The crypto industry was shocked and rocked by the collapse of FTX Trading LTD, a centralized crypto-trading platform operating through a web of more than 100 entities spread over 5 continents, with Alameda Research being its trading arm. The collapse has uncovered the shortcomings of the lack of oversight and regulation in an industry that operates outside traditional financial rules. This has emphasized the case for regulatory intervention to address the intrinsic risks of the crypto-asset industry. On April 20, 2023, the EU Parliament adopted the landmark regulation on the crypto-market with the aim to regulate crypto-asset activities (Regulation on Markets in Crypto-Assets (MiCA) in the EU. It remains to be seen if the MiCA will achieve the so aimed legitimacy and credibility of the crypto-asset industry.
What is all the fuss about crypto-assets?
Crypto-assets are considered as digital representation of a particular asset, utility or value, which underlying technology is the distributed ledger technology (DLT). They may serve as a means of exchange (payment tokens such as Bitcoin), attach certain rights to their holders (security tokens) or give access to certain products or services (utility tokens). Crypto assets are an example of how technology can potentially create innovative sources of investment and facilitate peer-to-peer trading of alternative financial assets, which justifies the significant growth of public interest in these assets.
Despite the crypto hype, there are also risks associated with investing in crypto-assets, and especially payment tokens, mostly related to their volatility, (lack of) consumer and investor protection, money laundering and potential terrorism financing activities. The collapse of FTX, as largely expected, has shown the vulnerability of the industry, which has in turn triggered a vivid debate on whether far reaching regulatory intervention is needed to protect investors and maintain a fair, safe and efficient market.
While there are few countries that have adopted ad hoc legislation on crypto activities, most of the countries in the EU address regulatory challenges within existing legal frameworks (e.g. under AML/KYC regulations and tax law). There is no specific legislation at EU level that regulates operators of crypto-assets trading platforms, operators of crypto-assets exchanges for funds or other crypto-assets, or custodian wallet providers of crypto-assets on behalf of third parties. On September 24, 2020, the European Commission submitted a proposal for a regulation on Markets in Crypto-Assets (MiCA) aiming to create an EU regulatory framework for the issuance of, intermediating and dealing in, crypto-assets. MiCA was adopted in April 2023, with its provisions expected to come into force before the end of 2024, after the publication in the EU’s official journal.
How does MiCA regulate the crypto industry?
MiCA aims to (i) provide legal certainty for crypto-assets that are currently not covered by the existing European Union legislation (ii) replace existing national legislative frameworks and provide uniform European Union rules for crypto-assets and (iii) set out specific rules on stable coins (a cryptocurrency token that attempts to have a stable price).
MiCA will apply to any legal or natural person being engaged in the issuance or trading of crypto-assets or provide services related to crypto-assets (CASPs) in the European Union (regardless of whether or not such legal or natural persons are established in the EU). These uniform rules entail:
- transparency and disclosure requirements for the issuance and admission to trading of crypto-assets (whitepaper publication);
- authorization and supervision of crypto-asset service providers and issuers of asset-referenced tokens and/or electronic money tokens;
- the operation, organization and governance of issuers of asset-referenced tokens, issuers of electronic money tokens and crypto-asset service providers;
- consumer protection rules for the issuance, trading, exchange and custody of crypto assets;
- measures to prevent market abuse to ensure the integrity of crypto-asset markets.
Entities already regulated under existing financial service legislation will not be captured by MiCA, including MiFID investment firms, alternative investment fund managers, credit institutions and e-money institutions.
Classification of cryptoassets under the MiCA
The main cryptoassets covered by MiCA include:
- Asset-referenced tokens (ARTs), a type of crypto-asset which aim is to maintain a stable value by being tied to the value of legal tender fiat currency, commodities or other crypto-assets, or a combination of such assets. This category includes all crypto-assets that do not qualify as ‘electronic money tokens,
- Electronic money tokens (EMT), crypto-assets which aim to mantain a stable value by referring to the value of a fiat currency that is legal tender. The difference between ARTs and EMTs is lies in the asset used to support the token’s price.
- Crypto-assets that are not considered ARTs or EMTs, e.g. “utility tokens” which allow digital access to goods or services, available on DLT, and are only accepted by the issuer of that token.
On the other hand, MiCA leaves out certain aspects of the digital asset industry, including decentralized finance (DeFi), non-fungible tokens (NFTs), crypto-assets covered by existing financial services legislation (e.g., security tokens qualifying as financial instruments under MiFID II), and central bank digital currencies though (CBDCs).
Unintended consequences of the MiCA solution?
While a regulatory framework is welcomed, many consider the legislation as not capable to tackle the risks of the crypto-asset industry. A main concern is the broad scope of the definition of crypto-assets in MiCA. The ECB considers this definition as “a wide, catch-all” definition which will need further clarification. For instance, it is unclear whether hybrid tokens, which may incorporate elements of financial instruments after issuance, are also covered by MiCA. Similarly, it is also unclear whether crypto-asset-based derivatives should be classified as a financial instrument, hence not covered by MiCA, or as an asset-referenced token, thereby falling within its scope. The risk is that MiCA may create uncertainty rather than provide the so aimed legal clarity.
The reverse solicitation exemption is also seen as a possible loophole in the MiCA, which may still allow foreign companies to serve EU markets outside the radar of EU regulators, if the services are provided to EU residents at their “own exclusive initiative”. Once adopted, further guidelines on the interpretation of MiCA should be expected by the European Security and Authority (ESMA), which normally takes a narrow approach in interpreting the reverse solicitation exemption under MiFID II (main EU legislation on financial markets). With the crypto-assets market largely unregulated, addressing cross-border challenges and harmonizing regulations across different jurisdictions will be essential.
Finally, it is unclear to what extent the stringent requirements and liability regime in MiCA will effectively provide the so aimed investor and consumer protection. MiCA imposes several general and specific obligations on CASPs, including prudential safeguards (either via own funds, insurance policy or comparable guarantee), fiduciary-type duties, governance requirements, and other custody and safeguarding obligations. For certain CASPs, like custodian of crypto-assets, it introduces an increased liability regime, in case of loss of crypto-assets or of the means of access to them as a result of an incident “that is attributable to the provision of the relevant service or the operation of the service provider”, including an incident resulting from a cyber-attack, theft or any malfunctions. Custodian of crypto-assets will essentially be obliged to refund the identical assets or their value to the issuer without undue delay. Overall, compliance with MiCA will come at high cost, especially for small CASPs or start-ups. This can in turn disincentivize certain CASPs to operate in the EU or offer their services at a high cost, which may likely force investors or consumer to pursue these services with non-EU firms.
The introduction of a new regulatory regime comes undoubtedly with both advantages and disadvantages. Though the MiCA regulation has raised many eyebrows, a tailored and comprehensive legislation on crypto-assets markets, which legitimizes these activities, might serve the interests of crypto-asset service providers which wish to operate in a well-defined and pro-innovation regulatory environment. At the same time, establishing specific rules addressing some of the key risks and concerns raised about consumer and investor protections, money laundering or cyber-security threats would also serve the interests of investors and consumers, while at the same time enabling alternative payment tools, innovative financing instruments or new fundraising mechanisms and benefit from all related advantages. With the lesson learnt from the FTX crash down, the new EU regulatory framework for crypto-assets market could be viewed as an opportunity to regulate and accommodate these interests and to address these key concerns.
For any specific questions on the MiCA or if you wish to discuss anything covered in this article, please contact Glenn L’hoest or Aida Kaloci.
Glenn L’hoëst, Senior Associate
Aida Kaloci, Associate
 EC, Proposal of 24 September 2020 for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937. A compromise text of MiCA has been published on October 5, 2022: https://data.consilium.europa.eu/doc/document/ST-13198-2022-INIT/en/pdf
 Decentralized finance (DeFi) refers to a financial system built on public blockchains that enables permissionless and trustless access to financial services, without relying on traditional financial intermediaries. It allows individuals to access financial services such as borrowing, lending, trading, and investing in a peer-to-peer (P2P) manner, with no central authority controlling the process.
 A digital asset that represents ownership of a unique item or piece of content, such as digital art, music, or collectibles, that cannot be exchanged for other assets of equal value and which use blockchain to verify authenticity and ownership.
 European Central Bank (2021) Opinion of the European Central Bank on a proposal for a regulation on Markets in crypto-assets OJ C 152/1 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021AB0004