Key Takeaways: Agreement on MiCA, European crypto-assets regulation
On June 30, 2022 the EU Council Presidency and the European Parliament reached a provisional agreement on the scope and direction of the Markets in Crypto-Assets Regulation. For the first time, European lawmakers aim to harmonize rules for crypto across the European Union and addressIn a cryptocurrency context, an address is a cryptographic k... More the borderless risks introduced by crypto-assets while fostering innovation. Once adopted, MiCA is intended to become applicable 18 months following its entry into force.
History of MiCA
The European Commission came forward with the MiCA proposal on September 24, 2020. It was part of the larger digital finance package, which seeks to bridge a gap and aims to develop a European approach that fosters technological development, ensures financial stability and consumer protection, while supporting innovation. In addition to the MiCA proposal, the package contains a digital finance strategy, a Digital Operational Resilience Act (DORA) – that will cover Crypto-Asset Service Providers (CASPs) – and a proposal on distributed ledger technology (DLT) pilot regime for wholesale uses [which entered into force in June 2022]. The Council adopted its negotiating mandate on MiCA on November 24, 2021. Trilogues between the co-legislators started on March 31, 2022 and ended in the provisional agreement reached on June 30, 2022.
Scope and direction of MiCA based on agreement reached
- Crypto-asset service providers: CASPs will need an authorization to operate within the EU. National authorities will be required to issue authorizations within a timeframe of 40 days. Regarding the largest CASPs, national authorities will transmit relevant information regularly to the European Securities and Markets Authority (ESMA). The ESMA will also have powers to blacklist CASPs and operate a crypto blacklist in which it can identify and warn investors of any CASPs that do not comply with the requirements of MiCA (i.e., refuses to register in an EU member state).
- CASPs minimum capital requirements: Three classes of crypto-asset servicesGeneral services, including non-profits, forums and news sit... More are stipulated, each with different capital requirements;
|Class||Capital Requirement (in Euros)||Description|
|1||50,000||Reception and transmission of orders on behalf of third parties and/or providing advice on crypto assets and/or execution of orders on behalf of third parties and/or placing of crypto-assets and/or portfolio management on crypto-assets and/or transfer of crypto-assets|
|2||125,000||Includes everything in Class 1 plus custody and administration of crypto-assets on behalf of third parties and/or exchange of crypto-assets against funds and/or exchange of crypto-assets against other crypto-assets|
|3||150,000||Includes everything in Class 2 plus crypto-assets operations of a trading platform for crypto assets|
- Consumer protection: Crypto-asset service providers (CASPs) will have to respect strong requirements to protect consumers wallets and become liable in case they lose investors’ crypto-assets. MiCA will also cover any type of market abuse related to any type of transaction or service, which would include market manipulation and insider dealing.
- Stablecoins: Crypto-assets that reference another asset to maintain a stable value will be categorized as either asset-referenced tokens (“ARTs”) or e-money tokens (“EMTs”), depending on the type of asset(s) pegged (e.g., government-issued currency, basket of currencies, gold, another crypto-asset). Issuers of such stablecoins would be required to back the amount of outstanding stablecoins circulation with a sufficiently liquid reserve composed with a 1/1 ratio and partly in the form of deposits. StablecoinStablecoins maybe privately issued cryptocurrency or algorit... More holders will be offered a claim at any time and free of charge by the issuer. Stablecoin issuers would be generally supervised by the respective National Competent Authorities (NCA), with a presence of the issuer in the EU being a precondition for any issuance. Furthermore so-called “significant” stablecoins, will be supervised by the European Banking Authority (EBA). The issuance of asset-referenced tokens (ARTs) based on a non-European currency, widely used as means of payment (i.e., more than 1 million transactions and EUR 200 million volume per day) will be constrained to preserve EU’s monetary sovereignty. Issuers of ARTs will need to have a registered office in the EU to ensure the proper supervision and monitoring of offers to the public of asset-referenced tokens.
- Non-fungible tokens (NFTs): NFTs (i.e., digital assets representing real objects like art, music, and videos), will be excluded from the scope except if they fall under existing crypto-asset categories. Within 18 months the European Commission will be tasked to prepare a comprehensive assessment, and, if deemed necessary, a specific, proportionate and horizontal legislative proposal to create a regime for NFTs and address the emerging risks of such new market.
- Decentralized Finance (DeFi)DeFi stands for Decentralized Finance. DeFi purports to remo... More: 36 months after the date of entry into force of this Regulation, after consulting the EBA and ESMA, the Commission shall present a report to the European Parliament and the Council with an assessment of the level of threat of money laundering, terrorist financing and other criminalA Criminal is an individual or group who has been convicted ... More activity in relation to crypto-assets channeled through decentralized finance systems and the necessity and feasibility to establish appropriate and effective measures, including transactional restrictions on payments in crypto-assets for goods and services involving payments above a de minimis thresholds, stronger intelligence channels and a regime of effective, proportionate and dissuasive penalties to prevent illicit transactions in crypto-assets. 12 months from the date of application of this Regulation and every year thereafter, ESMA, in close cooperation with the EBA, shall submit a report to the European Parliament and to the Council on the application of this Regulation and the developments in the markets in crypto-assets. The report shall be made publicly available and will include volume of transactions in decentralized finance protocols and decentralized exchanges, accompanied by an analysis of risks posed for money laundering, terrorist financing and other criminal activities;
- Environmental and climate footprint: Actors in the crypto-assets market must ensure that the underlying technology is climate friendly, in line with the European Union green deal objectives and will be required to declare information on their environmental and climate footprint. The European Securities and Markets Authority (ESMA) will develop draft regulatory technical standards on the content, methodologies and presentation of information related to principal adverse environmental and climate-related impact. Within two years, the European Commission will have to provide a report on the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards for consensusConsensus is a mechanism to achieve the necessary agreement ... More mechanisms, including the proof-of-work.
- Central Bank Digital Currencies (CBDCs) based on distributed ledger technology or issued in digital form should not be subject to the framework covering crypto-assets.
MiCA is complemented by an Anti-Money Laundering (AML)Anti-Money Laundering (AML) rules are in place to help prote... More framework for crypto-transfers, as established by the revised Transfer of Funds Regulation (TFR) provisionally agreed by the Council and the European Parliament on June 29, 2022. Key provisions of the TFR provisional agreement include the following:
- Travel RuleIn October 2018, the Financial Action Task Force (FATF), the... More: The agreement extends the “travel rule”, already existing in traditional finance, to cover transfers in crypto-assets. Before making the crypto-assets available to beneficiaries, providers will have to verify that the source of the asset is not subject to restrictive measures or sanctions, and there are no risks of money laundering or terrorism financing.
- Minimum thresholds for exemption: The regulation applies to all transactions involving CASPS. No minimum threshold for exemptions of low value-transfers, as originally proposed are included.
- Un-hosted wallets: The rules would also cover transactions from so-called un-hosted wallets, when they interact with hosted wallets managed by CASPs. In case a customer sends or receives more than 1000 euros to or from their own un-hosted walletA wallet is a device (a hardware device, a program, or servi... More, the CASP will need to verify whether the un-hosted wallet is effectively owned or controlled by this customer. The rules do not apply to person-to-person transfers conducted without a provider, such as bitcoins trading platforms, or among providers acting on their own behalf.
- Regarding protecting personal data, including a name and an address required by the travel rule, negotiators agreed that if there is no guarantee that privacy is upheld by the receiving end, such data should not be sent.
The European Commission’s June Financial package, including MiCA, will be top of mind for businesses operating in Europe (i.e., businesses headquartered in Europe, headquartered in US with European operations, etc.). This marks one of the more comprehensive global regulatory frameworks for virtual assets that we’ve seen to date.
CipherTrace is a wholly-owned Mastercard company that delivers cryptocurrencyA cryptocurrency (or crypto currency) is a digital asset des... More AML and counter terrorism financing (CTF), blockchainA blockchain is a shared digital ledger, or a continually up... More forensics, and regulatory monitoring solutions. Our goal is to utilize expertise and tools to help make the digital asset ecosystem safer for consumers, business, governments, and investors.
Disclaimer: The above information may be subject to changes as the legislative process is still ongoing. This information has been collated on a best effort basis and reflects CipherTrace’s latest regulatory intelligence.
 The provisional agreement is subject to approval by the Council and the European Parliament before going through the formal adoption procedure.
 Council of the EU. Digital finance: agreement reached on European crypto-assets regulation (MiCA). https://www.consilium.europa.eu/en/press/press-releases/2022/06/30/digital-finance-agreement-reached-on-european-crypto-assets-regulation-mica/
 Crypto-asset Service Provider (CASP) is defined under MiCA as “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis
 Custody and administration of crypto-assets on behalf of third parties’ means safekeeping or controlling on behalf of third parties, crypto assets or the means of access to such crypto-assets, where applicable in the form of private cryptographic keys;
 Asset referenced tokens: a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets. Source: https://www.europarl.europa.eu/doceo/document/A-9-2022-0052_EN.html#title1 article 3 § 2. So-called algorithmic ‘stablecoins’ that aim at maintaining a stable value, via protocols, that provide for the increase or decrease of the supply of such crypto-assets in response to changes in demand should not be considered as asset-referenced tokens, provided that they do not aim at stabilizing their value by referencing one or several other assets. Source: https://www.europarl.europa.eu/doceo/document/A-9-2022-0052_EN.html#title1 § 26
 Climate change and environmental degradation are an existential threat to Europe and the world. To overcome these challenges, the European Green Deal will transform the EU into a modern, resource-efficient and competitive economy, ensuring: no net emissions of greenhouse gases by 2050, economic growth decoupled from resource use and no person, and no place left behind. Source: https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en and https://eur-lex.europa.eu/resource.html?uri=cellar:b828d165-1c22-11ea-8c1f-01aa75ed71a1.0002.02/DOC_1&format=PDF
 During the period 1 January 2016 to 30 June 2018, the BitcoinThe term "Bitcoin" can either refer to Bitcoin the network, ... More network was responsible for up to 13 million metric tons of CO2 emissions. It has been estimated that each Bitcoin transaction deploys 707 kWh of electricity power.
 European Parliament News. Crypto-assets: deal on new rules to stop illicit flow in the EU. https://www.europarl.europa.eu/news/en/press-room/20220627IPR33919/crypto-assets-deal-on-new-rules-to-stop-illicit-flows-in-the-eu