1. EU-wide rules for crypto markets
For a long time there was only talk about EU-wide regulation of the crypto markets, now the time has finally come: In the middle of the COVID crisis, the European Commission recently published the first draft of a regulation to regulate the ” Markets in Crypto Assets ” (” MiCA- VO “) (COM (2020) 593 final).
2. Legal framework depends on the type of token
The regulation is intended to regulate the distribution, trading and issuance of digital currencies and crypto assets uniformly in the EU in the future. The 160-page draft divides crypto assets into different categories and provides for specific reporting and supervisory powers:
- Asset-referenced tokens : These are tokens of stable value that refer to several assets (e.g. fiat currencies such as EUR or USD, raw materials or other crypto assets) and are used as a medium of exchange. Classic examples are all types of stablecoins such as Libra.
- E-money tokens : These are tokens that represent exactly one fiat currency and are used as a medium of exchange. One example is the USD coin, which depicts the USD.
- Utility tokens : These are tokens that enable digital access to applications, services or resources and can only be accepted by the issuer (also called “crypto vouchers”. One example is filecoin, which is “exchanged” for data storage in the cloud) can.
3. Rules for issuing tokens
The MiCA-VO regulates, among other things, the issue of certain tokens.
The issue of asset-referenced tokens , for example, requires the approval of a white paper by the local supervisory authority. In addition, issuers may only be legal entities domiciled in the EU with equity capital of at least EUR 350,000 available at all times. Anyone who issues tokens worth more than five million euros within twelve months also needs a license from the local supervisory authority. The advantage: As is usual with regulatory licenses, this is then valid throughout the Union (passporting). There are exceptions in particular for the exclusive offer to professional investors.
According to Part IV of the draft regulation, e-money tokens should only be allowed to be issued by credit institutions and e-money institutions. The issuer must also prepare a whitepaper and report it to the competent national authority.
If an asset-referenced token or e-money token is classified as “significant”, approval is no longer subject to the local authority, but to the European banking supervisory authority . A token is “significant” if three of the following requirements are met: (i) The token is used by more than two million users, (ii) the market capitalization is higher than EUR 1 billion, (iii) more than half a billion is used Million transactions per day, (iv) more than 100 million EUR are transferred per day, (v) the reserve is more than one billion EUR or (vi) the token is used in at least seven EU member states.
Issuers of other crypto assets (that are not asset-referenced or e-money tokens) will in future have to notify the local supervisory authority, of the issue of the assets in accordance with Part II of the draft, with a white paper twenty days before publication . The whitepaper must contain the essential characteristics of the crypto assets (such as a description of the underlying technology, the rights and obligations as well as the associated risk information) and the specific provider. The national supervisory authorities can instruct issuers to improve or supplement the white papers or prohibit the issuance of crypto assets.
Classic Security Token and Security Token Offerings (STO) are expressly excluded from the MiCA Regulation.
There are also exceptions if the offer is made exclusively to professional investors or if the turnover or total value of the tokens does not exceed certain thresholds. In detail, the exceptions are quite technical and must be considered individually.
4. New requirements for Crypto Asset Service Providers (CASP)
For the first time there are binding requirements not only for issuers of tokens, but also for service providers in the crypto industry , such as wallet operators, exchanges and trading services . These so-called Crypto Asset Service Providers (” CASP “) must be legal entities with their registered office in the EU and have a corresponding license from the local supervisory authority in their home member state. This checks the prerequisites, e.g. whether the minimum capital requirements are met and whether appropriate internal control mechanisms and effective risk management processes have been implemented.
In addition, the management must prove their reliability and their professional suitability. As with the issuers of asset-referenced tokens, the following applies: If the CASP has received the license in one member state, it can also operate in all other member states via ” passporting “.
In any case, CASP must always act in the best interests of their customers . In addition, CASP have specific obligations depending on the activity, such as the strict segregation of assets, the prohibition of acting in one’s own name, transparency requirements, liquidation obligations and the prevention of conflicts of interest. The requirements are closely based on the comparable regulations in the securities supervision area .
5. Prevention of market abuse
In particular, insider trading, disclosure of inside information and other market manipulation are prohibited in connection with permitted crypto assets . Anyone who violates this must expect heavy penalties: The draft regulation requires the member states to implement very high penalties. They shall by the Member States for some n are provided to 15% of the Group’s annual turnover of at least EUR five million and legal persons of at least EUR 15 million or violations of natural persons maximum sentences.
6. Other developments in the crypto market
The ECB recently published a longer report on the possible implementation of a ” digital euro “. The e-euro designed by the ECB should not become a crypto asset or stablecoin, but a (real) virtual currency.
The ECB proposes two variants of implementation: In the first “central” variant, the ECB records and controls all transactions. The second “decentralized” variant is intended to work with several regulated providers based on predefined rules. By setting up the digital euro on the blockchain, it should be easily accessible and can be transferred in a legally compliant and (internationally) time-efficient manner.
The Governing Council has not yet taken a decision on the introduction of the digital euro. However, he is in lively exchange with stakeholders and international partners. In addition, possible design forms are already being tested. The Governing Council is expected to decide in mid-2021 whether and how (that is, with which of the two variants) the “digital euro” project will be implemented.
In any case, all the developments that can be observed reflect the advancing digitization and use of distributed ledger technology (DLT) in the financial markets. This also includes the fact that the payment service provider PayPal recently integrated Bitcoin into its services. As a result, Bitcoin can now be used for all transactions that can be paid for with PayPal – a further step by crypto currencies in the direction of the “real economy”.
7. Conclusion and outlook
The draft of the MiCA-VO and the initiatives to create a real E-Euro show: The EU is (finally) reacting with appropriate foresight to the rapid developments in the crypto market. The EU is obviously not only interested in blockchain technology for its own projects, but also does not want to lose touch with other nations (especially China and the USA): ” This proposal supports a holistic approach to blockchain and DLT, which aims at positioning Europe at the forefront of blockchain innovation and uptake. “
It remains to be seen whether the EU will really get to the forefront of the crypto world. With the MiCA Regulation, it creates regulatory harmonization for the entire Union area and thus a good starting point for the further development of the crypto sector within the EU . The resulting legal security across national borders not only makes it easier for entrepreneurs to gain a foothold in this area, but also creates a basis of trust for consumers to use crypto assets. In the past, market abuse scandals have repeatedly caused a stir – the new rules, including prohibitive penalties, will hopefully contribute to something like this occurring less often in the future.
The draft regulation is currently in the consultation stage. The MiCA Regulation is expected to come into force at the beginning of 2022 . Until then, issuers of tokens and other crypto service providers will still have time to prepare for the new legal framework. One thing is already clear: The MiCA-VO will become a game changer for the crypto world. Those who deal with it in good time can use the new rules for themselves.