number of requirements regarding stablecoins and stablecoin reserves to avoid market collapses. The 168-page document presented a strong focus on types of crypto assets such as stablecoins and crypto asset service providers. 

As stated by the document itself, a clear and transparent framework had to be produced in order to enable crypto assets service providers the possibility to scale up their business and run their ordinary business and cross-border activities smoothly. The regulation should be able to provide equal opportunities for market entry, financial stability, a secure payment system, and less monetary policy risks.  

The new rules may be burdensome for a number of issuers or crypto-asset service providers as it imposes multiple obligations, liability rules, and requirements to draft a bunch of legal documents and introduce procedures. However, the main regulatory objective is reflected in the need to increase the reception of crypto products while decreasing the monetary risks we have encountered in the past.

2. Subject matter, scope of application & legislative approach 

MiCA’s subject matter and scope of application have been dealt with in articles one and two. The regulation’s subject matter can be illustrated as laying down uniform rules for the offering and placing on the market of crypto assets in the light of transparency, disclosure requirements, authorization and supervision, protection of investors and consumers, and measures to prevent anti-competitive behavior in the crypto market.  

Keep in mind that particular crypto assets have been regulated by former EU legislation. Therefore, MiCA explicitly excludes crypto assets that may qualify as financial instruments as defined by Directive 2014/65/EU, as deposits defined under Directive 2014/49/EU, as funds according to the definition given by Directive 2015/2366/EU other than e-money tokens, as securitization positions in the light of Regulation 207/2402 and as non-life or life insurance contracts or social security schemes. Sounds complicated but it won’t seem like that when we state to which assets MiCA actually applies. And forget about lending or borrowing since this Regulation explicitly excludes these activities as well. When it comes to non-fungible tokens (NFTs), it has been conclusively stated that the regulation in question doesn’t apply to them, describing them as unique and non-fungible crypto assets, including digital art and collectibles, with a value attributable to such asset’s unique characteristics.

In simple terms, this piece of regulation applies to natural and legal persons and other undertakings that are dealing with the issuance, offer to the public, and admission to trading of crypto assets or that provide services related to crypto assets in the EU’s internal market, others than those that have been decisively excluded. The document mentions three sub-categories to which it strictly applies and these are: 

  • Utility tokens 

The regulation applies to utility tokens that are issued with non-financial purposes to digitally provide access to an application, resources or services available on the blockchain. 

  • Asset-referenced tokens 

MiCA definitely applies to asset-referenced tokens or in other words, to tokens that aim to maintain a stable value by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets, and act as a means of payment to buy goods and services. As it can be seen from the definition, we are talking about notorious stablecoins. 

  • E-money tokens 

Finally, the legislation applies to e-money tokens or crypto assets with a stable value based on only one fiat currency that aims to function similarly to electronic money. E-money tokens are also considered stablecoins. In the part of the regulation that talks about exclusions, it has been mentioned that such tokens cannot be considered as deposits excluded from MiCA’s scope of application.

The EU decided to take on an interesting legislative approach by making definitions as wide as possible. Whilst law has always been associated with clear, direct, and narrow definitions that have been elaborated, whether through case law or expert opinion, the legislator decided that this time we should probably find a way for the law to stop losing the race against technology. Thus, MiCA directly mentions in its explanatory part that crypto assets, e-money tokens, and distributed ledger technology should be defined as widely as possible to capture all types of it that may fall under the current scope of the EU’s legislation.

The regulation further backs up our above-mentioned assumption about a new approach. Namely, any novel legislation adopted in the field of crypto assets should be specific, future-proof, grounded on an incentive-based approach, and able to keep pace with innovation and technological developments. Now we have a narrowly applicable legislative proposal with so many wide definitions. Maybe it was a marathon after all, and now the slow and steady one changed the strategy to succeed.

MiCA’s main focus: All eyes on stablecoins 

As already pointed out, MiCA focuses heavily on the so-called stablecoins. Before we got our hands on the European legislative proposal, we talked about stablecoins and regulatory developments following the Terra collapse. Then came the Tether scam and stablecoins rapidly got a bad reputation. Even though the European Commission considers the crypto market still relatively small, such affairs have the power to disrupt the stability of the internal market. The EU solution can be understood as stablecoins getting another chance.  

The proposal doesn’t define stablecoins per se, yet it covers two types that are usually described as stablecoins, namely asset-referenced tokens and e-money tokens. For a better comprehension of the document, we have to be able to tell them apart. Hence, asset-referenced tokens refer to several fiat currencies, one or several commodities or one or several crypto assets, or a combo of such assets (referred to as ‘reserve assets’), and e-money tokens refer to one single fiat currency. The line of distinction is drawn in relation to whether the European Banking Authority (EBA) considers stablecoins to be ‘significant’ under certain criteria. Significant stablecoin issuers have to comply with strict investor, capital, and supervisory requirements and create a bunch of legal documents and procedures to safeguard European investors and consumers. MiCA explicitly includes the regulation of the so-called algorithmic stablecoins.

If you are a stablecoin issuer, MiCA wants a cartload of things from you. To avoid another Tether-like affair or Terra-like market collapse, the proposal states many times that information given to token holders and investors has to be clear, fair, and not misleading by prescribing how the white paper and other policy documents should look like. While the creation and publishment of a white paper that fulfills all required criteria may seem central, issuers need to provide information on an ongoing basis as well, specifically in relation to the amount of asset-referenced tokens in circulation and the value and composition of reserve assets on their official website, along with clear policies, governance arrangements, recovery and redemption plans and complaint handling procedures.  

Stablecoins’ reserves: Honesty is the best policy

Finally, we are down to reserves. Fun fact: Tether messed up royally when it came to the subject of reserves. The issuer in question said stablecoins were backed completely and all the time, yet the New York Attorney General found that it wasn’t true. Thus, the EU regulators added special parts about reserves. To cover their liability, issuers should constitute and maintain a reserve of assets matching the risks reflected in such issuers’ liability against holders. Asset reserves should be consistent and prudently managed in such a manner that the issuer doesn’t face currency and market risks. To sum it up, the reserve must amount at least to the corresponding value of tokens in circulation, and reserve changes should be adequately managed to avoid unfortunate consequences. Hence, not playing by EU rules, whether marketing stablecoins at the same time in Europe and third countries or not, leads to liability issues. 

Yet, that is not all you have to know about reserves. MiCA requires the creation of an adequate custody policy for managing reserves and ensuring that the reserve assets are fully segregated from the issuer’s personal assets, that they are not hindered or pledged as collateral, and that the issuer has prompt access to such reserve assets. It seems that the EU regulators have been carefully observing the Tether affair. Furthermore, MiCA prescribes specifically that reserve assets should, depending on their nature, be kept in custody either by a credit institution, or an investment firm, both authorized by certain EU Directives, or by a crypto-asset service provider.

The crypto market and community have been rapidly growing due to the rise of decentralized finance. However, all this talk sounds like MiCA poses a real existential threat to DEFI. MiCA probably won’t be enforced anytime soon, and how DEFI is going to change in that time remains to be seen. One thing is for sure; requirements for legal presence and not operating in gray zones are here to stay. 

What are the potential industry effects? 

When there is something new that should be dealt with, we often stumble upon the issue of overregulation. While leaving an area unregulated or partially regulated leads to many problems associated with gray zones, legal loopholes, and legal uncertainty, so does overregulation. The legal theory has spoken many times of such situations, pointing out that burdening excessively with rules and regulations stifles development. Thus, creating a legal document means finding a fine balance between burdening and requiring compliance and leaving enough room for innovation and industrial progress. 

MiCA’s creators were well aware of this, and decidedly stated the price of overburdening the industry by highlighting the importance of avoiding undue administrative burdens. Specifically, small and medium-sized enterprises and start-ups should not be subjected to disproportionate and excessive administrative burdens. Furthermore, offers to the public of crypto assets, other than asset-referenced tokens and e-money tokens that don’t exceed an adequate aggregate threshold over a period of 12 months should be excluded from the requirement to create a crypto asset white paper. The main goal after all is to provide a competitive market where offers of crypto assets enable innovative and inclusive manners of financing, especially in relation to small and medium-sized enterprises. 

How can MiCA benefit me as a consumer? 

The document’s primary focus, aside from stablecoin regulation, is centered around consumer and investor protection. From simple requirements such as increasing transparency and regulatory oversight to opening the question of liability, MiCA is all about increasing consumer welfare which may lead to wide adoption and use of crypto assets in the future. Particularly, consumer protection obligations will apply to the matters of issuance, exchange, trading, and custody of crypto assets to lay down a secure environment for consumers on European soil.

There are a number of consumer-related provisions under MiCA, such as the requirement for crypto asset issuers to continuously act in the best interest of asset holders, and the right to withdraw without incurring costs or explanations up to 14 days after the purchase of assets. Therefore, MiCA benefits consumers by giving them something new, namely a bundle of rights for their protection. Apart from the above-mentioned rights, issuers and service providers will be obliged to disclose pricing policies and complaint handling systems or face liability otherwise. 

MiCA was seamlessly created to align the objectives of consumer protection, market integrity, and financial stability by learning from past misconduct in the crypto community. Present-day legal systems are more than ever linked to the rise of competitive markets with a high degree of consumer protection rights. For instance, competition law in the times of the 4th industrial revolution is intertwined with consumer protection. Consumers won’t face any problems with MiCA going into full effect as they can only benefit from it. After all, it is easier to invest, purchase and use something if you know where you stand.