The Market in Crypto-assets Regulation

An introduction to the first comprehensive European regulation of crypto-assets

Introduction

In October 2022, an agreement was reached on the text of the rst comprehensive regulation of crypto-assets: the Market in Crypto-assets Regulation (MiCAR) (2). MiCAR is a fundamental piece in the accomplishment of the Commission’s ambition to make the EU a global standard-seer in the eld of digital nance (3). e Regulation also constitutes the rst European aempt to police a market able to polarise opinions with views spanning fromsuchassetsbeing‘ratpoison’tothe‘nextinternet’.

e polarisation, the (at least initial) allergy of the crypto-world to regulation, and the classic dilemma between regulation and innovation had led the EU to adopt a wait-and-see approach e only eld where the legislator hadstepped-inwasAnti-moneyLaundering(AML),withtheVAMLDirectivein2018(4).

MiCAR is a fundamental piece in the accomplishment of the Commission’s ambition to make the EU a global standard-seer in the eld of digital nance

1.GiulioSoanaispursuingadoublePh.D inLawatKULeuvenandLuissUniversity

2.MiCARRegulation (Political Agreement)

3.Availablehere

4. of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the nancial system for the purposes Directive(EU) 2015/849 of money laundering or terrorist nancing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/ECoftheEuropeanParliamentandoftheCouncilandCommissionDirective2006/70/EC(OJ2015L141, p 73).

Fieen years aer the publication of the Bitcoin paper (5), the European Regulator has decided the time for waiting is over. e reasons for this change in approach are multifaced. First, the market value of crypto-assets has continued to soar (notwithstanding a relevant contraction in the last months). e gures andvolatilitymadethecrypto-markettoobigtoignore.Second,establishedplayers started entering the crypto-market. e proposal by Meta for a global stablecoin (Lybra) generated concern among regulators and called for a clear framework to address and mitigate risks (it is not a coincidence a whole section of MiCAR is devoted to policing stablecoin-like tokens). ird, multiple Member States have introduced crypto-assets’ legislations. e resulting fragmentation menacedtheevolutionofthemarketandcalledforcoordinatedaction(6).

edenitionofcrypto-assets

‘Virtualcurrencies’wastheexpressionadoptedbytherstEuropeanlegislation in the eld: the V AML Directive. e Directive dened virtual currencies ‘ a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily aached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored, and traded electronically’ .isrstdenitionwascurrency-centricandtechnologically-generic.

MiCAR takes a diametrically different approach adopting the term ‘cryptoasset’ As signalled by the prex ‘crypto’, in contrast with the previous one ‘virtual’,thenewdenitionistechnology-specic.Meaning‘crypto-assets’areidentied based on the technology they are rooted in: Decentralised Ledger Technology(DLT).

Article 3 MiCAR denes crypto assets a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technologyorsimilartechnology’andreferstotheDLTPilotRegimeforamoredetailed denitionsofthetermsused.Article2,para.1,PilotRegimedenesDLT‘ atechnologythatenablestheoperationanduseofdistributedledgers’ ,Article2,para.2,denes Distributed Ledger ‘an information repository that keeps records of transactions and that is shared across, and synchronized between, a set of DLT network nodes using a consensus mechanism’ , Article 2, para. 3, denes consensus mechanism ‘the rules and procedures by which an agreement is reached, among DLT networknodes,thatatransactionisvalidated’ .

5.Availablehere

6.Recital4-5MiCAR

e Regulation introduces three sub-categories: e-money, asset-referenced, and utility token

Below this overarching denition, the Regulation introduces three sub-categories: e-money, asset-referenced, andutilitytoken

E-money and asset-referenced tokens both identify stablecoins – meaning tokens that aim at maintaining a stable value. ese coins have experienced a rapid growth in the last decade due to the high volatility of traditional crypto-assets To achieve price stability different solutions have been proposed: from the use of non-volatile assets or at currencies as reserves to algorithms that mimic the actions of a Central Bank. MiCAR differentiates between the two subcategories based on what the single token uses as an anchor for its value. E-money tokens reference to a single currency, asset-referenced to ‘ any other value or right or a combination thereof, including one or more official currencies’ . Outside of the coin panorama, the third category, utility token, identies a crypto-asset ‘onlyintendedtoprovideaccesstoagoodoraservicesuppliedbytheissuerofthattoken’

Finally,MiCARexcludesfromitspurviewtwomacro-categoriesoftokens.

First, the Regulation is explicitly residual. Any token that falls within the purview of other EU Financial Regulations is excluded from MiCAR. Second, MiCAR does not apply to crypto-assets that are unique and not fungible–i.e.,Non-fungibleTokensorNFTs.

estructureofMiCAR

e core of MiCAR is the discipline of crypto-assets’ issuance and offertothepublic.Toprotectinvestorsandreduceinformationasymmetries, a set of detailed rules are laid down regarding the who, when, and how of crypto-assets’ issuance. To the issuance of crypto-assets are devoted Title II, III, and IV divided following the tripartition among utility, asset-referenced, and e-money tokens. A key entity is, hence, the issuer of crypto-assets dened as any ‘naturalorlegalpersonorotherundertakingwhoissuesthecryptoassets’.

Apart from issuers, the Regulation – at Title V – also encompasses a category similar to AML’s Virtual Assets Service Providers (VASPs): (8) Crypto-assets Service Providers (CASP). A CASP is any legal person or undertaking who provides professionally to third parties one of the following services: ‘(a)thecustodyandadministration of crypto-assets on behalf of third parties; (b) the operation of a trading platform for crypto-assets; (c) the exchange of crypto-assets for funds; (d) the exchange of crypto-assets for other crypto-assets; (e) the execution of orders for crypto-assets on behalf of third parties; (f) placing of crypto-assets; (fa) providing transfer services for cryptoassetsonbehalfofthirdparties;(g)thereceptionandtransmissionoforders for crypto-assets on behalf of third parties; (h) providing advice on crypto-assets;(hb)providingportfoliomanagementoncrypto-assets’

eofferofcrypto-assets,otherthanasset-referencedtokensore-moneytokens

e rst category to be regulated is a residual one comprising all crypto-assets that are not asset-referenced or emoneytokens eissuanceofsuchtokensisunderalooserdisciplinecomparedwiththeothertwocategories

To issue this rst type of tokens or apply for their admission in a trading platform mandates three fundamental requirements: 1) be a legal person; 2) dra, publish, and notify to the competent authority a white paper; 3) comply with a set of minimum standards (act honestly, treat token holders fairly and equally, avoid conicts of interest,etc.).

Key to this discipline is the regulation of the white paper. e concept of a white paper is not new to the cryptoworld.Itisquitecommonforinitialcoinofferings,oranyothertokenissuance,tobeaccompaniedbyawhitepaper detailing the token’s characteristics, the goal of the project, etc. e problem that has arisen is that such white

8.Seehere papers were frequently incomplete or inaccurate is has caused an explosion of crypto-projects raising stellar amounts of money and then failing (due to fraud or incompetence). Aracted by the, seemingly magical, earnings of early adopters, investors ocked to crypto-projects and invested millions in tokens that were rooted in dreamywhitepaperswithout,insomecases,evenonelineofcodewrien.

MiCAR addresses the problem by introducing a detailed regulation of the white paper. Such a paper is explicitly mandatory for any issuance (9) e white paper has to include a list of mandatory information - information about the offeror or the person seeking admission to trading, information about the crypto-asset project, information on the underlying technology – and warnings – as that the crypto-assets may lose their value in part or in full. e aim is to ensure the white paper provides the investor with a complete picture of what they are buying (the white paper should be published on the issuers’ website) and to force the issuer to only proceed to a public offering when the project is advanced enough to be able to dra a complete paper. It is with this same purpose thatMiCARregulatesmarketingcommunications

e white paper also plays a role in facilitating the activity of supervisory authorities. Eminently, the white paper must be notied to the competent authority at least twenty working days before its publication together with a statement detailing where the token will be offered and the starting date of thepublicoffer.

Whilethewhitepaperhasafunctionofprotectionfortheinvestor, MiCAR also makes its notication a means to streamline crypto-offerings in Europe. e Regulation states that National law cannot require any ex-ante authorisation, with the notication as the only requirement needed to proceed to an offering. Furthermore, it prohibits Member Statestoimpose‘ anyfurtherinformationrequirements,withregard to the offer of those crypto-assets or the admission of such crypto-assetstoatradingplatformforcrypto-assets’ .

ese prescriptions are reinforced through the introduction of civil liability in case of non-compliance When a white paper is not draed in accordance with MiCAR, a ‘a holder of crypto- assets may claim damages om those persons or bodies for damage caused to her or him due to that iningement’, adding that ‘ any contractual exclusion thereof shall be deprived of anylegaleffect’ .

eofferofasset-referencedtokens

e offer or admission to trading of asset-referenced tokens is under a more stringent discipline compared to theonedetailedsofar.

First of all, to offer an asset-referenced token the entity should be a legal person (with very limited exceptions) established in the EU and have received an ex-ante authorisation by the home Member State – excluding smaller offers or offers only directed to qualied investors. is authorisation is rooted in an evaluation of both the entity and the white paper An exception to this double evaluation is introduced for credit institutions which onlyneedtosubmittheirpaperforapproval(10).

Before proceeding to an offer, the issuer should submit an application comprising the white paper (whose content largely overlaps with the one mentioned above) and a series of information regarding the issuer. With asset-referenced tokens, the evaluation of the National authority is not only ex-ante but also entails the entity per se(consideringelementsasthemanagementbody’srepute,thecybersecurityframework,etc.).

Aerhavingreceivedtheapplication,thecompetentauthorityhastwenty-veworkingdaystocommunicateif the application is complete, sixty working days to adopt a fully reasoned dra decision (also based on additional information that can be requested during this time-frame), the dra decision should be communicated to EBA, ESMA and the ECB (or the National Central Bank where outside the euro-zone) that have twenty working days to send a non-binding opinion, within twenty-ve working days from the reception of such opinion theAuthorityshouldissueanaldecision

Oncegranted,theauthorisationisvalidfortheentireUnion

To underline how crypto-assets regulation–especially when it comes to stablecoins –mixes technical and political considerations, among the grounds of refusal, and authorisation’s withdrawal, MiCAR explicitly includes (apart from the classic ones of individual and corporate non-compliance) a negative opinion by the ECB or the NationalCentralBank‘ ongroundsof( )monetarysovereignty’ .

e issuance of a parallel currency by the private sector, if diffused enough, may exclude the public authority from the management of the currency. While the Digital Euro (11) and other Central Bank Digital Currencies’ projects worldwide constitute a ‘market answer’ to this menace providing for a State-backed competitor to stablecoins,MiCARdeliverstotheStatearegulatorybulwark(12).edemarcationofwhataseriousthreattomonetarysovereigntyiswillthenbeuptoCentralBanks,andCourtstodecide

10.Certainrequirementsaredictatedalsoforcreditinstitutions,seeArticle 15a

11.Availablehere

12.Onasimilarnote,Article 19bMiCARrestrictsasset-backedtokentoowidelyusedasmeans-of-exchange.

Asset-referenced tokens are under more stringent requirements also in terms of governance and organization. Of particular relevance are those concerning the reserve of assets, due to the specicity of stablecoin’s business model. As mentioned, one of the methods a stablecoin can employ to maintain its value stable is by referring to another asset, currency, or basket thereof. When the investor buys such tokens, the issuer buys an equivalent value (or a percentage) of the referenced asset is guarantees the holder against uctuation as they can always redeemtheirtokensagainstthevalueoftheunderlyingreferencedasset

One of the main problems underlined in practice is a signicant risk that issuers don’t buy the reserves promised or overvalue them (13). When a crisis hits (or any other event that triggers something comparable to a bank-run), the issuer is unable to honour its debts and millions,ifnotbillionsarelost.

To avoid this scenario MiCAR prescribes a series of rules to guarantee the formation and preservation of the reserves. Such measures entail prescriptions on the insulation of funds, the management of the liquidity risk, the reserves’ custody, the connection between issuance/redemption and reserves, and mandatory independent audits (every six months). To further guarantee investors, MiCAR mandates issuers to dra a ‘ recovery plan’ to restore reserves and a ‘redemption plan’ to guarantee orderly redemption of assets by holders (to be draed within six months from the authorisation and notied to the Supervisors).

eissuanceofe-moneytokens

For the issuance of e-money tokens MiCAR largely refers to the emoney Directive (14). is reference encompasses the issuer (that can only be a credit or an e-money institution), the token (that qualies as e-money under the meaning of the Directive) and in general the regulation of the token Article 43, para. 1b, explicitly makes Title IV MiCAR lex specialis with respect to the Directive stating: ‘Title II and III of Directive 2009/110/EC shall apply with respect to e-money tokens unlessotherwisestatedinthisTitleofthisRegulation’ .

Currencies’ projects worldwide constitute a ‘market answer’ to this menace providing for a State-backed competitor to stablecoins, MiCAR delivers to the State a regulatory bulwark

13.SeethecontroversyregardingTether’sbacking, . NYT,eCoin thatcouldwreckcrypto,17.06.2022 14. of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the Directive(EU) 2009/110 businessofelectronicmoneyinstitutionsamendingDirectives2005/60/ECand2006/48/ECandrepealingDirective2000/46/EC(OJ2007L267,p 7).

e main additions to the Directive’s discipline are the key elements of MiCARwe have already underlined. First, the white paper for which a notication procedure and not an approval one is prescribed. In this sense, e-money tokens follow the same discipline as the rst category of token we have analysed, with a notication twenty days prior to the publication and a prohibition to impose an ex-ante approval procedure Second, reserve and redeemability. E-money tokens can only be issued at par with the reserves and must guarantee immediate and free redeemability.MiCARalsoextendstoe-moneytokensthedutytodraarecoveryandredemptionplan.

Signicantasset-backedande-moneytokens

For both asset-backed and e-money tokens, MiCAR introduces a separate category: the signicant token. e discipline is mostly similar for the two tokens e classication is done by the EBA, aer a consultation procedure, based on a series of criteria (number of holders, number, and value of transactions, international usage, etc.).

e classication can also be requested by the issuer In this case, they need to prove they are likely to meet the abovementionedcriteriashortlyaertheissuance.

e classication as signicant shis the supervisory responsibilities from National authorities to the EBA. Due to the width of the services provided, issuers of signicant tokens are also under additional requirements, in termsofriskmanagement,competition,stresstests,etc.

Crypto-assetsserviceproviders

e last piece of MiCAR’s infrastructure is the regulation of CASPs. CASPs (even though under the label of VASPs) have been regulated under the AML legislation since 2018 is already provides for registration/licensing procedures and for a supervisory overview which will have to be coordinated withtherequirementsnowintroducedbyMiCAR.

MiCAR introduces an authorisation procedure mandatory for any CASP that provides services, even if remotely, in the Union’s market (safe for a series of categories of providers thatareunderanoticationregime)(15)

TolawfullyoperateCASPsmustbelegalpersonsorotherundertakings and must have received an authorization in the host Member State e related application must contain a list of information detailing the CASPs governance structu- re, activity, management, and so-on. Within forty days from the reception of the application, the National Authority,aerhavingcompletedanumberofcontrols,mustadoptareasoneddecision

e authorisation is not general, rather it only applies to one or more specic services that must be detailed in the application. Once obtained the authorisation, the CASP is allowed to provide its services throughout the UnionwithoutthepossibilityforotherMemberStatestorequireadditionalauthorizations

Apart from the authorisation procedure, CASPs are under very similar behavioural and organisational duties as issuers (honesty, transparency, prudential, and governance requirements). Furthermore, MiCAR introduces additionalprovisionsforspecicservices–assafekeeping,trading,exchange

Also with respect to these entities, MiCAR introduces the concept of signicant CASPs Meaning those services that have more than 15 million active users per annum. is denomination does not shi the supervisory dutiesattheUnionlevel,aswithissuers,butratherintroducesamonitoringdutybyESMAontheactivityofNationalAuthorities.

Conclusions

e introduction of the Market in Crypto-assets Regulation constitutes a historic step. e Regulation lays down the rst comprehensive European discipline of the market Furthermore, given the transborder nature of crypto and the relevance of the Union’s market, MiCAR is deemed to have an effect that goes well beyond the EU shaping crypto-markets and players globally

Conceived as a market that would oust regulators, crypto-assets are experiencing a (partial) process of normalisation, one experienced by many technologies before e MiCAR is a key piece ofsuchprocess.

e present article has briey presented the key elements of MiCAR in terms of the discipline of the entities involved. is does not exhaust the Regulation which also encompasses an innovative supervisory framework and sanctioning system. e nextarticlewilldelveintotheseaspects.