In 2020, the EU Commission published its package on the digitization of the financial sector, which builds on the work of the Commission’s FinTech Action Plan and includes a draft Markets in Crypto Assets Regulation (“MiCAR”) regulation, among other legislative proposals. At the end of 2022, the crypto regulation is approved.
The relevant Committee on Economic and Monetary Affairs of the European Parliament (ECON) voted on a final draft. This means that the trialogue negotiations on the most comprehensive European regulatory framework for crypto assets to date can now begin.
We have summarized the regulations of the Commission’s draft MiCAR and venture a first outlook on the expected supervisory regime.
WHAT DOES THE MiCAR REGULATE?
The regulation applies to all market participants that issue crypto assets (issuers) or provide services related to crypto assets (crypto service providers) in the EU. It standardizes conduct and capital requirements for them, as is known from other regulated areas, and thus creates a regime on the operation, management and organization of issuers and service providers in the field of crypto assets.
The Commission’s draft regulation defines crypto assets as “a digital representation of value or rights that can be electronically transmitted and stored using distributed ledger technology [DLT] or similar technology.” MiCAR understands DLT to mean a technology that supports the distributed recording of encrypted data (cf. Art. 3(1) MiCAR). This is also how the EU Council version defines it.
The ECON Committee’s version, on the other hand, stipulates that the representation is cryptographically secured and is in the form of a coin, token or other digital medium1. It, therefore, remains to be seen whether the definition of crypto assets will still be amended in the trialogue negotiations.
With regard to crypto assets, MiCAR distinguishes between value-referenced tokens, e-money tokens and other, general crypto assets, the latter being the catch-all definition.
This includes currency tokens (cryptocurrencies such as Bitcoin), e-money tokens and value-referenced tokens (both also called stablecoins) as well as utility tokens (usage tokens, comparable to “digital” vouchers).
For e-money tokens, however, there is the special feature that, in addition to MiCAR, the rules for e-money as defined in the E-Money Directive may also apply if the token also qualifies as e-money.
Value-referenced tokens and e-money tokens are also considered significant tokens if they meet certain thresholds. Significant Tokens require supervision by the European Banking Authority (“EBA”) due to their economic importance in legal transactions.
Security tokens (security-like tokens) are not included; as financial instruments, these continue to be subject to the regime of MiFID II (or the implementing standards), as well as overall financial instruments or structured deposits as defined by MiFID II, e-money as defined by the E-Money Directive, deposits as defined by the Deposit Guarantee Directive (DSGD), securitizations as defined by the Securitization Regulation.
In addition, the usual manifestations of Non-Fungible Tokens (NFT) are not covered by the scope of MiCAR. MiCAR is not intended to apply to unique crypto tokens that are not fungible with other crypto tokens. Thus, the draft regulation excludes from its scope NFT in the form of digital art and collectibles, as well as in the form of services or physical assets.
Likewise, decentralized finance (DeFi) projects are not likely to be included in the scope of MiCAR, as they lack a central legal entity as an issuer. Therefore, the current draft of the ECON Committee also provides that DeFi constellations should not be subject to regulation until the offering of crypto securities is centralized.
The draft regulation provides for a tiered system of requirements for issuers based on the crypto tokens to be issued, with the overall requirements for issuers of value-referenced tokens being more stringent than those for issuers of e-money tokens and general crypto tokens. However, the following generally applies to all issuers:
For issuers of value-referenced tokens, the draft also provides for comprehensive conduct of business obligations and capital adequacy requirements.
Issuers of e-money tokens must be licensed as a credit institution or an e-money institution . Accordingly, the strict conduct and capital requirements of MiCAR do not apply to them, as the issuers are already subject to the licensing requirements of the respective type of institution.
2. CRYPTO SERVICE PROVIDERS
The provisions for crypto service providers include a licensing requirement and ongoing conduct of business obligations, and no differentiation is made here based on crypto values.
For crypto service providers, the draft regulation lists eight manifestations of crypto services that are not conclusively regulated, which go far beyond the scope of application of the crypto custody business.
According to Art. 3 (1) No. 9 MiCAR, the following activities fall under the non-exhaustively standardized services requiring a license:
The MiCAR contains a separate chapter on the prevention of market abuse in relation to crypto assets, the rules are similar to those of the Market Abuse Regulation and include, inter alia, a ban on insider dealing and a ban on market abuse.
Responsible for the licensing and supervision of crypto issuers under MiCAR are the national supervisory authorities and the ECB, while issuers of significant tokens are subject to supervision by the EBA. In addition, the European Securities and Markets Authority (“ESMA”) is to be responsible for maintaining a crypto service provider registry.
CURRENT REGULATORY REGIME FOR CRYPTOS IN TURKEY
Although Turkey is not yet a European Union country, it closely follows the European Union regulations and is embedding its own regulations. Currently, there is no crypto asset regulation in Turkey, but work is underway and a draft has been leaked to the public.
However, crypto-asset service providers are recognized as liable for the prevention of laundering proceeds of crime. These organizations, which are subject to AML-CFT regulations, may be subject to sanctions from time to time.
There is no concrete regulation on crypto assets as securities. However, it is expected that the Capital Markets Board, which regulates securities and public offerings, will make a special regulation on this issue.
The first comprehensive European regulatory framework for crypto-asset markets has the potential to create a uniform and secure legal framework for crypto FinTechs in Europe.
To be sure, there are no insignificant conditions attached to the market entry of issuers and crypto service providers. However, it should not be overlooked that correspondingly high market access requirements already exist in individual member states. It is important that the supervisory regimes remain close to technical practice and do not block any avenues and development opportunities through overly narrow supervisory regulations. Here, much will also depend on the administrative practice of the supervisory authorities, which would do well to create their own units exclusively for the regulation of crypto assets.
Once again, the EU’s choice to regulate this via regulation is exciting, so that a fully harmonized legal framework for crypto markets is created, which can be seen as an important step towards abolishing so-called gold plating, i.e. the excessive implementation of regulatory requirements by individual member states.
For Turkey, it is foreseen that a regulation will be published in the coming period in parallel with the European Union regulations.