What is MiCA Regulation and How Does It Affect the Crypto Market?

MiCA (Markets in Crypto-Assets Regulation) is a regulatory framework by the EU aimed at harmonizing the treatment of crypto-assets across member states. It introduces rules for transparency, operation, and supervision of crypto businesses, aiming to protect investors, maintain market integrity, and foster innovation in the crypto market.

Who Needs to Comply with MiCA Regulation?

All crypto-asset service providers operating within the EU, including exchanges, wallet providers, and ICO operators, must comply with MiCA. This includes both existing businesses and new entrants in the EU's crypto market.

What Are the Key Requirements of MiCA for Crypto Businesses?

Key requirements include obtaining proper authorization, adhering to strict AML and KYC guidelines, maintaining operational resilience, providing clear information to consumers, and meeting capital and governance standards.

How Does MiCA Regulation Enhance Consumer Protection?

MiCA enhances consumer protection by ensuring transparency in crypto-asset offerings, setting standards for fair and clear marketing practices, and implementing safeguards against fraud and market manipulation.

What Are the Implications of Non-Compliance with MiCA?

Non-compliance with MiCA can result in significant penalties, including fines, revocation of licenses, and prohibition from operating within the EU market. It also risks reputational damage and loss of consumer trust for the business.

Scenic view of Lithuania, representing the country's adaptation to MiCA regulations in the evolving landscape of crypto-asset services.

CRYPTO-ASSETS (MICA) REGULATION

MiCA stands as the world's first and unique legislative framework, establishing an unprecedented global benchmark for the regulation of crypto assets.

MiCa Final Draft

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MICA REGULATION EXPLAINED

The Regulation on markets in crypto-assets, amending various EU regulations and directives, introduces unified rules for crypto-assets and crypto licenses across the EU. This legislation fills gaps in existing EU law, offering legal clarity for crypto-assets, enhancing consumer and investor protection, and promoting financial stability. It categorizes crypto-assets into asset-referenced tokens (ART), electronic money tokens (EMT), and other types not covered by current EU legislation and crypto licenses. The regulation governs the issuance, trading, and asset management of these crypto-assets, with specific rules for significant ART and EMT. It focuses on ensuring liquidity and redemption rights, and includes provisions for communicating the environmental impact of crypto-assets to investors. Signed on May 31, 2023, this regulation will be effective from December 30, 2024, setting a new standard in crypto-asset regulation in the EU. Read the full MiCa document here.

Image of a Bitcoin symbol with the EU flag in the background, depicting the integration of cryptocurrency within the MiCA regulations framework in the European Union.

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Benefits of Mica:
The regulation suggested by the Commission aims to offer legal clarity for crypto-assets that are not currently encompassed by EU legislation. It is designed to supersede national frameworks for crypto licenses and implement consistent rules for crypto-assets across the EU. Additionally, the regulation includes particular provisions for stablecoins, covering scenarios where they qualify as 'e-money'

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MICA'S CLASSIFICATION OF CRYPTO ASSETS

MiCA regulation specifically excludes certain types of crypto-assets due to their unique characteristics:

NFTs and Unique Assets: MiCA does not cover crypto-assets that are non-fungible and unique, such as digital art, collectibles, or assets representing unique services or physical items like real estate. These assets must genuinely be unique and not just labeled as such by a unique identifier. The regulation requires that the uniqueness of these assets is intrinsic and not just based on an identifier.
Central Bank-Issued Digital Assets: Digital assets issued by central banks in their capacity as monetary authorities are also exempt from MiCA regulation. This includes any crypto-assets directly issued by governmental authorities. Learn more about What is digital EURO.
Non-Transferable Assets: MiCA excludes assets that cannot be transferred to other holders, such as certain loyalty scheme points that can only be redeemed with the issuer. These assets are limited to transactions exclusively between the holder and the issuer.

In all cases, MiCA emphasizes a substance-over-form approach, where the actual features and use of the asset determine its regulatory treatment, rather than the issuer’s designation.

Image of a EU flag in the background, depicting the integration of cryptocurrency within the MiCA regulations framework in the European Union.

LAUNCHING CRYPTO EXCHANGE UNDER MICA REGULATION

MiCA introduces comprehensive requirements for entities providing crypto-asset services:

EU Establishment and Licensing: Entities must be based in an EU country and obtain a license from a State authority responsible for overseeing financial market participants. This shift to a unified supervisory authority aims to enhance sector oversight and align CASPs with EU financial standards.
Local Substance Requirements: CASPs must have at least one senior management member (like a director) located in the establishment country and operate through a business place in the EU, facilitating effective supervision.
Provision as Financial Services Providers: CASPs are classified as financial service providers under EU law, subjecting them to consumer protection rules. They must provide clear, fair, and non-misleading information to clients, highlighting risks associated with crypto-assets.
Capital Requirements: MiCA sets minimal capital requirements for CASPs between €50,000 and €150,000, along with monitoring own funds, akin to other financial entities.
Requirements for UBOs, Shareholders, and Staff: CASPs, their UBOs, shareholders, and senior managers must be of good repute and fit for anti-money laundering and terrorism financing purposes. Staff must possess the necessary skills and knowledge to perform their duties effectively.
Internal Policies and Governance: CASPs are required to have internal processes similar to other financial institutions, covering areas like AML/CTF, data protection, risk management, and conflict of interest.
Transitional Period for Existing CASPs: A transitional period of 18 months is allowed for existing CASPs in the EU to comply with the new regulations, including obtaining the necessary license.
Passporting and Foreign Customer Solicitation: The passporting regime enables CASPs to offer services across the EU from a single jurisdiction. Providers serving EU customers on their exclusive initiative don't need an EU CASP license.
Operational Continuity: CASPs must commence their activities within 12 months of licensing and cannot cease operations for more than 9 months while holding an active license.

These MiCA regulations aim to standardize and strengthen the crypto-asset services sector across the EU, ensuring compliance, consumer protection, and market integrity.

CRYPTO EXCHANGE REQUIREMENTS UNDER MICA REGULATION

Under MiCA regulation, specific guidelines are outlined for crypto-asset service providers launching a trading platform for crypto-assets.

Operating Rules Establishment: Authorized providers must create operating rules for their trading platforms, covering:
- Admission criteria and due diligence for crypto-assets.
- Exclusion categories for certain types of crypto-assets.
- Policies and fees for crypto-asset trading.
- Objective criteria for trading participation to ensure fair access.
- Provisions for orderly trading.
- Conditions for continuous trading of crypto-assets, including liquidity requirements.
- Suspension protocols for trading.
- Efficient settlement systems for crypto and fiat transactions.
Crypto-Asset Compliance: Platforms must ensure that listed crypto-assets comply with operating rules and assess their quality, considering the issuer's reputation and track record.
Exclusions for Anonymized Crypto-Assets: Crypto-assets with built-in anonymization functions are generally not admitted unless their holders and transaction histories can be identified.
Language and Accessibility of Operating Rules: These rules should be drafted in an official EU language and made publicly available, ensuring transparency.
Prohibition of Self-Dealing: Platforms cannot trade on their own account, ensuring impartiality and reducing conflict of interest.
Trading System Integrity: Systems must be resilient, able to handle market stress, and capable of rejecting erroneous orders, backed by effective continuity arrangements.
Transparency of Trading Data: Platforms must publicly disclose bid and ask prices, trading depth, and details of executed transactions in near real-time.
Non-Discriminatory Access to Information: Published trading information should be accessible to the public on fair terms, free of charge after 15 minutes, and retained for at least 2 years.
Fair and Transparent Fee Structures: Fee policies must be transparent and non-discriminatory, without encouraging disorderly trading or market abuse.
Final Settlement: The final settlement of transactions must occur on the same day as the trade execution on the platform.
Reporting and Backup Facilities: Maintaining resources and backup facilities for continuous reporting to competent authorities is mandatory.

These comprehensive regulations under MiCA aim to ensure a secure, transparent, and fair environment for operating crypto exchanges within the EU, balancing innovation with investor protection and market integrity.

Article 68 & 69 of the MiCa directive.

EU Passport Benefits for Service Providers with Estonia, Lithuania, Cyprus, or Poland Crypto Licenses

Service providers who obtain crypto licenses from EU member states like Estonia, Lithuania, Cyprus, or Poland and choose to opt into the EU regime stand to gain significantly from the EU passporting system. This system allows them to seamlessly expand their operations across European borders. By holding an Estonia crypto license, Lithuania crypto license, Cyprus crypto license, or Poland crypto license, these service providers can leverage the EU passport to access a wider market, offering their services in multiple EU countries without needing separate licenses in each jurisdiction. This harmonized approach under the EU regime facilitates a broader reach, simplifying cross-border operations and fostering growth within the European crypto market. This integration not only benefits the service providers by opening up new markets but also enhances the crypto ecosystem's cohesion within the EU.

LAUNCHING CUSTODIAL WALLET UNDER MICA REGULATION

Under MiCA regulations, crypto-asset service providers authorized for custody and administration of crypto-assets on behalf of third parties must adhere to specific guidelines:

Client Agreements: Providers must enter into a detailed agreement with clients, covering:
- Identification of the parties.
- Description of the custodial service.
- Communication methods, including client authentication.
- Security systems description.
- Fee structure.
- Applicable law.
Register of Client Positions: A register must be maintained for each client, accurately reflecting their crypto-asset rights. All client instructions affecting crypto-assets should be promptly recorded.
Custody Policy and Security: Establish internal rules and procedures to safeguard crypto-assets or access to them, such as cryptographic keys, protecting against fraud, cyber threats, or negligence.
Rights Management: Facilitate the exercise of rights attached to crypto-assets, ensuring all relevant events are recorded in the client's register.
Regular Statements of Position: Provide clients with a quarterly statement (or upon request) of their crypto-asset positions, including asset balance, value, and transaction history.
Prompt Access and Information: Ensure clients have quick access to their crypto-assets and are promptly informed about operations requiring their response.
Segregation of Assets: Keep clients' crypto-assets segregated from the provider's assets, with separate addresses on the DLT for client holdings.
Liability for Loss: Providers are liable to their clients for any loss of crypto-assets due to malfunctions or hacks, up to the market value of the lost assets.

Article 67 of the MiCa directive.

These regulations ensure the secure and transparent operation of custodial wallets, safeguarding client assets and rights, and maintaining trust in the crypto-asset market under the MiCA framework.

ISSUING TOKEN UNDER MICA REGULATION

Issuer Requirements
An issuer of such crypto-assets must:
(a) Be a legal entity.
(b) Prepare a crypto-asset white paper in line with Article 5 of the MiCa directive.
(c) Notify the relevant authorities of this white paper as per Article 7 of the MiCa directive.
(d) Publicly publish the white paper according to Article 8 of the MiCa directive.
(e) Adhere to requirements specified in Article 13 of the MiCa directive.

The full document of Markets in Crypto-assets and Directive.
Exemptions from White Paper Requirements
The obligations to draft, notify, and publish a white paper do not apply in cases where:
(a) Crypto-assets are offered for free (excluding cases where personal data or third-party benefits are exchanged).
(b) Crypto-assets are generated through mining as rewards.
(c) Crypto-assets are unique and non-fungible.
(d) The offer targets fewer than 150 persons per Member State, acting independently.
(e) The total consideration for public offers doesn't exceed €1,000,000 in a 12-month period.
(f) Offers are exclusively for and held by qualified investors.
Utility Tokens with Services Not Yet Operational: If the public offer involves utility tokens for services that aren't operational, the offer duration in the white paper must not exceed 12 months.

ISSUING STABLECOIN UNDER MICA

The Markets in Crypto-Assets Regulation (MiCA) classifies two main types of crypto-assets: Asset-Referenced Tokens (ART) and E-Money Tokens (EMT). ARTs aim to maintain a stable value by referencing multiple fiat currencies, commodities, or other crypto-assets. EMTs, on the other hand, are designed to be a medium of exchange and keep a stable value by tying to a fiat currency.

MiCA sets specific criteria to identify significant ARTs and EMTs based on their impact and reach:

Customer Base: A significant ART or EMT should have a user base of not less than 2 million natural or legal persons.
ART Value or Market Capitalization: For an ART to be considered significant, it should have a market capitalization or value exceeding €1 billion.
Transaction Volume: A high number of transactions, with a threshold of no less than 500,000 transactions per day, is another criterion for determining the significance of these tokens.
The volume of transactions: the threshold shall not be lower than €100 million per day.
Number of Member States of use: the threshold shall not be lower than seven.
Audit: Issuers of asset-referenced tokens (stablecoins) shall as soon as possible and in a clear, accurate and transparent manner, disclose on their website the outcome of the audit of the reserve assets. Audit has to be conducted by independent auditors every six months time.

These thresholds ensure that ARTs and EMTs with substantial market influence are subject to more stringent regulatory scrutiny to maintain market stability and protect consumers.

Under this Regulation, crypto-asset issuers are mandated to publish a white paper containing essential information, fulfilling specific disclosure requirements. To alleviate administrative burdens, Small and Medium-sized Enterprises (SMEs) are exempt from this obligation if their total crypto-asset offering is under €1,000,000 within a 12-month period. Additionally, issuers of 'stablecoins' are exempt from requiring authorization from a national competent authority (NCA) if the total outstanding amount of these 'stablecoins' is less than €5,000,000.

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