The planned EU regulation of cryptovaluables such as Bitcoin, Libra and Co. – Background, content and classification of the MiCA regulation
Last week, the EU Commission published a proposal for the regulation of crypto assets, the so-called “Markets in Crypto-Assets Regulation” (short: MiCA). The proposal is part of a comprehensive “Digital Finance Package“It also contains other documents such as a “Digital Finance Strategy”, a “Retail Payment Strategy” and legislative proposals for a “DLT pilot regime” and for more “digital resilience” in the financial sector.
Once adopted and in force, the MiCA will regulate directly applicable law in all EU Member States and all issues and services related to cryptovision. It has the potential to set global standards in the handling of digital, block-chain-based assets, also beyond the EU. I would therefore like to briefly outline the background to MiCA, present the most important regulatory innovations and venture a look into the future.
From zero to MiCA in just two years
For some, the crypto market in Europe is nothing more than a niche that is often smiled at. How could a legally binding and directly applicable regulation throughout the EU have been created? In my view, three developments over the past one or two years play a particularly important role, each of which has been mutually reinforcing.
- At the end of 2017 and the beginning of 2018, the EU Commission commissions the European supervisory authorities (EBA, EIOPA, ESMA) within the framework of the EU FinTech Action Plan to examine the applicability of EU financial law to these new types of cryptographic values such as Bitcoin. No sooner said than done. The European Banking Authority (EBA) will publish its report in early 2019. According to the report, cryptographic values are largely not covered by EU law, but they do pose not negligible consumer protection or money laundering risks. The mandate is clear: the EU must act.
- It will, at least in part. Under the 5th Anti-Money Laundering Directive, the EU Commission obliges its member states to take measures by the beginning of 2020 at the latest. However, this results in a veritable patchwork of national initiatives. Countries such as Germany, France, Lithuania and Malta adopt sometimes very different rules, while other states do nothing at all. The still young crypto-sector will be fragmented, a clear EU locational disadvantage.
- The project of a global digital currency Libra, initiated by Facebook, is a real wake-up call for regulators worldwide and in the EU in June 2019. The Krytpo sector has grown out of its infancy, and global corporations are dealing with crypto assets such as Stablecoins. The insight in the EU is clear: a uniform and comprehensive legal framework is needed.
A lack of a legal framework, an increasing fragmentation of regulations in the EU, and a crypto-sector that is gaining in importance, with the lighthouse project Libra seen as a threat to the financial sector and state sovereignty, are forcing the EU to act.
Which rules should apply to crypt values in Europe in the future
Crypt value categories: The MiCA covers and defines all types of cryptographic values that are not yet covered by EU financial law (in particular MiFID 2). This also means that “security tokens”, which are already regulated as shares, bonds or funds, are not covered by the MiCA. Various regulatory categories are created for all other forms of cryptosecurity tokens:
- Crypto-Assets in general (Bitcoin, Ether, Litecoin etc.)
- Utility token (e.g. Filecoin token, Basic Attention token)
- ART – Asset-Referenced Token (e.g. DAI) and
- EMT – E-Money token (e.g. USDC). ART and EMT include the Stablecoins known in linguistic usage, depending on whether they are deposited with a single FIAT currency (Euro, Dollar etc.) (EMT), or are linked to several FIAT currencies, commodities such as gold, or other crypt values (ART). For these two categories, there are also additional requirements if the token is considered “significant”, i.e. a high range and usage is expected. This addition was obviously made with the Libra project in mind.
These rules apply to the issuers
Issuers of these crypt value categories in the EU will in future be required to publish a white paper, if no exception applies, and to send it in advance to the respective national supervisory authority such as BaFin in Germany. The supervisory authority can prohibit the issuance of tokens. For ART and EMT it even requires the explicit approval of the supervisory authority. And for “significant” ART & EMT, the European Banking Authority EBA is responsible with the help of a newly formed body of national supervisors. Depending on the crypt value category, different regulatory duties and requirements will therefore apply. Once the obligations have been fulfilled, the crypto value can be offered EU-wide.
These rules apply to service providers
Except for existing credit institutions, financial services with these cryptographic assets such as custody, brokerage, trading or advisory services will in future require prior authorisation from the national supervisory authority. The regulatory requirements concern, among other things, the initial capital, the IT infrastructure, the corporate structure and the suitability of the management. For countries such as Germany, where licences already exist for certain crypto-services, there will be “simplified authorisation procedures”. This could develop into a competitive advantage for crypto pioneer nations such as Germany. After all, once approved, the service can be offered throughout the EU via European “passporting” in the financial sector.
In addition, MiCa now also puts a stop to market manipulation and insider trading of crypto values on trading exchanges for the first time. From now on this is illegal, similar to the traditional capital market.
The MiCA as a political milestone in crypto-adaptation – and the EU in the vanguard
The MiCA will create a single European crypto-market. To this end, it creates legal security throughout the EU by clearly classifying crypto values and providing clear guidelines for crypto service providers. This is an important step for this young market and will undoubtedly professionalise it. Thanks to the clear legal framework, it is to be expected that institutional investors and partners will also increasingly open up to the crypto sector. Due to the relevance of the EU market, MiCA will also set standards and shape regulation internationally, similar to what the DSGVO has achieved in the data protection sector. The EU is playing a pioneering role here, not least in view of the inconsistent crypto regulation in the USA (which varies from country to country) and the restrictive attitude of many Asian states such as China, India or Indonesia towards crypto currencies.
Of course the success of the MiCA depends on many open questions. How to deal with completely decentralized crypto projects – so if Bitcoin were to be relaunched today, who would be responsible for the emission requirements such as the white paper? How are decentralized financial services (keyword DeFi) handled?
Time frame is uncertain
It is difficult to estimate when the MiCA will enter into force, given the pending legislative procedure in the EU Council and Parliament and the scheduled transitional period of 18 months. For the “significant” Stablecoins such as Libra, this is likely to take considerably longer, since a downstream EU authority will have to establish the “significance criteria” and the EBA supervisory body will have to be reorganised. Here we are probably talking about two to three years. And of course, the MiCA will only be a success if the requirements for young market participants are not set too high. There is often only a fine line between global locational advantage through a clear legal framework and the migration of innovative companies due to excessive requirements.
For Germany, the question arises as to the extent to which existing initiatives such as the crypto custody licence will be agreed with the MiCA. The Federal Ministry of Finance (BMF) stressed from the outset that the German solo efforts in the crypto sector were only an interim solution on the way to an EU-wide solution. The debate on cryptos has now moved from its niche to the highest political level. This is one of the reasons why I am confident that the MiCA will be a full European success in the long run and an important political milestone for further crypto adaptation.
On 1 October Bitkom invites you to a Bitkom Webevent on the topic of “European regulation of cryptographic values”.
…are guests: State Secretary Dr. Jörg Kukies and Marcel Haag, Director at DG FISMA in the EU Commission.
