On the 24^th September 2020, the EU Commission (“EC” / “Commission”) has officially released the Proposal for a Regulation on Markets in Crypto-assets (“MiCA”), effectively confirming MiCA’s earlier leak.

The proposed MiCA forms part of the wider EU Digital Finance Strategy, which succinctly put, aims to make the EU’s financial services more digital-friendly and stimulate responsible innovation and competition among financial services providers within the EU.

In similar fashion to certain homegrown EU national legal regimes which already regulate crypto-assets (such as Malta), MiCA proposes to differentiate between those crypto-assets that are already governed by existing EU legislation and other crypto-assets which at present fall outside of the scope of existing EU legislation.

Crypto-assets which are already governed by existing EU legislation such as those crypto-assets amounting to Financial Instruments (securities), will remain regulated by existing legislation, although the Commission has also proposed a “Pilot Regime for Market Infrastructures that wish to try to trade and settle financial transactions in crypto-asset form” ( the “Pilot Regime”).

On the other hand, for the currently unregulated crypto-assets categories, the Commission is proposing a bespoke regime through the MiCA, applicable in scope to issuers of crypto-assets and crypto-asset service providers.

In this Article, we will be focusing exclusively on the main elements of the MiCA and its expected affects on EU national crypto-asset legal regimes. A separate Article will be shortly issued focusing on the Pilot Regime.

1. MiCA Main Elements

First off, it should be noted that the MiCA sets out a number of proposed definitions of crypto-related terms in respect of which there was no fully harmonised approach to date, and this notwithstanding their extensive use in practice. Some such notable terms are mentioned below:

• “crypto-assets” which have been defined to mean a “digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”;

• “distributed ledger technology” or “DLT” which has been defined to mean “a type of technology that support the distributed recording of encrypted data”;

• “utility token” which has been defined to mean 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”;

• “asset-referenced token”, have been defined to mean “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”; and

• “electronic money token” or “e-money token” defined as 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.

Establishing appropriate crypto-asset related harmonized legal terminology across the EU will be crucial for the MiCA, since the same will in turn underpin the capture of the Regulation. In this regard, it should be emphasized that the MiCA is proposed to apply only in respect of crypto-asset issuers and service providers.

MiCA will not apply to:

1. Crypto-assets that qualify as:
   • financial instruments (as defined in Article 4(1), point (15), of Directive 2014/65/EU);
   • electronic money (as defined in Article 2, point (2), of Directive 2009/110/EC, except where they qualify as electronic money tokens under this Regulation);
   • deposits (as defined in Article 2(1), point (3), of Directive 2014/49/EU of the European Parliament and of the Council 49);
   • structured deposits (as defined in Article 4(1), point (43), of Directive 2014/65/EU;
   • securitisation (as defined in Article 2, point (1), of Regulation (EU) 2017/2402 of the European Parliament and of the Council 50).
2. The following entities and persons:
   • the European Central Bank, national central banks of the Member States when acting in their capacity as monetary authority or other public authorities;
   • insurance undertakings or undertakings carrying out the reinsurance and retrocession activities (as defined in Directive 2009/138/EC of the European Parliament and of the Council 51 when carrying out the activities referred to in that Directive);
   • a liquidator or an administrator acting in the course of an insolvency procedure, except for the purpose of Article 42;
   • persons who provide crypto-asset services exclusively for their parent companies, for their subsidiaries or for other subsidiaries of their parent companies;
   • the European investment bank;
   • the European Financial Stability Facility and the European Stability Mechanism;
   • public international organisations.

MiCA also provides certain exemptions with respect to credit-institutions in relation to matters relating to the issuance of asset-referenced tokens and provision of crypto-asset services, and similarly, to authorised investment firms where they only provide one or more crypto-services equivalent to the investment services and activities for which they are authorised to provide.

A.1. Issuers

Issuers have been classified as “any legal person who offers to the public any type of crypto-assets or seeks the admission of such crypto-assets to a trading platform for crypto-assets”. In this respect, it should be noted that the MiCA proposes that no Issuer of crypto-assets (other than asset-referenced tokens or e-money tokens), shall, in the EU, offer such crypto-assets to the public, or seek an admission of such crypto-assets to trading on a trading platform for crypto-assets, unless that Issuer:

a. is a legal entity (i.e. issuers cannot be a natural person acting in their personal name);

b. has drafted a crypto-asset white paper in respect of those crypto-assets in accordance with the content and form prescribed by MiCA under its Article c. has notified that crypto-asset white paper to the competent authority of the Issuers home-state in accordance with Article 7 of the MiCA;

d. has published the crypto-asset white paper in accordance with the requirements prescribed by MiCA under article 8; and

e. complies with the requirements and obligations laid down under Article 13 of the MiCA.

Points (b) to (d) above are proposed to not apply to Issuers where:

• the crypto-assets are offered for free;
• the crypto-assets are automatically created through mining as a reward for the maintenance of the DLT or the validation of transactions;
• the crypto-assets are unique and not fungible with other crypto-assets;
• the crypto-assets are offered to fewer than 150 natural or legal persons per Member State where such persons are acting on their own account;
• over a period of 12 months, the total consideration of an offer to the public of crypto-assets in the Union does not exceed EUR 1 000 000, or the equivalent amount in another currency or in crypto-assets;
• the offer to the public of the crypto-assets is solely addressed to qualified investors and the crypto-assets can only be held by such qualified investor.

Further to the above, it should be observed that the content and form of an Issuer’s whitepaper is proposed to be regulated in a somewhat similar fashion to the Prospectus Regulation and a number of home-grown national crypto regimes. Indeed, among other requirements, each whitepaper must contain:

1. a detailed description of the issuer and a presentation of the main participants involved in the project’s design and development;
2. a detailed description of the issuer’s project, the type of crypto-asset that will be offered to the public or for which admission to trading is sought, the reasons why the crypto-assets will be offered to the public or why admission to trading is sought and the planned use of the fiat currency or other crypto-assets collected via the offer to the public;
3. a detailed description of the characteristics of the offer to the public, in particular the number of crypto-assets that will be issued or for which admission to trading is sought, the issue price of the crypto-assets and the subscription terms and conditions;
4. a detailed description of the rights and obligations attached to the crypto-assets and the procedures and conditions for exercising those rights;
5. information on the underlying technology and standards applied by the issuer of the crypto-assets allowing for the holding, storing and transfer of those crypto-assets;
6. a detailed description of the risks relating to the issuer of the crypto-assets, the crypto-assets, the offer to the public of the crypto-asset and the implementation of the project; and
7. the disclosure items specified in MiCA’s Annex I.

Crypto-asset issuers are proposed to be bound to notify their white paper (and marketing communications) to the Competent Authority of their Home Member State at least 20 working days before publication of the crypto-asset white paper. While no ex ante approval of a crypto-asset whitepaper (or marketing communications) is envisaged by the Competent Authority of the Issuer’s Home Member State, it should be noted that the respective Competent Authority will be bestowed with (new) supervisory and investigative powers in this regard under article 82(1) of the MiCA.

A.2. Crypto-asset Service Providers

Crypto-asset service providers (“Service Providers”) will be classified as “any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis.”

Thus, whether a service provider amounts to a crypto-asset service provider or otherwise, will depend on whether said entity provides services which are deemed to amount to “crypto-asset services”. The following crypto-asset services and activities will be deemed to amount to “crypto-asset services” under MiCA:

• the custody and administration of crypto-assets on behalf of third parties: that is, the safekeeping or controlling, on behalf of third parties, of crypto-assets or the means of access to such crypto-assets, where applicable in the form of private cryptographic keys;

• the operation of a trading platform for crypto-assets: that is, managing one or more trading platforms for crypto-assets, within which multiple third-party buying and selling interests for crypto-assets can interact in a manner that results in a contract, either by exchanging one crypto-asset for another or a crypto-asset for fiat currency that is legal tender;

• the exchange of crypto-assets for fiat currency that is legal tender: that is, concluding purchase or sale contracts concerning crypto-assets with third parties against fiat currency that is legal tender by using proprietary capital;

• the exchange of crypto-assets for other crypto-assets; that is, concluding purchase or sale contracts concerning crypto-assets with third parties against other crypto-assets by using proprietary capital;

• the execution of orders for crypto-assets on behalf of third parties: that is,  concluding agreements to buy or to sell one or more crypto-assets or to subscribe for one or more crypto-assets on behalf of third parties;

• placing of crypto-assets: that is, the marketing of newly-issued crypto-assets or of crypto-assets that are already issued but that are not admitted to trading on a trading platform for crypto-assets, to specified purchasers and which does not involve an offer to the public or an offer to existing holders of the issuer’s crypto-assets;

• the reception and transmission of orders for crypto-assets on behalf of third parties: that is, the reception from a person of an order to buy or to sell one or more crypto-assets or to subscribe for one or more crypto-assets and the transmission of that order to a third party for execution; and

• providing advice on crypto-assets: that is, offering, giving or agreeing to give personalised or specific recommendations to a third party, either at the third party’s request or on the initiative of the crypto-asset service provider providing the advice, concerning the acquisition or the sale of one or more crypto-assets, or the use of crypto-asset services.

Crypto-asset services within the EU can only be provided by legal persons that have a registered office in a Member State of the EU and that have been authorised as Service Providers under the MiCA in accordance with Article 55.

The crypto-asset services authorisation is meant to allow Service Providers to provide their crypto-asset services through the EU, either through the right of establishment, including through a branch, or through the freedom to provide services. Crucially, Service Providers that provide crypto-asset services on a cross-border basis shall not be required to have a physical presence in Host Member States (i.e. in the Member States where they wish to provide services, where different from the Home Member State). Thus, the authorisation is meant to be a pass-portable one.

Legal persons that intend to provide crypto-asset services need to apply for authorisation as a Service Provider with the Competent Authority of the Member State where they have their registered office. While more details are expected to be divulged once MiCA is closer to implementation, it is envisaged that the authorisation process should be somewhat expedient and efficient, with the Competent Authorities being bound to confirm whether an application for authorisation is complete by containing all prescribed information/documentation within 25 working days from receipt of the application for authorisation and then, are also bound to assess whether the applicant complies with MiCA’s requirements for authorisation within three months from the date of receipt of a complete application by the Competent Authority.

A.3. Transitional Measures

It is key to note, especially given that a number of Member States have already issued their own national crypto-asset legal regimes, that the MiCA envisages that a number of transitional measures will be introduced under Article 123 of the MiCA. More specifically:

• The requirements under MiCA’s article 4 to 14, are proposed to not apply to crypto-assets, other than asset-referenced tokens and e-money tokens, which were offered to the public in the EU or admitted to trading on a trading platform before the date of entry into force of the MiCA (date of entry is to be confirmed);

• Service Providers that provided their services in accordance with applicable law before the date of entry into force of the MiCA, may continue to do so for 18 months following the date of MiCA’s application, or until they are granted an authorisation under MiCA (whichever is sooner); and

• Member States will be allowed to apply a simplified procedure for applications for an authorisation which are submitted between the date of MiCA’s entry into force and 18 months after that date, by entities that, at the time of entry into force of the Regulation, were authorised under national law to provide crypto-asset services.

B. MiCA’s Affect on EU National Crypto Legal Regimes: The End of National Crypto-Asset Legal Regimes with the EU seems Near

It is the author’s subjective view that the MiCA will effectively spell the end of the various fragmented national crypto-asset legal regimes that have been promulgated within the EU to date, including to mention a few, those of Malta, Estonia and France.

At the core of an authorisation process in the crypto-space, is the applicant’s need to be able to provide services on a cross-border basis within the EU – an element which to date is not present in any national authorisation process, in view of the homegrown nature of such authorisation processes.

Under a MiCA authorisation, this will now be possible and in fact, achieving EU market harmonization and prevention of national EU market regulatory fragmentation is one of MiCA’s stated main aims. To this end, the choice of legal instrument proposed by the EC should be noted. The Commission chose to propose for the MiCA the EU legal instrument of a Regulation, this to be able to lay down a single set of immediately applicable rules throughout the EU’s Single Market (as opposed to a “Directive”, which ultimately leaves some level of Member State discretion through the need of national transposition).

Similarly, Member States who purposefully chose to remain passive from a crypto regulatory perspective, will now have no choice other than to adopt the Regulation (once implemented).

All in all, once MiCA enters into force, national EU legal regimes will (in the author’s subjective view) become defunct. In the meantime, the main remaining relevance of such national EU legal regimes will be for being able to benefit from continuity in view of the Issuer exemptions and Service Provider transitional measures previously discussed, together with ensuring a level of preparedness once the MiCA enters into force.

The MiCA’s proposed text is accessible here: https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52020PC0593&from=EN

Article written by Senior Associate Dr Terence Cassar.

For more information on Fintech, Blockchain and Crypto-assets, please contact Dr Ian Gauci and Dr Terence Cassar.

Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.