Clifford Chance

On 24 September 2020, the European Commission published a proposal for the Markets in Crypto-Assets Regulation (MiCA) which aims to establish a harmonised regulatory framework for the administration, offering and trading of cryptoassets. The proposal is part of a broader Digital Finance Strategy package which also includes proposals for a draft regulation on operational resilience and a pilot regime on distributed ledger technology market infrastructure. Although legal certainty and uniformity of rules are a welcome step, MiCA seems to be attempting to bring cryptoassets to a similar standard as that which already applies to financial instruments. This may indirectly benefit established firms over newer entrants and so could be controversial.

What does MiCA do?

MiCA creates a regulatory framework for cryptoassets in the EU which:

• regulates the issuance of, and admission to trading of, cryptoassets, including transparency and disclosure requirements;
• introduces licensing of cryptoasset service providers, issuers of asset-referenced tokens and issuers of electronic money tokens;
• clarifies the regulatory obligations applicable to issuers of asset-referenced tokens, issuers of electronic money tokens and cryptoasset service providers including consumer protection rules for the issuance, trading, exchange and custody of cryptoassets;
• strengthens confidence in cryptoasset markets by creating a market abuse regime prohibiting market manipulation and insider dealing; and
• clarifies the powers, including the cooperation and sanctions framework, available to competent authorities.

Who would be caught by MiCA?

Broadly, MiCA will apply to three categories of persons:

1. issuers of cryptoassets. This does not necessarily mean the entity or firm that has created the cryptoassets. Instead, the issuer of a cryptoasset is the "legal person who offers to the public any type of cryptoassets" or "seeks the admission of such cryptoassets to a trading platform for cryptoassets". The specific framework also depends on what type of cryptoasset is being offered (see below).
2. cryptoasset service providers. This includes any person whose occupation or business is the provision of one or more cryptoasset services to third parties on a professional basis; and
3. any person, in respect of acts that concern trading in cryptoassets that are admitted to trading on a trading platform for cryptoassets operated by an authorised cryptoasset service provider, or for which a request for admission to trading on such a trading platform has been made.

Are there any boundaries to the definition of cryptoasset?

The definition of cryptoasset is very broad and is aimed at capturing not only traditional cryptocurrencies, such as bitcoin but also stablecoins and utility tokens. However, the definition of cryptoasset does not include:

• financial instruments for the purposes of the Markets in Financial Instruments Directive II (MiFID II); or
• securitisations as defined under the Securitisation Regulation.

If a cryptoasset falls within one of these exclusions (such as a security token which constitutes a security under MiFID II), the existing applicable regulatory regime would apply to that cryptoasset, rather than MiCA.

My firm could be an "issuer of cryptoassets", what does MiCA mean for me?

MiCA creates a base regime for all issuers of cryptoassets and imposes additional, or different, obligations on (i) issuers of asset-referenced tokens or (ii) issuers of e-money tokens.

Base regime requirements

• Legal form – An issuer of cryptoassets will have to be incorporated as a legal entity. Although an unexceptional requirement in the context of traditional finance, in the crypto sphere this may come as a bit of a surprise – a principal selling point of various blockchain and DLT initiatives is that they are decentralised and rely on consensus-building amongst network participants, rather than on decision-making by, and rights and obligations of, a single entity.
• White paper – MiCA also requires an issuer to publish a white paper in respect of the relevant cryptoassets and to notify such white paper to its competent authority. The white paper regime under MiCA borrows heavily from the existing Prospectus Regulation regime. A white paper should, amongst other things, describe the crypto project and the main participants, describe the terms of the offer to the public, set out the rights attaching to the cryptoassets in question, disclose the key risks associated with the cryptoassets and contain a summary, to help potential purchasers make an informed decision regarding their investment.

Although a white paper does not need to be approved prior to publication, the relevant competent authority may require amendments to the white paper or suspend the offer or trading of the cryptoassets.

Issuers of asset-referenced tokens (ARTs)

• Authorisation requirements – In order to offer ARTs to the public in the EU or be admitted to trading on a crypto platform, an issuer of ARTs must be established and authorised (licensed) in the EU. This will be a significant hurdle for the development of stablecoins in the EU.
• Systems and controls – An issuer of ARTs is also required to put in place "robust governance arrangements … with well-defined, transparent and consistent lines of responsibility" in order to, amongst other things, "identify, manage, monitor and report the risks to which [it is] or might be exposed".
• Requirements on reserve assets – Reserve assets must be held in custody on certain prescribed terms and can only be invested in highly liquid financial instruments.
• Detailed conduct of business and ongoing requirements – There are detailed requirements in respect of treating customers fairly, ongoing disclosure, complaint handling, governance and systems and controls as well as prudential requirements.
• Exemptions – The regime envisages certain partial exemptions depending on the type of offer (e.g., to qualified investors) or if the issuer is already regulated (e.g., as an EU credit institution).

Issuers of e-money tokens

• Only allowed for banks and e-money firms – The issuance of e-money tokens is only permitted for EU credit institutions and for electronic money institutions (authorised under the electronic money directive).
• Issuance and redeemability – E-money tokens must amount to a claim on the issuer and must be redeemable at par.
• Investment of reserve funds – Funds received by issuers of e-money tokens in exchange for e-money tokens, if invested, must be invested in assets denominated in the same currency as the one referenced by the e-money token.
• White paper – One substantively new requirement is that issuers of e-money tokens should publish a white paper in respect of such e-money tokens.

Although these tools are familiar in the context of financial instruments and services, some of the concepts sit at odds with current practices in the crypto sphere. For example, formal governance arrangements are not always seen with respect to cryptoassets, as the underpinning DLT relies on consensus-building and (at least in theory) envisages a community of equals. Further, in the case of stablecoins underpinned by cryptoassets, it is often unclear whether the underlying cryptoassets are formally subject to any third-party custody arrangements or are, instead, immobilised by way of smart contracts and/or held by the stablecoin issuer itself.

Significant tokens and college of supervisors

MiCA introduces the concept of "significant" ARTs and e-money tokens. The "significance" of any tokens is to be assessed by the European Banking Authority (EBA), considering a number of factors such as the size and customer base of the tokens, the number or value of transactions carried out and the interconnectedness with the financial system.

The classification of any ARTs or e-money tokens as significant tokens triggers certain additional prudential requirements, such as more regulatory capital and the maintenance of a liquidity policy with respect to any underlying assets. Further, an issuer of significant tokens is subject to supervision by a college of supervisors, comprising the EBA, ESMA, the competent authority of the issuer's home member state and, broadly, the competent authorities of the most relevant cryptoasset service providers for the functioning of such significant tokens and the ability of the issuer to discharge its various obligations under MiCA.

My firm provides cryptoasset services, do I need to be licensed?

Generally yes, the provision of any of the cryptoasset services listed above will trigger an authorisation requirement.

However, authorised credit institutions and authorised MiFID investment firms may provide cryptoasset related services without having to obtain a separate authorisation. Note that these firms would still have to comply with the relevant supervisory framework imposed under MiCA, including conduct of business obligations and governance arrangements, which may vary from existing applicable standards.

What are the key requirements for cryptoasset service providers?

• Legal form requirements - a cryptoasset service provider should be a legal person who has a registered office in a member state and has been authorised by the relevant competent authority.
• Systems and controls - a cryptoasset service provider will have to comply with detailed requirements in respect of its governance arrangements and risk management including systems and controls requirements.
• Prudential requirements - a cryptoasset service provider should maintain prudential safeguards, either in the form of own-funds regulatory capital or by taking out insurance.
• Activity specific requirements - MiCA provides details on the terms on which various cryptoasset services are to be provided, including, for example, the custody and administration of cryptoassets on behalf of third parties, the operation of trading platforms for cryptoassets, the placing and execution of orders for cryptoassets on behalf of third parties and the provision of advice on cryptoassets.

What are the next steps?

The proposal remains subject to the agreement of the European Parliament and the European Council. It is likely to take many months for MiCA to be agreed and come into effect.

Conclusion

The proposal for MiCA aims to introduce an extensive cryptoasset regulatory regime which uses a number of tools and concepts developed over the past decades by reference to financial instruments and services. The proposal is very ambitious in its scope and the legislator has clearly tried to address many of the regulatory challenges posed by the decentralised nature of the networks where cryptoassets are created and exist. However, it is also clear that some of the proposed requirements are at odds with how the crypto sphere currently operates – and, if implemented in their current form, would therefore require substantial changes to a number of cryptoasset-related business models. The cost of compliance with the new regime could be significant, particularly for new entrants, and so MiCA may indirectly benefit established firms. We may see some changes or concessions in this regard over the course of the coming months as the proposal is debated further.