After much anticipation MiCA has been approved by both COREPER, the Committee of Permanent Representatives and the European Parliament’s Economic and Monetary Affairs Committee (“ECON”) and enters into its final and what should be merely procedural stages. Whilst a political agreement was reached on 30 June under the French Presidency, the details of the text were left to technical discussions. Whilst ordinarily this is a relatively quick, silent process, that was not the case in these discussions with what turned out to be some quite complex negotiations spilled out into the public.

Once in the Official Journals, MiCA will produce a comprehensive framework to apply to all cryptoasset issuers and service providers who do not already fall within the remit of existing EU Financial Services Regulation and will be one of the most substantial regulatory frameworks for cryptoassets globally.

What does this mean for issuers of ARTs and EMTs?

Asset-referenced tokens are defined as cryptoassets that are not electronic money that purport to maintain a stable value by referencing any other value or right or combination including one or more official currencies. An E-Money Token is  a type of cryptoasset that purports to maintain a stable value by referencing the value of one official currency.

The final rules put in place strict requirements on issuing these tokens with a requirement for a white paper to be available outlining information such as a description of the composition, the custody arrangements, investment policies and the asset reserves.

Issuers will also need to register as a legal entity and get authorisation from their designated member state, with the exception of if they are already a credit institution.

Requirements are put on issuers to have own funds equal to an amount of at least the highest of EUR 350,000, 2% of the average amount of the reserve assets or a quarter of the fixed overheads of the preceding year.

Issuers of an E-money Token will also have to be authorised as a credit or e-money institution.

A key provision is the redemption rights to holders. MiCA mandates that upon request by the holder of either an ART or an EMT, the issuer must redeem at any moment by, in the case of ART, paying in funds other than e-money the market value of the ART held or by delivering the referenced assets. In the case of E-Money, at par value to the referenced official currency.

MiCA also creates a classification of Significant E-Money and Asset Referenced Tokens. These tokens unlike ARTs and EMTs will be supervised by the European Banking Authority if they his any three of their 7 criteria:

• More than 10 million users;
• Market cap in excess of EUR 5 Billion;
• Number of transaction more than 1.5 million or valued at more than EUR 500 million per day;
• They issuer is a provider provider of core platform services and is designated as a gatekeeper;
• The significance of the activities on a international scale;
• The interconnectedness with the EU financial system; and
• Whether the same legal person or undertaking issues at least one additional ART or EMT and provides at least one crypto-asset service.

The key consideration here is that whilst it is clear what the Regulation has outlined on paper, it remains to be seen how the EBA and ESMA will determine how this should be implemented in practice. History suggests that the practicalities of obtaining a license will be quite difficult.

What does this mean for Cryptoasset Service Providers?

MiCA creates a category of cryptoasset service provider (CASPs) which includes any legal person or other undertaking that provides one or more cryptoasset services. MiCA places a number of obligations on CASPs akin to those required in traditional financial services such as for credit institutions to ensure that the necessary internal systems and controls in place.

Requirements such as capital requirements, governance models to ensure accountability and sufficient training are at the forefront. But also the requirement to segregate client funds, have adequete insurance in place and critically, be liable client funds be lost as a result of a malfunction or a hack. CASPs are also only allowed to admit tokens that have a published whitepaper.

By nature of this being an EU Regulation, once a CASP is registered as a legal entity in at least one EU Member State they will be able to passport across the EU. ESMA has been given the role of keeping a register or a black list of non-compliant CASPs.

Like the rules put on place by cryptoasset issuers, these rules are quite heavy duty and in practice could pose some difficulties and will need a lot of adjustment from many in the industry. Eyes will be firmly fixed on what the Level 2 text outlines.

Is DeFi included?

When DeFi was not included in the initial draft of MiCA, eyebrows were raised as to how the Commission could look past a rapidly growing industry and many considered that MiCA would become out of date before it is even published. However, despite the number of iterations of the drafting, the final position is that services that are provided in a fully decentralised manner without any intermediary fall outside of the scope of MiCA. Looking deeper, the thinking seems to be that the EU consider most of these applications have some degree of control and that there is some form of intermediary that can be held accountable and therefore they are reasonably covered. Those that do not are not considered to have a material impact at the moment. As such, MiCA asks the EBA and ESMA to produce a report 18 months after the entry into force of MiCA assessing the development of the DeFi sector and whether there is a need for further regulation.

Are NFTs included?

There has been a great deal of debate on this and in fact much confusion and following the publication of the final text it doesn’t seem as though things are entirely clearer. MiCA does not apply to unique and non-fungible tokens, so on the face of things NFTs are excluded. However, tokens which are part of a large series or a collection should be considered as fungible. The definition of what a large series or a collection has been left to level 2 so it remains to be seen what proportion of the NFT market will in fact be brought within scope.

What has changed since the Political Agreement

Not much in short. Whilst there were a number of contentious issues, the main areas that we focussed on were DeFi and NFTs. Both of these areas have been excluded from the scope of MiCA. That being said, the Commission, after consulting the EBA and ESMA, will present a report to the European Parliament on the latest developments of crypto assets which were not addressed in this proposal and where appropriate accompanied with a legislative proposal and will contain at the least an assessment of the development of DeFi and the necessity and feasibility of regulating it. In addition to the RTS which will determine what is captured as a large series of collection, the Commission’s report will also look at the development of the NFT market and the necessity and feasibility of regulating it.

What happens next?

Now that the text has been voted through both COREPER and the ECON Committee, it will be sent to vote in the full European Parliament Plenary currently scheduled for 17 October. After this, the text will be sent for translation into the 24 official EU languages, after which it will be published into the Official Journal. Given the pressure to get this done, we can expect this to be done by the end of the year.

Once MiCA enters into the Official Journal titles III and IV on Asset-Referenced and E-Money Tokens will come into force after 12 months and the rest of MiCA, including CASPs will come into force after 18 months.

However, crucially, whilst the text has been agreed and we have the regulation, there is still some way to go. 126 provisions have been delegated to the EBA and ESMA to determine how this regime will be applied. The detail of this will give us a better indication of how MiCA will be enforced and what it means to the industry. As for the EBA and ESMA, they have been given 12 months to do this and whilst preliminary work may have already have started, this will be a very tough job.

We will be publishing further deep dives into the sections above in the coming weeks so keep an eye out for these.