Much Ado about Crypto – the Draft EU Crypto-Assets Regulation
MiCA (the European Commission’s proposed regulation on markets in crypto-assets) aims to bring crypto-assets (in particular cryptocurrencies) into the regulatory sphere on a harmonised basis across the EU. This briefing looks at the proposed regulatory framework in the context of the Commission’s Digital Finance Package, and its likely impact in Ireland.
European Digital Finance Agenda
MiCA is part of the Digital Finance Package adopted by the European Commission (the “Commission”) on 24 September 2020. It results from the increased profile of cryptocurrencies such as Bitcoin since 2017, and covers crypto-assets that do not qualify as financial instruments, deposits, structured deposits or securitisations under EU financial services legislation, and e-money tokens. MiCA will introduce an authorisation regime for issuers of asset-referenced tokens, and for crypto-asset service providers, and also contains a number of conduct of business requirements.
In conjunction with MiCA, the Commission proposed a pilot regime for market infrastructures to trade and settle transactions in crypto-asset financial instruments. This will take the form of a regulatory ‘sandbox’ which will allow for temporary derogations from existing rules so that the European Securities and Markets Authority (“ESMA”) and national competent authorities (“NCAs”) can gain experience in the area of distributed ledger technology (“DLT”) in market infrastructures, while managing risks to investor protection, market integrity and financial stability.
The MiCA definition of a crypto-asset is broad: “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. However, as mentioned above, MiCA carves out already-regulated financial instruments, deposits, structured deposits or securitisations from its scope.
Single European Regime
Once enacted, MiCA will supersede any national crypto-assets regulatory frameworks that are applicable in various EU Member States where those frameworks are not based on existing EU financial services legislation. In Ireland, crypto-assets are not, at the time of writing, subject to any bespoke regulatory regime but, depending on their structure and the types of services provided by their issuers or those involved in placing them for trading, crypto-assets may fall under existing financial services legislation, such as MiFID II.
In April 2020, the Irish financial services regulator, the Central Bank of Ireland (“CBI”), wrote to the Commission to express its support for the Commission’s MiCA-related consultation, welcoming “the development of a more harmonised approach to crypto assets” but also striking a more cautious note by warning that “expanding the definition of ‘e-money’ to include payment tokens, where there is no central issuing body or intrinsic value, could lessen consumer protections”. The CBI also cautioned that there are concerns in respect of stablecoins and anti-money laundering and stated that where stablecoins would be perceived as a (quasi) currency, they should be banned.
While MiCA, once enacted, would represent a radical shift in the treatment of crypto-assets in Ireland and other EU jurisdictions, it is important to bear in mind that the proposal is only the first step in a long European legislative process and the current draft of MiCA is likely to be amended substantially.
New Regulatory and Supervisory Regime
MiCA will create a new European licensing regime for the following types of entities:
- Crypto-asset issuers (“CAIs”) – a CAI is “any legal person who offers to the public any type of crypto-assets or seeks the admission of such crypto-assets to a trading platform for crypto-assets.” Issuers of ‘significant’ crypto-assets will be subject to supervision by the European Banking Authority (“EBA”) while others will be supervised by their NCAs.
- Crypto-asset service providers (“CASPs”) – this category is further subdivided into:
- CASPs that provide crypto-asset trading platforms; and
- CASPs involved in the placing of crypto-assets.
All CASPs will need to be authorised in at least one EU Member State before they are allowed to passport their services across the EU (such as custody or trading of crypto-assets), and ESMA will maintain a register of CASPs. The current draft of MiCA sets out general requirements that CASPs would need to comply with, including requirements relating to outsourcing, the safeguarding of crypto-assets and organisational requirements. Further specific requirements will apply, for example, in relation to the custody and administration of crypto-assets on behalf of third parties and the exchange of crypto-assets into either cryptocurrency or fiat currency.
There will be eight categories of crypto-asset services which will trigger a licensing requirement for the CASP, which broadly reflect the existing investment services and activities under MiFID II. The types of services will be:
- the custody and administration of crypto-assets on behalf of third parties;
- the operation of a trading platform for crypto-assets;
- the exchange of crypto-assets for fiat currency that is legal tender;
- the exchange of crypto-assets for other crypto-assets;
- the execution of orders for crypto-assets on behalf of third parties;
- the placing of crypto-assets;
- the reception and transmission of orders for crypto assets on behalf of third parties; and
- providing advice on crypto-assets.
Crypto-Asset Categories Under MiCA
MiCA will establish distinct frameworks for three different categories of crypto-assets.
These are crypto-assets which “purport to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets”.
CAIs of asset-referenced tokens will need to be authorised by the NCA of an EU Member State, unless they are already authorised as a credit institution or as a MiFID investment firm. In addition, a draft white paper relating to the offer of crypto-assets will need to be submitted to, and approved by, the CAI’s NCA prior to any asset-referenced tokens being offered to the public.
Crypto-assets “the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender” will be known as e-money tokens.
CAIs of e-money tokens must be authorised as a credit institution or an e-money institution and will therefore be required to comply with the provisions of the revised Electronic Money Directive (“EMD2”). The regulation of e-money tokens under MiCA will mostly be aligned with the provisions of EMD2. Similar to asset-referenced tokens, issuers of e-money tokens will also be required to submit a white paper to their NCA at least 20 days before publication, but unlike white papers for asset-referenced tokens, e-money white papers will not need to be approved by the NCA prior to publication.
This category will include, but not be limited to, so-called utility tokens which are tokens “intended to provide digital access to a good or service, available on DLT, and that is only accepted by the issuer of that token.” It will also include ‘standard’ cryptocurrencies such as Bitcoin.
For this category of crypto-assets, CAIs will not need to be licensed to offer them to the public or to seek access to a crypto-exchange. They will be permitted to carry out their activities throughout the EU, provided they comply with specific provisions of MiCA relating to market communications and the drafting of a white paper, which must be submitted to the CAI’s NCA. Prior regulatory approval is not a requirement, however the NCA will have the power to suspend or prohibit offers where MiCA requirements are not met.
Depending on their structure, stablecoins could be considered either asset-referenced tokens or e-money tokens. While e-money tokens maintain a stable value by reference to a single fiat currency, asset-referenced tokens do so by reference to several fiat currencies, one or more commodities, one or more crypto-assets, or a combination thereof.
Importantly, and as mentioned above, for issuers of asset-referenced tokens and e-money tokens where the EBA deems those tokens to be ‘significant’, the EBA will supervise those issuers and may apply enhanced prudential requirements to them. This enhanced supervision is intended to mitigate the risks of financial instability posed by such crypto-assets and would include higher capital requirements, requirements for a liquidity management policy, investment rules and custody requirements for reserve assets, and the implementation and maintenance of a remuneration policy.
Acquiring Transaction Approval Regime
MiCA will require NCAs to review, and approve or oppose, direct and indirect acquisitions of capital or voting rights in CASPs and CAIs of asset-referenced tokens established in their jurisdiction. This regime will be similar to existing acquiring transaction regimes in place for regulated entities such as MiFID investment firms or credit institutions.
Notifications will be necessary once the direct or indirect proportion of voting rights or capital held by an individual or a legal person reaches or exceeds 10%, 20%, 30% or 50% or if the CAI or the CASP would otherwise become the legal person’s subsidiary. Once the required information has been submitted, the relevant NCA will have 60 working days to assess the proposal and determine whether to oppose it, but this period may be extended if the NCA requires further information.
Market Abuse Regime
Finally, the Commission’s MiCA proposal includes a bespoke market abuse regime for crypto-assets admitted to trading on trading platforms operated by CASPs, or in respect of which a request for admission to trading has been made.
That proposal involves prohibitions on insider dealing, market manipulation and the unlawful disclosure of inside information, together with provisions concerning when inside information should be disclosed and when such disclosure may be delayed. The Commission felt that to bring crypto-assets into the scope of the Market Abuse Regulation itself would be disproportionate.
Conclusion and Next Steps
It is clear that the Commission’s aim is to create an ambitious regime for the harmonised regulation of otherwise-unregulated crypto-assets which should address the increasing fragmentation of the legal framework surrounding crypto-assets and crypto-asset services across Europe, and provide greater legal certainty for CAIs, CASPs and consumers.
Similar to the CBI, the European Central Bank (“ECB”) published an Opinion on the MiCA proposal on 22 February 2021 in which it broadly welcomed the intention behind MiCA, while suggesting various adjustments and clarifications. In particular, where a significant issuer is also a significant bank for Single Supervisory Mechanism (“SSM”) purposes, the ECB has asked for a clearer delineation between the roles of the EBA under MiCA and the ECB as SSM single supervisor. It has also recommended that more clarity be included about the distinction between crypto-assets that may be characterised as MiFID II financial instruments and those which would fall under the scope of MiCA. Further, the ECB would like to see additional safeguards in respect of stablecoins included in the proposal, such as prudential and liquidity requirements for its issuers which are proportionate to the risks they potentially pose to financial stability.
One area which merits further consideration is the relationship between MiCA and the new EU Crowdfunding Regulation (“CFR”) that aims to harmonise regulatory rules on crowdfunding services providers, given that a digital asset under MiCA could also be considered debt or equity funding under CFR. We will explore the CFR and its potential interplay with MiCA in a subsequent briefing.
The finer details of MiCA will be clarified over the course of 2021 and 2022 as the proposal is reviewed, and likely amended, by the EU Council and the European Parliament. It is expected that MiCA will enter into force by 2024.
We will continue to track MiCA as it makes its way through the European legislative process and provide updates on Irish and European developments in crypto-asset regulation.
With thanks to Conor J. O’Brien, trainee in Arthur Cox, for his help in preparing this briefing.