MiCAR: The European Union crypto assets regulation

Introduction

One of the most often heard reasons behind hesitation of bigger financial institutions to enter the crypto currency market is the lack of governmental regulation. While many cryptocurrencies are based around the concept of a fully free, decentralized system, the current lack of regulation poses several risks, ranging from lack of investor protection and customer protection, to an increased risk of fraud. The downfall of cryptocurrency exchange FTX due to fraudulent practices by its owner, and the resulting loss of millions of dollars of customer credits, perfectly illustrates the risk that comes with the lack of regulation of cryptocurrency related practices. However, an increasing number of countries is working on some kind of regulation, including one of the world’s biggest financial players: the European Union. In September of 2020, the European Commission put forward the Proposal for a Regulation on Markets in Crypto-assets (MiCAR), which aims to establish a regulatory framework for crypto-assets within the European Union. In this article, we will highlight the key points of this proposal, as well as the implications for cryptocurrency markets.

Why did the EU propose the MiCAR legislation?

The European Union (EU) has introduced the Proposal for a Regulation on Markets in Crypto-assets (MiCAR) to address the growing challenges associated with the burgeoning crypto-asset industry. This proposal aims to establish a comprehensive regulatory framework that ensures investor protection and market integrity.

Regulation will reduce risks

The lack of regulatory oversight in the crypto-asset industry has resulted in several risks, such as market volatility, fraud and scams, money laundering and terrorist financing, cybersecurity risks, and a lack of investor protection. These risks have highlighted the need for a regulatory framework that would address these challenges and provide legal certainty for the industry.

MiCAR aims to establish clear and consistent rules for the crypto-asset industry within the EU, providing a level of protection for consumers and investors, and contributing to the development of a safe and innovative financial market. Furthermore, by offering regulatory clarity and consistency across EU member states, MiCAR aims to create a more level playing field for the industry and foster cross-border activity in the crypto-asset market. 

Regulation might further open up the crypto market

The implementation of regulatory frameworks for crypto-assets would provide greater clarity and transparency for companies, customers, and financial institutions, thereby removing some of the obstacles that currently hinder the adoption of cryptocurrencies. This would allow such players to more confidently engage in activities involving crypto-assets, as regulatory guidelines would establish clear standards and expectations for compliance. The resulting increase in clarity and certainty would likely encourage greater participation and investment in the crypto-asset industry, as these entities would be more comfortable with the level of oversight and protection offered by regulation. Overall, the implementation of regulation would create a more stable and transparent environment for the crypto-asset industry, promoting its growth and development.

What are the key points of the MiCAR regulation?

The MiCAR proposal contains several important points that focus on a range of cryptocurrency related topics, including the definition of crypto-assets, rules for governance of trading platforms, and regulation for stablecoins. 

Definition of crypto-assets

The MiCAR proposal defines crypto-assets as digital representations of value or rights that are issued or transferred using distributed ledger technology (DLT) or similar technology. The definition encompasses a broad range of digital assets, including cryptocurrencies like bitcoin, utility tokens used to access a specific service or product, security tokens that represent traditional financial instruments, and stablecoins. The MiCAR definition also includes any other asset type that may be defined as a crypto-asset by EU law. 

Mandatory authorization for issuers and service providers

The proposal sets forth a mandatory authorization requirement for issuers of crypto-assets and providers of related services. This regulation stipulates that before conducting business, issuers and service providers must obtain authorization from the relevant national authority within the EU. To be authorized, issuers must provide an application containing detailed information about the crypto-asset being offered, including the issuer, the technology used, the investment’s risks and rewards, and the intended use of proceeds. This application must also demonstrate the issuer’s sound and robust governance structure, ensuring the integrity and reliability of the offering. Similarly, crypto-asset service providers must obtain authorization by meeting certain requirements, such as maintaining adequate organizational and technical resources, adhering to relevant anti-money laundering and counter-terrorism financing obligations, and establishing sufficient risk management and internal control mechanisms.

Once authorized, issuers and service providers must undergo ongoing supervision and monitoring by the appropriate authorities to ensure continued compliance with regulatory requirements. The authorities also have the power to suspend or revoke an issuer or service provider’s authorization in cases of non-compliance. The mandatory authorization requirement is a pivotal aspect of the MiCAR regulation, aiming to provide greater transparency and investor protection within the crypto-asset market. By allowing only authorized issuers and service providers to operate within the EU, MiCAR aims to mitigate the risks associated with the crypto-asset market and bolster investor confidence in this emerging sector.

Rules for governance and oversight of trading platforms

The EU regulation also proposes rules for the governance and oversight of trading platforms that facilitate the exchange of crypto-assets. The regulation requires that all trading platforms operating within the EU must be authorized and supervised by the relevant national authority in the EU. 

Some of the specific requirements for trading platforms include:

• Operational standards: Trading platforms must maintain robust operational standards, including measures to prevent market manipulation and ensure the integrity of prices.
• Transparency: Trading platforms must provide clear and transparent information about the assets listed on the platform, including details about the issuer, the technology used, and any risks associated with the asset.
• Custody requirements: Trading platforms must implement adequate security measures to safeguard the assets held in custody, and must have measures in place to prevent loss or theft.
• Risk management: Trading platforms must have adequate risk management and internal control mechanisms in place to identify, manage, and mitigate risks associated with the trading of crypto-assets.
• Licensing requirements: Trading platforms must obtain a license from the relevant national authority before they can operate, and must meet ongoing compliance requirements to maintain their license.

The aim of these requirements is to promote a level of transparency, accountability, and investor protection in the crypto-asset market.

Regulation of “e-money tokens”

MiCAR introduces a new category of crypto-assets known as e-money tokens, which are subject to the same regulatory requirements as traditional e-money. E-money tokens are defined as a type of crypto-asset used as a means of exchange for goods or services, and whose value is pegged to a fiat currency or issued by a central bank.

Under MiCAR, e-money tokens are subject to the same regulatory requirements as traditional e-money, including capital requirements and mandatory prudential supervision by the relevant national authorities. Issuers of e-money tokens must hold sufficient funds to back the token at all times, and these funds must be held in low-risk assets such as bank deposits or government bonds.

The inclusion of e-money tokens within the regulatory framework of traditional e-money aims to provide greater clarity and regulatory oversight to this emerging asset class, which is increasingly being used as a means of payment within the EU. By subjecting e-money tokens to the same regulatory requirements as traditional e-money, MiCAR seeks to ensure that these tokens meet the same safety and reliability standards. This should enhance consumer protection and foster greater confidence in the use of e-money tokens as a means of payment.

Requirements for stablecoins

A final key point of the new regulation is the proposal of specific requirements for stablecoins, which are a type of crypto-asset that aims to maintain a stable value relative to a traditional currency or asset.

The MiCAR regulation requires that stablecoin issuers obtain authorization from the relevant national authority before they can operate within the EU. The authorization process would include an application that provides detailed information about the stablecoin, including the issuer, the technology used, the mechanism used to maintain the stable value, and the intended use of the stablecoin. Additionally, the stablecoin issuer would be required to demonstrate that they have a sound and robust governance structure in place to ensure the stability and reliability of the stablecoin.

The regulation also stipulates that stablecoin issuers must maintain sufficient reserves to cover the value of the stablecoins in circulation at all times. These reserves must be held in a low-risk asset, such as a bank deposit or government bond. The regulation further requires that stablecoin issuers ensure that the stablecoin’s value is not affected by speculative activities, including market manipulation.

Implications of the MiCAR legislation

Broader adaptation of cryptocurrencies

The proposed MiCAR regulation from the European Union represents a significant step towards increased safety and certainty in the crypto asset market. Although it may not address all current issues related to crypto-assets, the MiCAR regulation provides an important foundation for the regulation of this emerging market. By introducing regulatory frameworks for issuers and service providers, trading platforms, e-money tokens, stablecoins, and other crypto-assets, the MiCAR aims to provide greater transparency and regulatory oversight for market participants.

The increased transparency and regulatory certainty provided are expected to make the crypto asset market more attractive to larger investors and financial institutions. By establishing clear standards and expectations for compliance, the regulation is expected to foster greater trust and confidence in the market, leading to broader adoption of and investment in decentralized currencies. This could lead to increased liquidity and stability in the market, further promoting the growth and development of the crypto asset industry.

Possible impacts of regulation on crypto prices

The impact of cryptocurrency regulation on cryptocurrency prices is a complex and multifaceted issue, which has been debated extensively by economists, investors, and market analysts. The introduction of regulation may have both positive and negative effects on cryptocurrency prices, depending on the specific nature of the regulation and its impact on the market.

One potential positive impact of cryptocurrency regulation is increased legitimacy and adoption of cryptocurrency as an asset class. This could attract more institutional investors and larger financial institutions to the market, leading to increased demand and potentially higher prices for cryptocurrencies. Additionally, regulation may provide greater clarity and stability to the market, which could also have a positive impact on prices.

However, there is also the possibility that investors may view regulation as a negative development, as it may impose new costs and requirements on cryptocurrency businesses and traders. Increased regulation may also lead to decreased liquidity in the market, as some participants may exit the market due to the new regulatory requirements or the potential for increased scrutiny and enforcement by regulatory authorities.

Possible consequences for traditional currencies

The MiCAR regulation might also impact traditional currencies, depending on the scope and the nature of the regulation. One possible impact of crypto regulation on traditional currencies is increased competition between decentralized cryptocurrencies and traditional fiat currencies. If cryptocurrencies become more widely adopted and regulated, they could potentially challenge the dominance of traditional currencies in certain markets. This could lead to increased volatility and uncertainty in traditional currency markets, as investors shift their holdings towards cryptocurrencies and away from traditional currencies.

On the other hand, some analysts argue that the adoption of cryptocurrencies could actually strengthen traditional currencies by increasing the efficiency and security of financial transactions. As cryptocurrencies become more widely used and regulated, they may become a complementary asset class to traditional currencies, offering new opportunities for diversification and risk management.

When will the MiCAR legislation be implemented?

It is anticipated that the EU will release the finalized version of the MiCAR in the spring of 2023. Since this new legislation comes in the form of a regulation, it will be effective immediately in EU member states after its official approval by the EU. 

Conclusion

The MiCAR regulation aims to provide a comprehensive regulatory framework for the crypto-asset industry within the European Union. It includes regulations for issuers, service providers, trading platforms, stablecoins, and e-money tokens. The proposed regulation is expected to promote investor protection, transparency, and legal certainty while fostering the growth and development of the crypto-asset industry. The impact of the regulation on cryptocurrency prices and traditional currencies is complex, but if the regulation is proportionate and reasonable, it may provide a stable and secure regulatory environment for cryptocurrency markets, potentially leading to increased investor confidence and demand. Through this way, the MiCAR regulation might contribute to a decentralized, free money world.