1. What is MiCAR?

On June 9, 2023, the European Union adopted the Markets in Crypto-Assets Regulation (MiCAR). The Regulation provides a “world first” regulatory framework for issuers of certain crypto-assets existing on distributed ledger technology (DLT), as well as market operators, custodians and intermediaries providing services to support trading in those assets. It delivers a comprehensive regulatory taxonomy of crypto-assets that clarifies how tokens such as BTC, ETH and USDT will be treated.

MiCAR delivers greater legal certainty for those who issue or offer crypto-assets in or to investors in the European Union, as well as consistent requirements for the authorization of crypto-asset service providers (CASPs). With a “mini-MAR” market abuse regime, conduct rules, and own-funds standards, MiCAR is intended to deliver greater protection for investors and contribute to market stability while fostering innovation.

2. What crypto-assets does MiCAR cover?

MiCAR uses a definition of “crypto-assets” which is broadly consistent with international standards: “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology”.

This definition is cast widely in order to capture representations of assets on blockchain or other, distributed, systems, irrespective of whether they are intended to represent “off-chain” or “on-chain” rights or things with value. MiCAR is agnostic about the technical features of particular crypto-assets (for example, whether they meet certain protocol requirements or incorporate smart contracts); focussing, instead, on the uses to which they are put.

MiCAR addresses primary and secondary market activities involving three types of crypto-assets:

• “asset-referenced tokens” (ARTs): a form of stablecoin which is backed by two or more official currencies or other assets;
• “electronic money tokens” (EMTs): a form of stablecoin which is backed by one official currency. As EMTs are closely aligned to existing e-money arrangements, they are deemed to be electronic money, and issuance of them is reserved to banks and electronic money institutions (EMIs);
• “other” tokens: a large residual category that includes most crypto-assets which are not ART or EMT (excluding deposits, MiFID financial instruments, fund units, and certain pension arrangements).

MiCAR does not regulate the “other” tokens category of crypto-assets, as such. Its focus is on issuers, persons who offer crypto-assets to the public, operators of markets which admit them to trading, custodians who hold them for clients, and intermediaries who offer brokerage, advisory and investment management services.

Some crypto-assets which meet the MiCAR definition – such as non-fungible tokens (NFTs) representing unique digital artworks or “off-chain” assets – are excluded from the scope of MiCAR. Others, which have limited financial utility, may still be included. The task of clarifying the boundary of MiCAR has been assigned to ESMA, but the range of possible crypto-assets is limited only by the imaginations of software developers. The European Commission has been empowered to amend the definition to respond to market developments.

MiCAR does not apply to MiFID financial instruments. Although derived largely from MiFID, the Regulation does not overlap with it: the definition of financial instruments in MiFID has been amended by the DLT Pilot Regulation to include instruments issued on DLT. Similar exclusions apply to deposits under the CRR and certain pension arrangements.

3. Is MiCAR relevant to what I do?

Banks, EMIs, MiFID investment firms, AIFMs, and UCITS management companies will be able to extend their permissions to provide certain services involving crypto-assets, but MiCAR requires them to engage with their regulators first.

4. Does MiCAR apply to banks’ new products?

MiCAR is derived from other European legislation, including MiFID, CRR/IFR, MAR, UCITS, and the AIFMD. It is intended to be a parallel regime to MiFID, while recognizing that firms with existing authorizations ought to be able to rely upon them. MiCAR does not completely excuse firms from its requirements (for example, for approvals, disclosures, and notification), but there are concessions which allow banks to issue stablecoins within their existing authorizations. Similarly, banks and investment firms can extend their existing permissions to include crypto-assets.

The issuance of deposit tokens does not form part of MiCAR.

5. How does MiCAR regulate custody services?

MiCAR requires custodians to be authorized as or deemed to be CASPs in order to hold crypto-assets or cryptographic keys for clients. Custodians holding the reserve assets for stablecoins as cash or financial instruments are subject to specific requirements to make them insolvency-remote. In either case, custodians will be liable for the loss of assets due to hacking and technical errors, unless they can show that the cause of the loss was beyond their reasonable control.

6. How does MiCAR address market abuse?

MiCAR does not apply the full EU market abuse regime; but it does borrow from it. Insider dealing, improper disclosure of inside information, and market manipulation are prohibited. Recognizing the potential misuse of electronic media, MiCAR requires those publicly voicing opinions on crypto-assets to disclose their positions.

Anyone arranging or executing crypto-asset transactions must have effective means to prevent and detect market abuse. Operators of trading platforms are required to have means to prevent and detect market abuse on their platforms.

7. What investor documentation must issuers/offerors/trading platforms produce?

To address information asymmetries, all persons issuing crypto-assets in the EU or offering them to EU investors must publish detailed offering documentation and simplified versions that meet minimum standards (called white papers after established crypto-asset market practices). White papers must be approved by competent authorities (in the case of ART) or notified to them (in all other cases).

Issuers/offerors and their administrative, management, and supervisory bodies (as appropriate) will be liable towards investors for resulting losses if the content is not complete, fair, clear, and not misleading.

8. Are cross-border activities permitted by MiCAR?

Unauthorized EU firms seeking to issue ARTs or act as CASPs must obtain authorization; but, once they are approved, they will have the benefit of an EU-wide passport. In contrast, non-EU CASPs will have two options to engage with EU clients: (a) rely upon passive “reverse solicitation;” or (b) subsidiarise and obtain authorization after becoming established in the EU with their place of effective management and at least one director resident in a Member State.

Non-EU issuers/offerors may remain outside of the Union, but they will still need to comply with certain requirements, including an obligation to produce a suitable white paper.

9. When will MiCAR apply?

The Regulation was published in the Official Journal of the European Union on June 9, 2023. It entered into force on June 29, 2023 and becomes fully effective on December 30, 2024; however, issuers of stablecoins will become subject to certain provisions on June 30, 2024. Level 2 rule-making will involve delegated acts, technical standards and guidelines which will better elaborate the prescribed requirements and procedures.

The first set of draft technical standards was issued for consultation by ESMA on July 12, 2023. The second package was published on October 5, 2023. The third set is expected in 1Q2024.

The following graphic illustrates the MiCAR timeline.

10. Is MiCAR definitive?

It is recognized that further work is needed to make MiCAR fully comprehensive. Activities such as decentralized finance (DeFi) protocols, staking, and lending are not yet addressed. Level 2 legislation is needed to refine the regulatory perimeter and clarify expectations. Other EU legislation involving payment services and e-money is being amended to take account of the introduction of MiCAR.

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.