Late into the evening right at the end of June, just before the Czech Republic took over the six-month presidency of the Council of the European Union from France, the council and the European Parliament jointly agreed the text of a new landmark framework for cryptocurrencies and assets, the Markets in Crypto Assets (MiCA) legislation. At the time of writing the full text of the policy is not yet available but will be imminently be published in the Official Journal of the European Union.
MiCA will regulate crypto assets and service providers across all member states, and is the first major legislation of its kind in the world. China has outright banned cryptocurrency mining and trading since the autumn of 2021. The United States has had a number of Bills introduced which have largely had minor impact on the sector to date, and with differing regulations in different US states.
One of the main delays to agreeing the MiCA text, reputedly, was negotiation on the extent to which member-state governments should directly regulate the EU’s crypto sector as opposed to an EU-wide agency, specifically the European Parliament’s European Securities and Markets Authority (ESMA). In the event, individual national governments will have the authority to issue EU-wide licences for crypto firms but must regularly report on larger crypto firms to ESMA.
There was intense industrial lobbying. On the one hand, some in the established international financial services sector argued that there was little need for brand-new and untried regulation, when existing laws relating to financial transactions already provide a solid basis for supervision of digital assets. On the other, many crypto-sector protagonists, concerned about stifling innovation, argued forcefully against overregulation and the draconian application of laws drafted for traditional financial operations.
MiCA’s provenance goes back to the spring of 2018 when Facebook (now Meta) announced plans for a new global digital currency, the “libra”. There were immediate EU concerns over consumer protection, potential undermining of the euro and Facebook effectively becoming a “shadow bank” operating outside normal EU financial provisions.
The libra initiative was subsequently abandoned in January 2022. More recently, the cryptocurrency sector has been globally stressed, with several significant failures of digital currencies and exchanges. Taken together with the potential circumvention of financial sanctions over the escalating war in Ukraine, MiCA is timely and a key pillar for the EU strategy for digital finance, avoiding fragmentation of the EU digital market and underpinning resilience of digital finance, especially for consumers.
The European Central Bank is already leading an initiative for digital cash – a “digital euro” – which is expected to operate under existing financial services regulations. MiCA recognises three additional categories of digital finance. The first is “e-money”, which is explicitly tied to a fiat currency (such as the euro) and is thus expected to have a relatively stable value. The second category is “asset reference tokens”, which are intended to maintain a stable value relative to a defined collection of fiat currencies, commodities and other digital assets. Finally, there are “utility tokens” to provide digital access to a specific service or goods as in, for example, a digital loyalty card scheme.
The strongest regulations are for e-money, such as libra was to have been. A controlling organisation must be present within the EU which issues the e-money, records transactions and redeems on demand the e-money back into its tethered fiat currency. The organisation must prepare a legal White Paper describing its purpose and operation, and must be authorised in advance by a national administration.
It is required to hold sufficient capital reserves in secure low-risk assets so that all redemptions of the e-money can be honoured. In general, anyone holding e-money in their (digital) account must first have been identified and verified by the issuer.
With the new rules, crypto asset service providers will have to respect strong requirements to protect consumers’ wallets and become liable in case they lose investors’ crypto assets, including negligence over potential adverse attacks by rogue actors. MiCA will also cover any type of market abuse related to any type of transaction or service, notably for market manipulation and insider dealing.
Non-fungible tokens (NFTs), typically representing digital art, are not currently covered by MiCA on the basis that each is an indivisible artefact. The commission has been asked to prepare further recommendations on NFTs within 18 months.
Some crypto asset mechanisms use consensus techniques across a group of organisations, rather than a single controlling organisation. Within two years, the commission is also asked to provide a report on the environmental impact of crypto assets and mandatory minimum sustainability standards for consensus mechanisms.
MiCA is a major milestone and will bring much-needed legal clarity to aspects of the crypto industry in Europe. Further legislation is expected in due course to cover crypto lending, NFTs and distributed consensus mechanisms.
MiCA seeks to balance consumer protection and innovation, rather than the outright banning of crypto trading or mechanisms such as e-money. It should further stimulate European inventiveness as a result, and it will be interesting to see how other jurisdictions – particularly the US and China – respond. It also creates challenges for crypto firms operating outside the EU which offer crypto assets to the European public.
