The Markets in Crypto-Assets Act, also known as MiCA, was finally passed by the European Parliament. While it still needs approval from the European Council, it's safe to say that this regulation will become a reality in no time.
MiCA will provide much-needed guidelines for the operation, structure, and governance of digital-asset issuers, which is a huge step toward legitimising the market. Although there are some voids in the text, particularly when it comes to regulating DeFi, NFTs, or crypto lending, the overall approach seems reasonable and promising.
It's expected that MiCA will facilitate the growth and expansion of European crypto firms, allowing licensed companies to offer their services to the largest single market in the world, encompassing approximately 450 million people.
After the regulation passes, crypto companies will have 18 months to adapt. However, the transition between the ‘status quo’ for compliance and what MiCA will require could potentially be substantial. Therefore, it's crucial for all those who are dealing with crypto assets to start preparing now.
What are the key MiCA innovations?
The MiCA legislation proposes a unified approach to regulating crypto-assets in all 27 EU member states, allowing companies approved in one country to 'passport' their business to other countries with minimal additional paperwork. Such a practice has already worked very well for other financial services allowing companies to market their services across Europe freely.
However, under MiCA, companies will have to face much higher disclosure standards to gain initial approval. First of all, companies dealing in crypto-assets will have to obtain a licence from the local regulator. Accordingly, there may be some initial difficulties in aligning existing national regulations with MiCA.
For example, in France, licensing is currently only mandatory for those cryptocurrencies that provide any type of cryptocurrency deposit, meaning they hold user funds in their accounts. For those that do not provide custody services, licensing is optional. The French Financial Markets Authority (AMF) is already considering a “fast track” option for licensed crypto firms to comply with the forthcoming MiCA laws.
I can't help but mention here Lithuania as one of the few EU countries that already have a well-legislated and structured virtual asset service provider (VASP) registration process. It should help companies operating in Lithuania to adapt to MiCA regulations more easily.
Secondly, anyone looking to offer a crypto-asset publicly will need to produce a white paper that discloses information about it. This will include information about the issuer or the entity looking to admit it to trading, what they will do with the capital raised, what rights or obligations are attached to the asset, and what technology is underlying it.
They will also need to be upfront about possible risks to investing. Many in the crypto sphere will be familiar with the concept of a white paper, but the EU rules will mandate a much tougher, standardized approach. This is not bad, as it may lead to the "cleaning" of the market and higher standards throughout.
Stablecoin issuers, meanwhile, are subject to even tighter rules, including holding sufficient cash to back up customer funds. Furthermore, MiCA will give regulators increased powers to enforce the rules and requirements outlined in the legislation. This includes the ability to impose fines and sanctions for non-compliance. It's also expected that a more robust approach will be taken in some of the technical standards and guidelines currently being worked on and will form part of the MiCA regime.
Who should get ready?
MiCA is concerned with laying down rules for a broad category company referred to as “crypto asset service providers” or CASPs. This covers businesses engaging in all kinds of activities, from operating a trading platform and offering custody to marketing new assets and providing crypto advice. Therefore, any company that operates in the cryptocurrency market in the EU should prepare for the implementation of MiCA. This includes:
- Issuers of crypto-assets: MiCA will set out requirements for the issuance of crypto-assets, including disclosure obligations, prospectus requirements, and minimum capital requirements.
- Crypto-asset trading platforms: Any business that operates a trading platform for crypto-assets will need to comply with MiCA's licensing, governance, and transparency rules. This includes centralized and decentralized exchanges, as well as peer-to-peer trading platforms.
- Crypto-asset custodians will be subject to MiCA's rules on capital requirements, risk management, and custody of assets.
- Crypto-asset service providers, including businesses that provide services such as portfolio management, investment advice, and safekeeping of cryptographic keys.
- Payment service providers: MiCA will also apply to businesses that provide payment services with crypto-assets, such as facilitating transactions or converting crypto-assets into fiat currencies.
Traditional financial institutions, such as banks and investment firms that offer services related to crypto-assets, such as custody or trading, will also need to ensure that their services comply with the new regulatory framework.
MiCA may also apply to non-financial businesses that use crypto-assets for their operations or as a means of payment. For example, companies that accept crypto payments or use blockchain technology to track supply.
On the user side of things, the onboarding process might become a bit longer for crypto exchange clients. Exchanges will need to figure out how suitable a user is for certain kinds of products. At the same time, users will be entitled to more information about the assets listed on exchanges so they can make more educated choices while trading.
Where is the best place to start?
As a European fintech scaleup that provides business banking solutions for digital companies, Nexpay started developing a plan to adapt MiCA before it was even voted on. If your company is involved in the crypto-asset industry and has not yet started looking in this direction, here are some initial steps to start with.
- Understand the requirements. The first step is to carefully review the MiCA legislation and understand the conditions that will apply to your business, e.g. licensing or operational requirements, and investor protection measures.
- Assess your current operations and identify any areas where you need to make changes to comply with MiCA. This may include reviewing your custody arrangements, record-keeping practices, or marketing materials.
- Develop a compliance plan outlining the steps you need to take to comply with MiCA. This plan should include timelines, responsible parties, and any necessary resources.
- Obtain a license. If your business requires a license under MiCA, you should begin the application process as soon as possible. This will ensure that you have sufficient time to meet all the necessary requirements before MiCA takes effect.
- Train your staff. It is crucial to ensure that all staff members are aware of the new regulatory framework and understand their responsibilities under MiCA. Consider providing training sessions or workshops to allow everyone to be up to speed.
Of course, we all need to wait for a more straightforward regulatory framework for the implementation of MiCA, including at the EU countries' level. But in any case, it is a long-awaited start to the regulation that many of us in the industry have been hoping for.
By providing legal certainty and increasing transparency in the cryptocurrency market, MiCA will increase institutional comfort levels with cryptocurrencies and enable more traditional financial institutions to engage with this new asset class. This, in turn, will promote innovation, competition, and growth in the industry while protecting consumers and investors.