An early draft proposal for a new Regulation on Markets in Crypto-assets (MiCA) was recently leaked to the public, giving industry participants a glimpse of the potential regulatory landscape of the crypto industry in the years to come. Acknowledging the need for harmonisation on the EU level, the draft Regulation covers the gamut from public offerings of “crypto-assets” to the licensing of stablecoin providers and crypto-asset service providers. The draft Regulation, which likely will not enter into force until 2022 at the earliest, applies to crypto-assets not covered by existing EU financial services legislation (e.g., MiFID II, E-Money Directive, PSD II).
Legal Certainty for Crypto-Asset Offerings
The draft Regulation aims to provide legal certainty for the offering and marketing of crypto-assets. Public offerings of crypto-assets within the European Union are made subject to an obligation to publish a “whitepaper” with mandatory disclosure requirements. The issuer must notify the whitepaper to the national competent authority at least 20 days before it is published. The issuer is also obliged to provide the competent authority an “assessment” explaining why the offered crypto-asset does not represent a financial instrument, electronic money, deposit or structured deposit under EU law. The competent authority has the power to require the issuer to amend or supplement the whitepaper or even suspend or prohibit the offering.
Exempt from the whitepaper obligation are offerings of less than EUR 1 million over a period of 12 months as well as offerings solely addressed to qualified investors. Also exempt are offerings of non-fungible crypto-assets as well as offerings of crypto-assets that “are automatically created through mining as a reward for the maintenance of or validation of transactions on a [distributed ledger technology] (sic) or similar technology” – possibly a reference to staking.
The draft Regulation also provides for certain organizational and behavioral requirements for issuers as well as requirements on marketing communications. Also significant is the requirement that proceeds of the offering must be kept in custody by a credit institution and/or an authorized crypto-asset service provider.
New Regulatory Regime for Stablecoins
The explanatory memorandum to the draft Regulation presents “stablecoins” as a potential threat to financial stability and orderly monetary policy as they become more widely adopted. The draft Regulation creates a new license requirement for stablecoin issuers with more than EUR 5 million tokens outstanding over a period of 12 months. An exemption is carved out for “algorithmic stablecoins” that do not reference one or more assets and whose value is maintained by protocols that adjust the token supply based on changes in demand. Stablecoin issuers are obliged to maintain a capital buffer of EUR 350,000 or 2% of the average amount of the reserve assets, whichever is higher.
The draft Regulation provides for a separate class of stablecoin issuers who are deemed to be “significant”. These issuers have more stringent organizational and governance obligations as well as a higher minimum capital buffer requirement.
Increased Regulation of Crypto-Asset Service Providers
Perhaps in response to the uneven national implementation of the provisions of the 5th Anti-Money Laundering Directive relating to virtual currency service providers, the draft Regulation imposes a license obligation on the provision of any of the following services:
- the custody and administration of crypto-assets on behalf of third parties;
- the operation of a trading platform for crypto-assets;
- the exchange of crypto-assets for fiat currency;
- the exchange of crypto-assets for other crypto-assets;
- the execution of orders for crypto-assets on behalf of third parties;
- the placement of crypto-assets;
- the reception and transmission of orders for crypto-assets on behalf of third parties;
- the advice on crypto-assets;
- the execution of payment transactions in asset-referenced tokens.
The services may be provided only by legal persons that have a registered office in an EU member state. These “crypto-asset service providers” are subject to prudential and organizational requirements, including maintaining minimum capital requirements and establishing appropriate internal control mechanisms and effective procedures for risk management.
Most interesting are the requirements for “the operation of a trading platform for crypto-assets”, which to date have largely escaped regulatory scrutiny within the EU. Under the draft Regulation, trading platform operators will be required to establish assessment procedures for listing crypto-assets on the trading platform. A general prerequisite to listing a crypto-asset is the prior publication of a whitepaper. Listing of crypto-assets with an “inbuilt anonymisation function” also is generally prohibited.
Codifying Prohibitions of Market Abuse
The draft Regulation prohibits market abuse in connection with crypto-assets. This includes prohibitions on insider trading and market manipulation. The prohibitions apply only to crypto-assets that are admitted to or have applied for trading on a trading platform. In addition, issuers are made subject to ad hoc disclosure obligations, which mirror the obligations of issuers of publicly traded financial instruments in the EU Market Abuse Regulation (MAR).
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Oliver Völkel | Bryan Hollmann | Philipp Ley