11-07-2022

The market in crypto-assets has frequently been compared to the wild west due to its lack of regulatory framework. This is however about to change to a certain extent now the Council of the EU and the European Parliament have finally reached a provisional agreement on the Markets in Crypto-Assets (MiCA) Regulation. The proposal, dating back to September 2020, is meant to create a safer market for investors while also providing the right tools to enhance the digital revolution.

A Framework to embrace the digital age

The emergence and triumph of crypto currencies, like Bitcoin, did not go unnoticed. For the last few years, its popularity has been increasing tremendously. This rapid innovation has, however, caused many regulatory gaps. National jurisdictions worldwide have tried to remedy some of these gaps by implementing national regulation. For example, the Belgian legislator has taken some (small) regulatory steps by amending its anti-money laundering act from 2017 and requiring crypto exchanges (insofar they trade between virtual and fiat currency) and wallet providers to register with the Belgian regulator. Non-EEA providers of such services have even been banned from Belgium.

Since crypto-assets are themselves block chain instruments that can easily be traded all over the world, there has been an obvious need for regulation with a wider scope. The EU has therefore finally agreed upon a regional legal framework which aims to provide more certainty, innovation, protection and financial stability in the light of the internal market.

Not all kinds of crypto-assets are subject to MiCA. The proposal makes a distinction between three different tokens: (1) utility tokens, (2) asset-referenced tokens and (3) electronic money tokens. The issuance of both asset-referenced tokens and electronic money tokens will be strongly regulated. Crypto currencies like Bitcoin do not fall into one of these categories. Most stablecoins on the other hand can be qualified as asset-referenced tokens.

A flood of regulation

Firstly, MiCA contains rules providing transparency and disclosure requirements for the issuance and admission to trading of crypto-assets. A so called ‘white paper’ will fulfill the role as information document containing all mandatory disclosure requirements. Detailed descriptions of the issuer, the type of crypto-asset, the underlying technology and standards, the rights and obligations attached to the crypto-asset and so on must be provided in this document. On top of that, the crypto-asset white paper must include a brief and non-technical summery including all key information.

Secondly, the framework entails the authorisation and supervision of crypto-asset service providers and issuers of asset-referenced tokens or electronic money tokens. Besides that, MiCA lays down rules concerning the operation, organisation and governance of these issuers and service providers. For example, effective policies and procedures to prevent, identify, manage and disclose conflicts of interest will have to be implemented.

Finally, with the aim of mitigating the risks of the market in crypto-assets for consumers and other actors, rules for the issuance, trading, exchange and custody of crypto-assets are provided as well as measures to prevent market abuse. Crypto-asset service providers will, inter alia, be subject to a general obligation to act in the best interest of their clients. Furthermore, the well-known prohibition of insider dealing will apply when acquiring or disposing crypto-assets.

Influence on the financial market

MiCA will fill a lot of gaps that urgently needed to be filled. Regulation on EU level definitely offers European citizens more certainty and protection than national legislation, ensuring also that the crypto industry can operate more freely and on the same level across the EU.

According to certain people it is regrettable that MiCA is not more ambitious, especially regarding sustainability. Industry backlash on previous versions of MiCA made certain compensations inevitable. Nevertheless, it is a first step in the right direction.

It could be questionned whether regional legislation will provide enough protection against a global phenomenon. Only worldwide standards for crypto-assets will ensure utmost protection. However, these are of course very difficult to reach. Perhaps the EU can be a leader in crypto regulation and more will follow, as they did with respect to privacy laws.

MiCA is expected to enter into force in 2024 following a vote in the European Parliament, which probably will adopt the text in first reading with limited amendments.

Contact: Dieter Veestreaten: dve@astrealaw.be, Jan Van loon: jvl@astrealaw.be