European Union Gives Final Green Light on New Crypto-Assets Regulation

On April 20, 2023, European Union (EU) lawmakers voted to pass the Markets in Crypto Assets (MiCA) legislation, which provides the first legal framework to regulate the crypto-assets industry in the EU¹.  MiCA applies to crypto-asset service providers (CASPs)²  and issuers³, and establishes uniform rules for issuance, operation, and governance of crypto assets and services, as well as establishes consumer protection rules and measures to prevent market abuse. While a number of EU member states had implemented their own national frameworks and legislation, regulation of the crypto-assets industry in the EU was fragmented. MiCA aims to unify regulatory requirements across the EU around CASPs and stablecoins.

This client alert discusses the obligations for CASPs and stablecoin issuers under MiCA and outlines specific actions CASPs and issuers should consider.

Rules for CASPs

To the relief of many CASPs across the industry, MiCA will ease entry into the EU market by giving CASPs the ability to operate across the EUon a passport basis, without distinct local authorization requirements. The European Securities and Markets Authority will be mandated to maintain a register of all EU-authorized CASPs. 

Notably, MiCA will also require CASPs to: 

• Follow requirements for business conduct, prudential safeguards, internal policies and procedures, safekeeping of clients’ crypto assets, outsourcing, business continuity, and specific crypto-asset services
• Be placed under additional obligations if the CASP is considered “significant” or has more than 15 million active users⁴
• Publish on their website information regarding the energy consumption of each crypto asset to which they provide services

Rules for Issuers of Stablecoins

As stablecoins continue to rapidly grow and become intertwined with the mainstream financial system, EU governing authorities are of the view that without tighter regulation, stablecoins may pose a risk to European financial stability in the future. As such, MiCA aims to address the kinds of systemic risks that metastasized with collapse of stablecoin TerraUSD and its sister token Luna.⁵

In targeting stablecoins, MiCA identifies two categories of stablecoins to be subject to more specific requirements: (1) asset-referenced tokens (ART), which maintain a stable value from a combination of assets (e.g., fiat currency, commodity, or crypto asset) and; (2) electronic money tokens (EMTs), which maintain a stable value from a single fiat currency.

Under MiCA, issuers of both ARTs and EMTs will need to do the following:

• Be authorized by a competent authority in an EU member state^6,7
• Produce and publish a crypto-asset white paper with mandatory disclosure requirements to inform purchasers about the characteristics and risks of the crypto assets, including disclosures about energy consumption⁸
• Have a mandatory redemption requirement and ensure the redemption of tokens at any time, including in stressed market conditions⁹
• Be subject to a European Banking Authority evaluation as to whether the ART or EMT is high risk or classified as “significant”¹⁰

Issuers of ARTs will also have to maintain:

• A reserve of assets including detailed policies regarding the composition, allocation, risk assessment, investment, and custody of reserve assets, as well as policies on the rights granted to token holders
• Own funds of at least EUR 350,000, two percent (2%) of the reserve assets, or a quarter of the fixed overheads of the previous year
• Organizational rules such as robust governance and internal control arrangements, complaint handling procedures, and conflicts of interest management
• Quarterly reporting to a competent authority for ARTs valued more than EUR 100 million
• Restrictions on ARTs to 1,000,000 transactions or EUR 200 million per day

Key Considerations

In order for CASPs and crypto-asset issuers to be fully compliant, they will need to consider:

1. Adequate and effective internal control mechanisms and governance capabilities to assess the risks of engaging in crypto-assets
2. Policies and procedures that outline the processes to identify and minimize risks posed by crypto assets such as, but not limited to, fraud, cyberattacks, and market manipulation
3. Risk assessment and risk management procedures to detect and prevent fraudulent activities
4. Management of operational risks such as establishing a business continuity policy and having procedures for managing information, communication, and technology systems
5. A robust gap analysis across EU member states to ensure all legal entities are in compliance with MiCA

How Guidehouse Can Help

Guidehouse professionals who collectively combine industry and consulting experience, including in crypto assets, can help entities assess their compliance programs and develop and implement the necessary systems, controls, policies, and procedures to address MiCA requirements. Guidehouse has been engaged by banks, non-bank financial institutions, initial coin issuers and administrators, trading platforms, virtual commodity associations, digital asset exchanges, and money service agents. 

Guidehouse is well-equipped to address your toughest challenges and offer innovative solutions for responding to significant regulatory pressure.

Co-author: Michael Ilewski

^{1  See press release: https://www.europarl.europa.eu/news/en/press-room/20230414IPR80133/crypto-assets-green-light-to-new-rules-for-tracing-transfers-in-the-eu.
2  A CASP is a person who provides any of the following services: operation of a crypto-asset trading platform, exchange of crypto assets for fiat currency or other crypto assets, custody and administration of crypto assets for third parties, as well as the reception, transmission, and execution of orders for crypto assets on behalf of third parties.
3  An issuer of crypto assets is any natural or legal person or other undertaking who issues the crypto assets.
4  A significant CASP will need to report to a competent authority, which will notify the European Securities and Markets Authority about ongoing or concluded authorizations or withdrawals of authorizations.
5  See :https://www.wsj.com/articles/why-did-cryptocurrencies-terrausd-and-luna-unravel-stablecoin-price-crash-explained-11652462779.
6  Issuers of EMTs will need to be authorized either as a credit institution under the Capital Requirements Directive or as an e-money institution under the Electronic Money Directive.
7  Except: (1) offers that are made to qualified investors or when the offer is below EUR 5,000,000; (2) issuers of ARTs who are authorized as credit institutions under the Capital Requirements Directive.
8 The white paper will need to contain information about the issuer, the identity of the person seeking admission to trading, the identity of the person preparing the white paper (if different from the issuer), the tokens, the public offer or admission to trading, rights and obligations, the underlying technology, the environmental and climate-related impact, and any related risks. Issuers of ARTs will also need to include additional information regarding reserve of assets.
9  Issuers of ARTs and EMTs will need to maintain an operational plan to support an orderly redemption of each token, as well as maintain a recovery plan that includes preservation of its services, recovery of operations, and fulfillment of their obligations during events that pose a significant risk of disrupting operations.
10  ARTs and EMTs will be classified as significant ARTs and EMTs where at least three of the following criteria are met: the number of token holders is more than 10 million, the market capitalization or the size of reserve assets is higher than EUR 5 billion, the number and value of daily transactions is higher than 2,500,000 and EUR 500 million, the issuer is a provider of core platform services in accordance with the Digital Markets Act, the significance of the issuer’s activities on an international scale, and the interconnectedness with the financial system. The EBA may also classify ARTs and EMTs as significant when the same legal person issues an additional token and provides at least one crypto-asset service. Issuers of significant ARTs and EMTs will be subject to increased own funds requirements, a remuneration policy promoting sound risk management, custody obligations, and a defined liquidity management policy ensuring sufficient liquidity of the reserve.}