On 23 September 2020 the European Commission published its long-awaited draft regulation on markets in crypto-assets (MiCA), with its accompanying annex and a draft regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLTR). The proposals, which are part of the broader Digital Finance Strategy package, are the first European-level legislative initiatives aiming to introduce harmonised and comprehensive framework for issuance, application and provision of services in crypto-assets, and to create bespoke legal regime for the practical application of DLT in post-trade services. The draft legislative proposals provide a set of prescriptive rules that – once formally adopted – will shape conduct of business in European markets in crypto-assets. The following note provides an overview of 10 key things that you need to know about the proposed legislation.
1) Scope and subject matter
When formally adopted, MiCA will apply to persons involved in the issuance of crypto-assets, as well as services related to crypto-assets in the European Union (EU), which are not regulated by other pieces of European law. As such, the draft legislation sets out rules on transparency and disclosure requirements for the issuance and admission to trading of crypto-assets, the authorisation and supervision of crypto-asset services providers and issuers, the operation, organisation and governance of issuers of asset-referenced tokens and electronic money tokens and crypto-asset service providers, consumer protection rules as well as measures to prevent market abuse and to ensure integrity of markets in crypto-assets. DLTR will provide regulatory framework for the development of DLT multilateral trading facilities (DLT MTFs) and DLT securities settlement systems, including for granting and withdrawing specific permissions and exemptions.
Once formally adopted, MiCA will set out harmonised EU-level definitions of all key terms relating to activities undertaken in crypto-asset markets. This includes definitions of crypto-assets, various types of tokens (asset-referenced, significant asset-referenced, electronic money, utility), crypto-asset service and service-providers, the operation of a trading platform in crypto-assets, the custody and administration of crypto-assets and other. Draft DLTR includes, among other, definitions of DLT MTF, DLT securities settlement systems and DLT transferable securities.
3) Offering and marketing of crypto-assets, other than asset-referenced tokens and e-money tokens
Draft MiCA sets out detailed requirements applicable to persons seeking to offer crypto-assets to the public in the EU, or to request an admission for such crypto-asset to trading on a trading platform for crypto-assets. This includes specific requirements for the issuers of crypto-assets, such as an obligation to publish a white paper containing detailed description of the planned crypto-asset offering or admission to trading. The draft legislation also includes requirements applicable to marketing communications relating to offering of crypto-assets or admission of such crypto-assets to trading, but it does not require issuers of crypto-assets to obtain competent authorities’ ex-ante approval for a white paper or related communications. Finally, the draft MiCA sets out additional obligations applicable to crypto-asset issuers (such as obligation to act honestly, fairly and professionally) and includes provisions on liability of issuers of crypto-assets.
4) Issuance of asset-referenced and e-money tokens
Draft MiCA sets out a separate set of requirements applicable to the issuance of asset-referenced tokens to the public in the EU or their admission to trading on a trading platform. This includes obligation for the issuer to obtain a prior authorisation by a National Competent Authority (NCA) and an obligation to publish a white paper approved by an NCA. In addition, issuers of asset-referenced tokens will have to comply with bespoke own fund requirements, governance arrangements, disclosure requirements, conflict of interest and complaints handling mechanisms, obligation to hold reserve of assets, as well as having in place polices and procedures governing custody of the reserve assets, investment of the reserve assets and planning on orderly wind-down. Finally, the draft law includes separate, more stringent provisions applicable to issuers of asset-referenced tokens that will be designated as “significant”. In addition to rules applicable to general issuance of crypto-assets and assets-referenced tokens, the draft MiCA includes a separate set of requirements applicable to issuers of e-money tokens. Subject to exemptions, this includes an obligation for the issuer to be authorised as a credit institution or an electronic money institution, and comply with the applicable legislation, as well as publishing a white paper and notifying it to the relevant NCA. Draft legislation also provides for categorisation of certain e-money tokens as “significant”, that will be subject to additional requirements and supervision.
5) Authorisation and operating conditions for crypto-asset service providers
The draft legislation requires that provision of services in crypto-assets should only be performed by legal persons that have a registered office in the EU and which have been authorised as crypto-asset service providers in accordance with MiCA. Authorised crypto-asset service providers will be able to provider their services cross-border in all EU jurisdictions. Authorised crypto-asset service providers will be subject to prudential requirements – composing of own funds and an insurance policy – the amount of which will depend on the nature of service provided. The draft legislation also sets out prescriptive organisational and disclosure requirements, including rules on safekeeping of client’s funds and outsourcing. Finally, the draft MiCA sets out detailed requirements applicable to crypto-asset service providers authorised to provide various services, including custody services, operating of trading platforms for crypto assets, exchanging services between crypto-assets and fiat currency or between other crypto-assets, executing of orders for crypto-assets on behalf of third-parties, as well as providing placement services, reception and transmission of orders in crypto-assets and advice on crypto-assets.
6) Access to third-country crypto-asset service providers
Contrary to other pieces of European capital markets legislation, draft MiCA does not include a separate regime for third-country crypto-asset service providers. Instead, it provides that persons based in the EU will be able to receive services offered by crypto-asset service providers established in a third-country on the reverse solicitation basis, so on the EU person’s exclusive initiative. When such a third-country firm would seek to actively solicit clients based in the EU and/or to promote or advertise its services in the EU, it will need to obtain authorisation as an EU crypto-asset service provider. The draft law includes a mandate for the Commission to assess, in due course, whether an equivalence regime should be established for third-country crypto-asset service providers.
7) Prevention of market abuse in markets in crypto-assets
Finally, draft MiCA sets out anti-market abuse rules applicable to acts carried out by any person and that concerns crypto-assets that are admitted to trading on a trading platform or for which a request for admission to trading on such trading platform has been made. This includes requirements concerning disclosure of inside information, prohibition of insider dealing, prohibition of unlawful disclosure of inside information and prohibition of market manipulation.
8) Requirements for DLT market infrastructure
DLT MTFs will have to be operated by an investment firm authorised in accordance with MiFID, or by a market operator, whether DLT securities settlement systems will have to be operated by a central securities depository as authorised in accordance with CSDR. Operation of DLT market infrastructure will, however, be subject to a separate permission, conditions of which are set out in the draft DLTR. The draft legislation sets out limitations in respect of financial instruments that could be traded on settled by using DLT market infrastructure. Permitted DLT transferable securities will certain shares and bond asset classes (with exception of sovereign bonds), subject to additional threshold conditions. In addition, operators of DLT market infrastructure will have to establish a clear and detailed business plan describing how they intend to carry out their services and activities, and comply with additional organisational and conduct requirements prescribed by DLTR.
9) Exemptions for DLT market infrastructure and pilot regime time-limits
Draft DLTR allows operators of DLT MTFs to request certain exemptions from MiFID and MiFIR, subject to proposing suitable compensatory measures “to meet the objectives pursued by the provisions from which an exemption is requested”. Likewise, operators of DLT securities settlement systems will be able to request certain targeted exemption from the CSDR provisions, list of such exemptions being specified in DLTR. The pilot regime for DLT market infrastructure as set out by DLTR will be initially established for five years, following which ESMA is to report to the Commission on the functioning of the regime.
10) Next steps
Both draft regulations will now be transferred to the European Parliament and to the Council of Ministers for review and adoption. The legislators can introduce additional amendments so the final version of the legislation might differ to some extent from the draft proposed by the Commission. Legislative review of complex files can take between 18 and 24 months, followed by a transition period that will be prescribed in a final legal act. Stakeholders are therefore encouraged to engage in legislative review from the early stages thereof.