Key Contacts: Andrew Tzialli – Partner

Whilst the crypto and digital asset industry remains an emerging market, it continues to rapidly gain traction across the globe. However, due to the often lack of regulatory frameworks, investors and traders have been facing significant risks and uncertainties, which has inhibited the growth of this market. Headline grabbing crypto company capitulations such as those experienced by Celsius and FTX, have only added to the unease within the sector.

Across the European Union, that’s now set to change.  As of 20 April, EU lawmakers voted in favour of passing the Markets in Crypto Asset Regulations (MiCA), a new regulatory framework for digital assets. This legislation will make the EU the largest regulated area on earth for digital assets.

What is MiCA?

MiCA is a set of regulations proposed by the EU that aims to regulate the issuance, distribution, and trading of digital assets, including cryptocurrencies, security tokens, and stablecoins. It is designed to provide clarity and legal certainty for market participants in the digital asset industry, including issuers, investors, and service providers.

MiCA aims to create a comprehensive regulatory framework that covers all aspects of the digital asset market, from initial issuance to trading, custody, and settlement. It also includes rules on capital requirements, investor protection, and anti-money laundering and counter-terrorist financing (AML/CFT) measures.

MiCA will be phased in across the EU in two parts – the first part will deal with stablecoins which will become applicable within 12 months’ time (around Q2 2024), while the second part will address Crypto Asset Service Providers (CASPs) which will apply within 18 months (around Q4 2024).

How will MiCA impact the crypto and digital asset industry?

The implementation of MiCA is expected to have a significant impact on the digital asset industry. The regulation will create a level playing field for all market participants, which will help to build trust and confidence in the industry. It will also provide a clear set of rules and guidelines for issuers, investors and service providers, which will reduce regulatory uncertainty and increase transparency.

One of the significant impacts of MiCA is that it will require all digital asset service providers to be licensed and registered with the relevant authorities. This will include crypto exchanges, wallet providers and custodians. This licensing requirement will ensure that service providers comply with the relevant regulations, including AML/CFT measures, which will help to prevent financial crimes such as money laundering and terrorist financing.

MiCA will also introduce a regulatory framework for stablecoins, which are digital assets that are pegged to a fiat currency or other assets. The regulation will require stablecoin issuers to hold sufficient reserves to back the coins and ensure that they maintain a stable value. This will increase investor confidence in stablecoins and reduce the risks associated with their issuance and use.

Another significant impact of MiCA is that it will establish a new category of digital assets called “utility tokens.” These tokens are not considered securities and are used to access specific products or services. The regulation will provide clarity on the classification of utility tokens and their regulatory requirements, which will reduce uncertainty for issuers and investors.

The EU Parliament also approved a separate item of legislation (the Transfer of Funds regulation) which aims to reduce the anonymity that underpins the fundamentals involved in transfers of cryptocurrencies like bitcoin and certain stablecoins. This applies the “travel rule,” to the crypto industry, which already requires financial companies to screen, record and communicate information on both sender and recipient.

Conclusion

The clarity and legal certainty provided for market participants by MiCA, will help to build trust and confidence in the industry, reducing regulatory uncertainty and increasing transparency. It may also encourage more investors that were previously concerned about the regulatory “grey areas”, to participate in the digital asset market.

Given the breadth of the legislation and the individuals and businesses it will apply to, the impact of MiCA will be felt not only in the EU but also across the globe, as other countries may look to adopt similar regulations.

The implementation of MiCA is a significant step towards regulating the crypto and digital asset industry in the EU and it firmly places the EU ahead of some of the world’s most substantive digital asset markets, being the U.S. and U.K in particular.