Markets in Crypto Assets Regulation (MiCAR)
By Donna Turner
The cryptocurrency market has remained broadly unregulated in many jurisdictions, and inconsistent in others, until now.
What is it?
The Markets in Crypto Assets Regulation (MiCAR) is the European Union’s approach to cryptocurrency asset regulation. It is intended to help streamline distributed ledger technology (DLT) and virtual asset regulation in the European Union (EU) and provide a single licensing regime for member states, whilst protecting investors.
To date, consumers have had very limited rights to protection or redress. The new rules require service providers to protect consumers and prohibits any type of market abuse, notably market manipulation (Art. 80 MiCAR) and insider dealing (Art. 78 MiCAR). It brings crypto assets, crypto asset issuers and crypto asset service providers under a single regulatory framework for the first time.
A key advantage of the framework is that the anticipated passporting regime will allow service providers authorised in one Member State to provide their services across EU borders without the need to obtain any additional authorisations.
Who does it apply to?
The Markets in Crypto Assets Regulation applies to all EU member states although implementation into national law will not be required and any cryptocurrency-associated company or individual that wants to offer their coins, assets, or services in Europe.
All trading platforms, exchanges (whether fiat* to crypto or crypto to crypto), and asset issuers will be subject to the regulation.
* Fiat money is legal tender whose value is tied to a government-issued currency, like the U.S. dollar, while cryptocurrency is a digital asset that derives its value from its native blockchain.
What are the regulatory objectives?
There are 4 key objectives:
Provide a legal framework for crypto assets not already covered by existing financial services legislation;
Develop the market through fair competition;
Protect consumers, investors, and market integrity;
Support financial stability in the market.
What is in scope?
MiCAR aims to regulate crypto-assets not already defined as financial instruments or electronic money (e-money) under the 2nd Markets in Financial Instruments Directive (MiFID II) and the Electronic Money Directive (EMD).
MiCAR defines a crypto-asset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology” (Art. 3 para. 1 No. 2 MiCAR). MiCAR distinguishes and regulates 3 categories of crypto assets; asset-referenced tokens, e-money tokens, and other, general crypto assets.
Asset-referenced tokens, whose value is pegged to the value of several fiat currencies, one or several commodities or one or several crypto-assets, or a combination of such assets (Art. 3 para. 1 no. 3 MiCAR).
E-money tokens whose value is pegged to the value of a fiat currency (e.g., USD, EUR etc) (Art. 3 para. 1 no. 4 MiCAR).
General crypto assets including all crypto assets that are neither asset-referenced tokens nor e-money tokens.
Note that security tokens are not within the scope of the MiCAR as these are defined as financial instruments, and are subject to MiFID II (Art. 2 para. 2a MiCAR).
What will be the impact
MiCAR’s biggest impact will be on stablecoins, prompted by the collapse in May 2022 of the algorithmic stablecoin TerraUST and its governance token LUNA, which led to substantial losses across the crypto industry.
For example, there will be a cap of 200 million euros in daily trading volume for stablecoins, which is interesting as some market leaders have daily trading volumes far in excess of this amount, for some in the billions!
It is also expected that stablecoins will have to be backed by reserves that are fully protected in case of insolvency and must be entirely segregated.
Finally, stablecoins with over 10 million users or 5 billion euros worth in circulation, will be supervised by the European Banking Authority (EBA).
When will MiCAR come into force?
It is expected that MiCAR will be applicable in Q3/4 2024. Although this feels like it may be a long way off, MiCAR presents some significant challenges that crypto service providers will have to overcome. We strongly suggest that firms operating in the industry and targeting EU markets start considering their upcoming obligations and eventual submission of authorisation applications. It remains to be seen to what extent the UK’s approach will follow the EU’s.
Link to full proposal: EUR-Lex - 52020PC0593 - EN - EUR-Lex (europa.eu)