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The EU brings crypto assets, crypto assets issuers and crypto asset service providers under a regulatory framework for the first time. The much-anticipated regulation is expected to completely change the crypto landscape.
On 30th of June, the European Union (EU) policymakers, after nearly two years of negotiations, have finally reached to a provisional agreement with regards to a landmark regulation on digital assets that is harmonized across EU member states.
The proposed legislation, Markets in Crypto Assets Regulation (“MiCA”), main objectives will cover issues such as, consumer and investor protection and market integrity, support for innovation, financial stability, and finally legal certainty.
Accordingly, the main provisions of this landmark Regulation relate to:
- the purpose and scope of the regulation;
- the rules applicable to the issuance of utility crypto assets;
- assets – referenced tokens;
- electronic money crypto assets;
- the rules applicable to crypto assets service providers.
Purpose and Scope of MiCA
The objective of the law is to establish guidance on:
- Disclosure requirements and Transparency for the admission and issuance of trading crypto assets;
- Supervision and Authorization requirements of crypto asset providers, issuers of electronic money tokens and issuers of asset-based tokens;
- Governance and operation of crypto asset providers, issuers of electronic money tokens and issuers of asset-based tokens;
- Consumer protection policies for issuance, exchange, trading, and custody;
- Safeguards with regards to market abuse in order to ensure integrity of the crypto- asset market.
The proposed regulation will apply to individuals within the EU who issue and/or provide services relating to crypto assets.
The regulation does not apply to:
- Crypto assets that are financial instruments in the sense of equity securities issued by companies with shares, debt securities, units or shares in collective investment undertakings and financial future contracts or electronic money except where the latter qualifies as electronic money tokens under the regulation;
- Specific entities or individuals, accordingly the European Central Bank and national central banks of member states, insurance undertakings, liquidator or administrator acting in insolvency procedure, the European Investment Bank, public international organizations, persons providing crypto asset services exclusively for their parent undertaking, their subsidiaries or other subsidiaries of their parent undertaking. Moreover, authorized credit institutions and investment firms will be subject to certain provisions of the regulation.
Rules governing the issuance of crypto utilities
- MiCA will admit crypto assets offered to the public or seeking admission on a trading venue, only if the issuer is a legal entity and a white paper complying with the aforementioned regulation has been prepared, admitted to the competent authority and published;
- Crypto asset offered free of charge or automatically created by mining or transaction validation, unique and nonfungible (NTFs) or offered to less than 150 individuals per member state and the amount of the offer does not exceed 1 million euros within a timeframe of 12 months or when the offer is reserved solely for qualified investor are not under an obligation to produce a white paper;
- Fair, honest, and professional conduct as well as communications, conflict of interest, management and compliance with protocol security standards will be covered in the regulation;
- Moreover, the regulation provides for a consumer the right to withdraw which can be exercised over a period of 14 calendar days.
It should be noted that the regulation will cover crypto assets intended to provide digital access to a service or good, available on the Distributed Ledge Technology (“DLT”), which can be accepted only by the issuer of this token, the utility token. As such, these utility tokens can be of special type, since they have no financial interest related to the operation of a digital platform and services and may include cryptocurrencies such as Bitcoin (BTC), Ether (ETH).
Issuance of Asset-Referenced Tokens
- MiCA will cover Crypto Asset Tokens which aim to maintain a stable value by reference to several currencies, on or more commodities, one or more crypto assets or a holder of these assets;
- In order for an individual wishing to offer or apply for admission to trading on a trading venue of asset tokens must obtain authorization from the competent authority of its home member state;
- A white paper must be prepared, and authorization gives access to the European Passport;
- An issuer will be subject to obligations (conflict of interest, marketing communications etc.);
- Reserve assets (350,000 or 2% of such assets) must be efficiently and prudently managed, segregated from the issuers assets and entrusted to a credit institution or crypto asset service provider;
- Importantly, interest payments to holders of such tokens is strictly prohibited.
Issuance of Crypto Assets of Electronic money
- This category consists of crypto assets intended as a means of payment with the purpose of stabilizing their value by reference to a fiat currency.
- Similarly, authorization must be granted, and a white paper is required.
- Interestingly, a way of derogation from the Electronic Money Directive, no issuer of electronic money tokens or crypto asset service provider shall grant interest to the holders of such tokens.
Providers of Crypto Asset Services
- According to the new Regulation, service providers must have their office within the European Union by a legal person, authorized as crypto asset service providers;
- Authorization grants valid permit to provide their services throughout the Union, the services which authorization is granted;
- Crypto Asset Service Providers must act fair, honest, professional in the best interest of their clients and provide such clients or potential clients with fair and not misleading information. They must warn on the risk associated with crypto asset and publish their pricing policy on their website.
Finally, the MiCA regulation will better protect Europeans who have invested in such assets while preventing the misuse of crypto assets as well as being innovative friendly in order to maintain EU’s attractiveness.
MiCA will come into force by the end of 2022.
The information provided by A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.
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