MiCAR should be seen as an important step towards European harmonisation of crypto regulation, but uncertainties remain
After much back-and-forth, a preliminary agreement on the Markets in Crypto-assets Regulation (MiCAR) was reached on 5 October 2022, and the formal adoption process began. While the final vote on MiCAR was originally planned for February 2023, there are now to be further delays. Due to the 18-month transition period, MiCAR is expected to enter into force by the end of 2024. So should those affected just wait and see? No – potential addressees of MiCAR should begin to deal with the authorisation obligation that is likely to come their way.
The starting point is that MiCAR becomes relevant when crypto-assets are involved. A crypto-asset within the meaning of MiCAR is:
“[…] a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” (Article 3 para.1 no. 2 MiCAR)
There are three types of crypto-assets:
(Citations to MiCAR in this post refer to the Final Compromise of 5 October 2022.)
ART means a:
“[…] type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets.” (Article 3 para.1 no. 2 MiCAR)
In particular, so-called stablecoins – such as Tether or DAI – are to be covered by this.
An EMT means a:
“[…] type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender.” (Article 3 para. 1 no. 4 MiCAR)
In contrast to ART, EMTs may only represent one fiat currency and not several fiat currencies, one or several other assets (such as commodities) or a combination (basket) offiat currency(ies) and other assets.
In the case of EMT, however, it will not be easy to make a distinction between EMT and e-money, pursuant to the E-Money Directive and the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz).
Utility token means a:
“[…] type of crypto-asset which is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token.”
They are (largely) excluded from the scope of MiCAR if they represent the purchase of an existing good or service.
The question arises whether non-fungible tokens (NFTs), or which types, can fall within the scope of MiCAR. The decisive factor is likely to be whether the NFTs are unique tokens that are not fungible with other crypto-assets or whether they are series of NFTs (so-called fractional NFTs).
In the latter case, depending on the detail of their structure, NFTs can either be financial instruments within the meaning of MiFID II or crypto-assets within the meaning of MiCAR.
With regard to the authorisation requirement, MiCAR distinguishes between the primary market (issuers when issuing crypto-asset) and the secondary market (crypto service providers when providing crypto-asset services) as well as between different types of crypto-asset.
Only issuers of ART are subject to a authorisation requirement. For issuers of EMTs, there is no separate authorisation requirement under MiCAR, but they must have a licence as a credit or e-money institution, and must also comply with the MiCAR obligations, such as the obligation to prepare a white paper. A special feature of ARTs is that they may only be distributed by the issuer itself – not by other persons.
MiCAR provides for the following ten crypto-asset services in total:
If one or more of these crypto-asset services are provided, this generally triggers an authorisation requirement under MiCAR.
In principle, issuers must have their registered office in the EU in order to apply for a MiCAR authorisation.
The application must be submitted to the respective competent national supervisory authority – that is the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) for an issuer having its registered office in Germany, CSSF for an issuer with its registered office in Luxembourg (and so on).
An authorisation application for the issue of ART shall contain, in particular, the following:
Even though details on this are still being determined by technical regulatory standards, it is already clear that a MiCAR licence is not easy-going, but practically equivalent to a MiFID II-licence.
As part of the application, a white paper on the ART to be issued must also be submitted to and approved by the competent authority.
The requirements for a MiCAR authorisation for crypto-asset services are in principle similar to those for an authorisation to issue ART. In addition, the description of the measures and processes for the fulfilment of obligations under money laundering law is particularly important.
Depending on the type of crypto-asset service, the authorisation application must also contain specific process and procedure descriptions.
MiCAR provides exemptions for both issuers and crypto service providers.
In particular, issuers of ART do not need an authorisation in the following cases:
Companies with a MiFID II licence do not need an extra MiCAR authorisation to provide crypto-asset services. Rather, these companies can extend their services relating to financial instruments (MiFID II) to crypto-assets within the meaning of MiCAR.
However, this does not work for the custody and administration of crypto-assets on behalf of third parties, because there is no European equivalent for this, for example due to MiFID II.
As a more general exception, MiCAR also provides for a kind of reverse solicitation: no authorisation is required for a company that provides crypto-asset services to a client resident in the EU who has approached the company exclusively at his own initiative.
For crypto-asset service providers that already have a national authorisation in their home country for an activity that would constitute a crypto-asset service as defined by MiCAR, MiCAR provides for a simplified authorisation procedure.
Provided that they submit their application within 18 months of the application of MiCAR, the national competent authorities will only examine whether the respective crypto-asset service provider fulfils the general obligations and the obligations relating to the provision of crypto-asset services.
Generally, the MiCAR authorisation regime provides a clear, purely crypto-specific framework. Some companies, in particular those that already have a MiFID II licence, can in principle continue to use their existing licence.
Due to its character as a regulation (and thus binding in all European Member States), MiCAR should be seen as an important step towards European harmonisation of crypto regulation; it creates uniform rules.
The MiCAR legislative process has already raised numerous questions, not all of which have been answered yet. It is therefore inevitable that there will be uncertainties and a need for clarification. One solution to avoid these uncertainties may be for potential addressees of the MiCAR to apply for a MiFID II- licence now (although the timescale for this process could be challenging), as the supervisory authorities have more experience of that process and the MIFID II-licence can then also be used for crypto-asset services (avoiding the need for a MiCAR authorisation).