The Markets in Crypto-Assets Regulation

The Markets in Crypto-Assets Regulation (MiCA)

What is the scope of MiCA?

MiCA applies to persons engaged in the issuance, offer to the public and admission to trading of crypto-assets, or persons that provide services related to crypto-assets in the EU.

What are the key features of MiCA?

1. MiCA provides for categories of crypto-assets based on how they stabilise their value, namely e-money tokens (EMTs), asset-referenced tokens (ARTs) and other crypto assets such as utility tokens.
2. MiCA sets out requirements for the offering and admitting to trading of these categories of crypto-assets, including for example transparency and disclosure requirements and measures to prevent market abuse.
3. For EMT and ART issuers, there will be restrictions for investment of reserves and the expectation of robust governance, including business continuity, control and risk assessment, and appropriate 3^rd party contractual arrangements.
4. MiCA will also introduce an authorisation regime for CASPs, who must apply to the state where their registered office is located to passport their services within the EU.
5. A CASP is a legal person, or other undertaking, whose occupation or business is the provision of one or more crypto-asset services to clients on a professional basis.
6. MiCA will impose important consumer protection measures on CASPs, with governance obligations, minimum capital requirements, and transparency requirements. MiCA will also provide for prohibitions on insider dealing, market manipulation and the unlawful disclosure of inside information.
7. There are 10 crypto-asset services, including exchange services, transfer services, custody services and MiFID-like services e.g., portfolio management of crypto-assets and execution of orders for crypto-assets on behalf of clients.
8. In terms of regulated products, fully decentralized, unbacked assets are not included in MiCA’s issuer/product framework. According to the Central Bank of Ireland (CBI), they lack a central governance structure to engage with as well as not having an underpinning value.

CASP authorisation process

The CBI has published general engagement principles and its high-level authorisation expectations. Generally speaking, the CBI’s approach to regulation is underscored by a consumer and investor protection rationale. Consequently, the higher the risk related to the products offered by an applicant firm, the higher the CBI’s expectations will be regarding the firm’s ability to manage those risks.

The CBI has discussed its supervisory expectations for CASPs, which include:

1. Transparency: a firm must act in a fully transparent manner with respect to its proposed application MiCA strategy.
2. Governance and supervisability: a firm must be able to demonstrate an appropriate level of substance and autonomy in Ireland, with the board of directors led by a local crypto-competent executive.
3. Conflicts of interest: a firm must be able to demonstrate that no risks will be posed to the interests of customers due to conflict of interests. It is incumbent on firms to design and implement a robust system that will proactively identify and subsequently remedy any conflicts.
4. Client assets: a firm must be able to outline how a crypto asset is backed by an underlying asset. Firms must also have full control of all client assets, with segregation and reconciliation processes and procedures in place, as well as prompt access to the reserve of assets to meet redemption demands.
5. Business model and financial resilience: the CBI will likely take a sceptical view of any CASP business model where profitability is driven by the heavy marketing, offering, and distribution of unbacked crypto to retail customers for speculative purposes. Therefore, firms should develop and maintain a business strategy that displays viability and sustainability.
6. Anti money laundering (AML): A firm must always know who its customers are and how they are funding their crypto activities, so as to maintain compliance with Irish AML legislation.
7. Crisis management: A firm shall maintain a comprehensive plan that will enable an orderly winding down of its activities and timely redemption of customer funds.

When will MiCA come into force?

The first phase of MiCA entered into force in June 2024 and deals with stablecoins. The second phase, which will enter into force in December 2024, will deal with CASPs.

CASPs that provide their services in accordance with applicable law before 30 December 2024 may continue to do so until 1 July 2026 under MiCA’s transition period, although the Department of Finance exercised its discretion to reduce this transition period to 12 months.

In addition, Ireland did not exercise the discretion under MiCA to grant existing CASPs a simpler authorisation process, on the basis that the virtual asset service provider (VASP) regime in Ireland is not comparable to the regime under MiCA.

What is the impact of MiCA?

It is hoped that increased regulatory oversight and the imposition of a harmonised regulatory framework for crypto-assets across the EU will help to restore consumer confidence in the crypto-market by mitigating risk and uncertainty in the sector.

The CBI has commenced its preparation for the implementation of MiCA and is currently integrating the regime into its supervisory and authorisation processes, which will replace the existing VASP regime. Applicant firms are encouraged to engage with the CBI at their earliest convenience.

Read the full legislation here.

We have extensive experience advising crypto operators and we advise firms who are interested in applying for authorisation under MiCA. Please reach out to a member of our team should you require advice and support in this area.