Home » EU Close to Introducing Groundbreaking Law to Regulate Crypto

EU Close to Introducing Groundbreaking Law to Regulate Crypto

by admin

In October 2022, the European Council approved the Crypto Asset Market (MiCA) Regulation. This is one of the first global attempts at comprehensive regulation of the cryptocurrency market. The regulation extends to money laundering, consumer protection, accountability for cryptocurrency companies and environmental impact. The European Union (EU) is a pioneer in digital regulation, and the breadth of the MiCA means it will have a significant impact globally.

prologue

What are laws?

The Markets in Crypto-Assets Regulation (“MiCA” or “Regulation”) is a new piece of broad EU law designed to regulate crypto-asset related activities taking place in the EU. MiCA covers several key areas such as transparency, disclosure, authorization and oversight of transactions. This Regulation applies to natural and legal persons and other undertakings engaged in issuing, offering to the public and permitting trading of crypto-assets or providing services related to crypto-assets within the EU.

MiCA has adopted its own definition of “crypto-assets”. It means “a digital representation of value or rights that can be transferred and stored electronically using distributed ledger technology or similar technology.” The convention divides this definition into three subcategories, described below.

MiCA has passed all stages of the EU legislative process, with the exception of approval by the European Parliament. The European Parliament is not expected to oppose the rule and is expected to pass it by the end of 2022. In that case, MiCA will enter into force in 2024.

General purpose

MiCA’s primary objectives are industry regulation and consumer protection.1, preventing market abuse, and maintaining the integrity of the crypto market. Under MiCA, consumers will be “more informed. [the] Risks, Costs and Fees in Dealing with Crypto-Assets”, and Regulation “supports market integrity and financial stability by regulating public offerings of crypto-assets”, as well as addressing market manipulation and money laundering. , introduce measures to prevent terrorists. Financing and Other Criminal Activities.

More broadly, MiCA is designed to ensure that “EU financial services law is fit for the digital age and contributes to a future-proof economy that works for people”.

Interaction with Other Laws

Broadly speaking, crypto-assets that are already regulated under existing EU financial services regulation will not be subject to MiCA and will not be regulated under the existing framework “regardless of the technology used for issuance or transfer”. continue. For example, this means that crypto-assets, which are already classified as “financial instruments” under EU law, will continue to be governed by existing regulations rather than MiCA. The European Securities and Markets Authority will be tasked with publishing guidelines on the interaction between the MiCA and existing EU financial services regulation before the MiCA comes into force. [the] Regulation and Financial Instruments”.

execution

The Regulations are administered by competent authorities appointed by each Member State, a list of which is published. Competent authorities may be new or existing authorities. The European Securities and Markets Authority and the European Banking Authority will be the supervisory regulators at EU level.

Competent authorities have the power to take appropriate administrative penalties and other administrative measures in the event of an infringement, notwithstanding existing criminal sanctions in Member States.Regulations stipulate that a competent authority must have the power to impose at least Certain specific penalties, including, inter alia, a fine of €5 million or a fraction (3% to 12.5%) of the annual turnover of the legal entity, depending on the nature of the infringement.

approach

The regulation classifies crypto-assets into three subcategories, each with different requirements. The categories are based on whether crypto assets reference other assets and try to stabilize their value. The three categories are:

  1. Electronic money (electronic money) tokenA crypto asset that aims to stabilize its value by referencing the only official currency.
  2. asset reference tokenThese are not electronic money tokens, but crypto assets intended to maintain a stable value by referencing other values ​​or rights, or combinations thereof, including one or more official currencies. . This category captures all crypto assets whose value is backed by assets, not electronic money tokens. Regulation notes that this catchall makes his MiCA “future-proof.”
  3. All other crypto assets. This covers all crypto assets that are not e-money tokens or asset-referenced tokens. This includes utility tokens (that is, a type of cryptocurrency whose sole purpose is to provide access to goods or services offered by the issuer of that token).

The regulation states:Unique and non-fungible with other crypto-assets, including digital art and collectibles, and its value is due to the unique properties of each crypto-asset and the utility it imparts to token holders”. The regulation further expands the meaning of “unique and irreplaceable,” but NFTs, especially those in the form of digital art and collectibles, may not be prosecuted unless they qualify as financial instruments. there is.

Authorization

MiCA applies to persons engaged in:

  1. Authorizing the issuance, offering and/or trading of crypto assets.
  2. Provision of crypto asset services.

A crypto asset service is one of the ten services listed in the regulation, examples include the storage and management of crypto assets on behalf of a third party. Operation of crypto-asset trading platforms; exchange of crypto-assets and funds;

The Regulations govern which legal entities or other entities are permitted to provide cryptocurrency services (and therefore are cryptographic service providers (“CASP”)). In short, CASP is

  • A certain type of financial institution (such as a credit institution or an investment company) that meets various specific requirements.Also
  • Be licensed by the relevant competent authority, and: Have a registered office in a Member State that carries out at least part of the cryptocurrency services. Has an effective place of control within the Union. At least one of her directors resides in her EU.

Penalties for providing cryptocurrency services without authorization are a fine of at least €5 million or 5% of the total annual turnover of the legal entity.

main requirements

As an example, here are some of the key regulatory provisions that MiCA will introduce when it enters into force:

Liability for Loss of Crypto Assets

under the rules CASP Those who are authorized to store and manage crypto assets on behalf of third parties, Responsible to clients for loss of crypto assets As a result of an incident arising from the provision of the Service or the operation of the Service Provider, or regarding the means of access to the Crypto Assets;2It is worth noting that incidents such as this include ICT-related incidents such as cyber-attacks, thefts, and malfunctions. “occurred independently of the provision of related services or the business of the crypto asset service provider;For example, any issues that may be inherent in operating a distributed ledger that CASP does not control cannot be attributed to CASP.

Crypto Asset White Paper

Entities, whether individuals or financial institutions, wishing to make their crypto assets available to the public or to allow their crypto assets to be made available to trading platforms, should have a crypto asset whitepaper containing mandatory disclosures and other information. must be created. The content of the whitepaper varies depending on the type of crypto-asset, but all whitepapers contain information about the issuer, information about the crypto-asset, information about the underlying technology, and information including associated risks. must be Advertising and marketing communications must be consistent with the content of the white paper.

Acceptance and Registration of Positions

CASPs that provide custody and custody services of crypto assets on behalf of third parties must enter into agreements with their clients to identify their obligations and responsibilities. Such contracts must contain certain specific information (as defined in Section 67). This includes the identity of the parties, a description of the security systems used by CASP, and the law applicable to the contract.

CASPs that provide custody and custody services of crypto assets on behalf of third parties are also required to maintain a register of open positions in each customer’s name corresponding to each customer’s rights to crypto assets. .

Such CASP must also provide each client with a crypto asset position statement recorded in that client’s name at least once every three months or upon request by the client.

Transparency and governance

MiCA requires issuers of asset-referenced tokens to maintain a robust governance regime. This is said to include: (b) effective processes for identifying, managing, monitoring and reporting risks to which the issuer is or may be exposed; (c) appropriate internal control mechanisms, including appropriate management and accounting procedures;

Effect of MiCA

One of MiCA’s main objectives is to increase consumer confidence in crypto assets by increasing consumer protection through regulation. The EU hopes that increased consumer confidence will lead to the development of markets for crypto assets and opportunities for innovative digital services. In addition, the uniform framework set out in MiCA gives CASPs certainty about how the services they offer will be treated in different Member States.

Therefore, the beneficiaries of MiCA should be wide-ranging, including consumers, developers, financial institutions and regulators. Furthermore, regulation also means recognition, and extensive EU regulation gives legitimacy to this sector. Some commentators point out that this kind of regulatory justification is needed to strengthen trust and certainty if cryptocurrencies are to live up to their potential.

next step

MiCA is not yet in force, but now is a good time to start preparing. Any individual or entity considering entering the CASP space is encouraged to do so in accordance with MiCA’s requirements. This is not only because many of the requirements are good practice, but also because in most cases regulations will be compliant by the time they are introduced. push in.

Akin Gump is happy to discuss MiCA’s implications and requirements for you and your business, as well as the crypto space more broadly. For more information, please contact one of the authors or your usual Akin Gump contact.

Related Posts

Leave a Comment