One of the Commission's three key objectives of the 2020 Capital Markets Union Action Plan was to make the EU a safer place for citizens to invest in the long term. 

The package includes wide-ranging measures to:  

• "Improve the way information is provided to retail investors about investment products and services, in ways that are more meaningful and standardised, by adapting disclosure rules to the digital age and investors' growing sustainability preferences;
• Increase transparency and comparability of costs by requiring the use of a standard presentation and terminology on costs.
• Ensure all retail clients receive at least annually a clear view of the investment performance of their portfolio; 
• Address potential conflicts of interest in the distribution of investment products by banning inducements for "execution-only” sales (i.e. where no advice is provided) and ensuring that financial advice is aligned with retail investors' best interests. Stricter safeguards and transparency will also be introduced where inducements are allowed;
• Protect retail investors from misleading marketing by ensuring that financial intermediaries are fully responsible for the use (and misuse) of their marketing communication, including where it is made via social media, or via celebrities or other third parties they remunerate or incentivise.
• Preserve high standards of professional qualifications for financial advisors.
• Empower consumers to make better financial decisions by encouraging Member States to implement national measures that can support citizens' financial literacy, regardless of their age, and social and educational background.
• Reduce administrative burdens and improve the accessibility of products and services for sophisticated retail investors, by making the eligibility criteria to become a professional investor more proportionate.
• Enhance supervisory cooperation to make it easier for national competent authorities and European Supervisory Authorities to ensure that rules are properly and effectively applied in a coherent manner across the EU and to jointly fight fraud and malpractices." 

The package is wide-ranging in scope and touches on the entire investment journey of the consumer. It consists of an amending Directive, which revises the existing rules set out in the Markets in Financial Instruments Directive (MiFID II), the Insurance Distribution Directive (IDD), the Undertaking for Collective Investment in Transferable Securities (UCITS) Directive, the Alternative Investment Fund Managers  Directive (AIFMD), and the taking-up and pursuit of the business of Insurance and Reinsurance Directive (Solvency II), as well as an amending Regulation, which revises the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation.

The Commission also published Q&As on the Retail Investment Package and a Factsheet.

McGuinness encouraged the EU lawmakers to find a political compromise and speed up passage of MiCA. She said "MiCA rules will be the right tool to address the concerns on consumer protection, market integrity and financial stability." 

She added that had MiCA been in place, it could faciliate the implemention of sanctions against Russia as the sanctions also applied to crypto.  "Of course, sanctions implementation could be facilitated if our framework on crypto was in place, and if all cryptoasset service providers were regulated entities and subject to effective supervision in the European Union," said McGuinness.

The proposal strengthens consumer rights and foster the cross-border provision of financial services in the single market. This market has significantly evolved in light of the overall digitalisation of the sector and the new types of financial services that have been developed since the rules were first introduced in 2002. These developments have been further enhanced by the impact of the COVID-19 pandemic, which contributed to an increase in online transactions.

The pilot regime sets out the conditions for acquiring permission to operate a DLT market infrastructure, defines which DLT financial instruments can be traded and details the cooperation between the operators of DLT market infrastructures, national competent authorities and ESMA.

A provisional agreement between the Council of the EU and the European Parliament was reached on the following key issues:

• definition of the DLT market infrastructure;
• thresholds for admission to trading or recording on a distributed ledger;
• supervision: national competent authorities will remain in charge for the authorisation while the ESMA can issue an opinion on the application. The opinion would be non-public and non-binding but an explanation would be needed in case the national competent authorities decide to significantly deviate from it;
• consumer protection: DLT operators will have mechanisms for handling clients’ complaints and their compensation

This pilot regime will be in place for three years. The European Commission, based on advice from ESMA, will then report to the Council of the EU and the European Parliament on the costs and benefits of extending, modifying or ending it.

Following a comprehensive consultation, the EC published its legislative package for cryptoassets to bring legal certainty to the cryptoasset industry in the EU.

The package includes a proposal for an EU Regulation of Markets in Crypto-Assets (MiCA) as well as a pilot regime for market infrastructures based on distributed ledger technology (DLT) that will allow for experimentation within a controlled environment under a regulator's supervision.

This proposal is part of a wider Digital Finance Strategy as the EU looks to embrace the opportunities of emerging tech.

Key takeaways from the proposal

Scope and definitions

• The regulation applies to entities engaged in the issuance of cryptoassets and services related to cryptoassets in the EU that do not qualify as: a financial instrument, deposits, structured deposits or securitisation.
• The Commission proposes a number of definitions, most significantly:
  • Cryptoasset: a digital representation of value or rights, which may be transferred and stored electronically, using distributed ledger or similar technology.
  • Asset reference tokens: a type of cryptoassets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of several fiat currencies, one or several commodities or one or several cryptoassets, or a combination of such assets.
  • E-money token: a type of cryptoassets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by being denominated in (units of) a fiat currency.
  • Utility token: a type of cryptoasset intended to provide access digitally to an application, services or resources available on a distributed ledger and that is accepted only by the issuer of that token to grant access to such application, services or resources available.
• The proposal also has additional definitions for significant e-money tokens and significant asset reference tokens, when at least three of the following criteria are met (note the Commission is empowered to set higher limits via a delegated act):
  • size of the customer base (should not be lower than two million natural or legal persons);
  • value of the asset reference tokens issued (should not be lower than €2 billion);
  • number and value of transactions (should not be lower than 1 million transactions per day or €1 billion per day);
  • size of the reserve of assets (should not be lower than €2 billion);
  • significance of the issuer's cross-border activities, i.e., the number of Member States that use the token (should not be lower than seven); and
  • interconnectedness with the financial system.

Issuance of cryptoassets 

• Issuers of cryptoassets are required to publish a whitepaper with all the relevant information concerning the cryptoasset issuer and the planned cryptoasset offering or admission to trading on a trading platform for cryptoassets.
• The whitepaper must be notified to the national competent authority, which then can: require the inclusion of supplementary information or amendments; suspend or prohibit the offering if it suspects that a provision has been infringed; or make public that the issuer is failing to comply.
• The regulation also requires that issuers are incorporated in the form of a legal entity in the EU.

Issuance of asset reference tokens

•  As is the case with the issuance of cryptoassets, asset reference tokens will also have to publish a whitepaper and be incorporated in the form of a legal entity in the EU.
• In addition, the proposal includes capital requirements of a minimum of €350,000 or 2% of the average amount of the reserve assets (3% for issuers of significant asset reference tokens).
• The competent authority may require the issuer to hold an amount of own funds up to 20% higher if an assessment deems that the tokens are at higher risk.
• The proposal outlines the requirements for an issuer of the asset reference tokens to have a clear and detailed policy and procedure describing the stabilisation mechanism of such cryptoassets.
• The issuer is obliged to appoint a credit institution (in the case of financial or ‘other’ assets) and/or a registered cryptoasset service provider (in the case of cryptoassets) as custodians of the reserve assets.
• Should the reserve wish to invest reserve funds, it can do so only in highly liquid financial instruments with minimal market and credit risk, something that will be defined by the European Banking Authority (EBA) via regulatory technical standards after consulting the European Securities and Markets Authority.
• There are additional requirements for asset reference tokens that are deemed significant and these will be supervised by the EBA.

Issuance of e-money tokens 

• As above, issuers of e-money tokens need to publish a whitepaper with all relevant information. In addition, they are required to be authorised as a credit institution or as an e-money institution.
• Holders of e-money tokens shall have a claim on the issuer for such e-money tokens which should be issued and redeemed at par value to the monetary value of the token.
• Any funds that are received in exchange for e-money tokens that are invested should be done so in a secure, low-risk assets denominated in the same currency as the one referenced by the e-money token.
• Again, issuers of significant e-money tokens will have additional requirements and will also be supervised by the EBA.

Requirements for cryptoasset service providers 

• The regulation details that cryptoasset services should be provided only by legal persons that have a registered office in the EU and that have been authorised as a cryptoasset service provider in accordance with the regulation.
• MiCA also includes a number of other provisions, such as prudential requirements, organisational requirements, the safekeeping of client funds, information that needs to be provided to clients, complaints handling procedure, conflicts of interest rules and outsourcing rules.
• Specific requirements have also been put in place depending on the type of cryptoasset service provider. Most significant are those of custodians, trading platforms and exchanges.
• Custody on behalf of third parties of cryptoassets or access to cryptoassets must:
  • enter into an agreement with their clients defining their duties and responsibilities;
  • keep a register of positions opened in the name of each client;
  • establish a custody policy including internal rules and procedures to ensure the safekeeping or control of cryptoassets;
  • communicate at least once every three months with the client as well as at each request;
  • segregate holding on behalf of their clients from their own holdings;
  • only use cryptoassets or their cryptographic keys with their client's express prior consent; and
  • be liable for the loss of crypto assets as a result of a malfunction or hack.
• Operation of a trading platform for cryptoassets must:
  • have in place operating rules for the trading platform;
  • have in place effective systems, procedures and arrangements to ensure its trading system is resilient, has sufficient capacity, is able to reject orders that are clearly erroneous, is fully tested and is subject to effective business continuity arrangements;
  • make public the price, volume and time of the transactions executed;
  • complete the final settlement of the transaction on the DLT on the same date as the transact has been executed on the trading platform; and
  • ensure that their fee structures are transparent, fair and non-discriminatory.
• Exchanges dealing with the exchange of cryptoassets against fiat currency or cryptoassets against other cryptoassets must:
• establish a non-discriminatory policy which details the types of clients they accept to transact with;
• publish a firm price of the cryptoassets or a method for determining the price they propose;
• execute the clients' orders at the price displayed at the time of their receipt; and
• publish the details of the orders and the transactions concluded.