News Update Fintech
1 July 2022
The European Parliament and European Council reached political agreement on the draft EU Markets in Crypto Assets Regulation ("MiCA") on 30 June. The European Commission initially launched its proposal for MiCA in September 2020, as part of its EU Digital Finance Package.In March 2022, the European Parliament approved an amended version of the MiCA proposal. Yesterday's deal, marks the end of the so called 'trilogue negotiations' between European Commission, Parliament and Council.
MiCA is the EU regulatory framework regulating Crypto Asset Service Providers ("CASPs") and offerings of crypto assets in the EU. MiCA is the largest piece of supranational legislation governing crypto assets to date, demonstrating the EU's resolve to update its financial legislation to the digital era. MiCA may be published in the EU's Official Journal as early as 2023, after which an 18 month transition period applies, after which it will enter into force. MiCA is a regulation and will therefore apply directly in the entire EU, without any national implementing legislation being required.
The press release of the European Council pointed out some noteworthy changes compared to the previous draft of MiCA. The ecological aspects of crypto assets will not be part of MiCA. Instead ESMA, the EU Securities and Markets Authority, will be delegated to compose guidance concerning these ecological aspects. Further, the Anti Money Laundering ("AML") components included in the previous drafts, will not be included in the final version. CASPs will become subject to existing EU AML legislation. The existing EU wire transfer regulation (Regulation EU 2015/847) will be updated in parallel with MiCA, specifying minimum identity information requirements. CASP's need to include this minimum information for each crypto asset transaction in scope.
Impact on CASPs and existing financial institutionsMiCA will hugely impact CASPs active in the EU – including CASPs established outside the EU – but will also affect incumbent financial institutions, and creates opportunities for EU banks, investment firms and insurance companies.
Based on previous MiCA drafts, we know MiCA will result in the following changes. MiCA will govern CASPs similar to how the EU Markets in Financial Instruments Directive II ("MiFID II") governs investment firms. CASPs are parties engaged in "crypto asset services". These services are similar to investment services under MiFID II, with the key distinction that they solely concern crypto assets as underlying assets. To the extent crypto assets also qualify as (MiFID II) financial instruments, e.g. tokenized shares, tokenized notes, or units in AIF's, these products and the services relating thereto are governed by MiFID II, and not by MiCA.
Under MiCA, CASPs require a MiCA license from the competent Member State authority. MiCA licenses will – after completion of notification requirements – serve as a EU passport for the provision of licensed crypto asset services. License requirements are similar to those in other EU financial services legislation, and include:
- Good repute and competence of senior management;
- Minimum capital requirements;
- Adequate insurance coverage (as an alternative to minimum capital);
- Robustness of organization and processes;
- Safeguarding of client assets;
- Policies on prevention of conflicts of interest, inducements, order execution, complaints handling, AML prevention, ICT business continuity, etc.
In general, EU Member States will have to dismantle or adapt their existing national legislation and frameworks governing crypto assets and crypto asset services, to the extent these are irreconcilable with MiCA. For example registrations under the Dutch DNB registration regime as set out in the WWFT, will not automatically result in eligibility for a MiCA license. The requirements set out in MiCA are wider and more onerous. Existing CASPs may have to make tremendous efforts and investments in order to obtain a MiCA license.
Under MiCA, licensed EU banks and investment firms will be uniquely positioned commercially, compared to CASPs. Their EU banking or investment firm licenses authorize them to provide crypto asset services, without having to apply for a MiCA license. Banks may provide all crypto asset services. Investment firms may provide the crypto asset services equivalent to their investment services. This is also an opportunity for incumbent banks, investment firms and CASPs to explore collaborations and joined service provision.
Also noteworthy, CASPs have to appoint custodians for the safekeeping of client assets as well as reserve assets, backing up so called asset referenced tokens (i.e. stable coins). Banks will be authorized to uniquely act as custodian for the safekeeping of all categories of CASP client assets and reserve assets, i.e. cash, financial instruments and crypto assets. Investment firms may only provide custody for client assets consisting of of financial instruments and crypto assets and CASP's may only act as custodian for client crypto assets.
Licensed financial institutions have to start thinking about these commercial opportunities, the changes to the financial landscape that will occur post MiCA, as well as the increased risks they will be exposed to. For example, it will become more difficult for banks to refuse services to licensed CASPs, payment service providers acting on their behalf or merchants accepting payments in crypto assets. Also, financial institutions engaging with CASPs need to ensure their CASP counterparties or CASP clients are duly licensed.
For financial regulators, MiCA means that it will become far more difficult to dissuade banks, and other financial institutions from exploring and engaging in crypto asset services, and providing services to licensed CASP's and their service providers, such as PSP, and collaborating with them. It also means regulators will need to enforce compliance and can no longer refrain from taking action against business practices harming consumers. Crypto assets will be in their remit. Although MiCA aims at protecting consumer, there appears to be room for improvement. MiCA does not regulate "social media" / "finfluencers" not engaging in crypto asset services. Also it appears various mandatory warnings on crypto risk are limited to advisory / portfolio management services, while "execution only" is the predominant means of exchange.
Impact on information provisionMiCA also sets out requirements on minimum information that must be made available by parties offering crypto assets in the EU. Minimum information has to be published in a so called 'white paper' MiCA differentiates between different categories of crypto assets based on their application and risk profile:
- crypto assets;
- utility tokens;
- asset reference tokens (i.e. stable coins);
- E-money (payment) tokens.
Information requirements are proportionate and risk based. In addition the safeguards set out in MiCA are risk based and more stringent for the highest risk categories: asset reference tokens (e.g. stable coins such as tether and terra USD) and E-money tokens (e.g. bitcoin). This approach, already formulated in 2020, appears to be aligned perfectly with the risks that recently materialized in global crypto markets.
Next stepsAs next steps, the provisional agreement on MiCA has to be approved formally by the Council and the European Parliament, after that draft will go through the formal adoption procedure, resulting in publication of the final text in the Official Journal. Publication in the Official Journal will likely occur in the next 12 months.
MiCA results in challenges and opportunities both for CASPs as well as licensed financial institutions. Parties taking a wait and see approach will quickly find themselves running out of time. Now is the time to start preparing for MiCA and the change it will bring.
Houthoff will be glad to navigate you through this changing and challenging environment.