MiCA:  a new major milestone in your Crypto Asset Transformation Journey

On 9 June, Regulation (EU) 2023/1114 on Markets in Crypto-Assets (MiCA) was published in the Official Journal of the EU.

This marks a momentous milestone for crypto markets in Europe. A sound legal framework that clearly defines the regulatory treatment of crypto-assets will reap benefits for Europe, and some findings already show a rapid increase in VC funding in European crypto startup companies (according to Pitchbook in Q2 2023, Europe accounted for 48% of all VC funding that went to crypto startups¹).

With MiCA, Europe seals its position as a global standards setter in the crypto space, and several other jurisdictions are already using MiCA as a blueprint in order to stay competitive in the global market (UK, Switzerland, Australia and Hong Kong).

Refresher: What MiCA is all about?

Once it goes live, MiCA will apply to:

• Crypto-assets that are not considered financial instruments and, as such, not captured by existing financial service legislation (e.g., stablecoins, e-money tokens, utility tokens, etc.);
• Issuers and offerors of these crypto-assets;
• Crypto-asset service providers (CASPs), such as trading platforms, crypto exchanges for funds or other crypto-assets, custody and administration of crypto-assets, portfolio management, advice, transfer services for crypto-assets on behalf of clients.

Classification of crypto-assets will therefore have to be done on case-by-case basis. For instance:

• MiCA will not apply to fully decentralized crypto projects without an identifiable issuer (such as Bitcoin). CASPs providing services in respect of such crypto-assets will, however, be covered by MiCA. In practice, this means that an EU exchange which admits a fully decentralized crypto-asset based on the agreement with that issuer or on its own initiative, will be treated, and held liable, as the EU offeror for that crypto-asset under MiCA.
  
  
• Non-fungible tokens (NFTs), including tokens representing real (digital) objects like art, music and videos, will be left out of scope of MiCA as well. Interestingly, the fractional parts of NFTs will not be considered unique and non-fungible as such. The issuance of crypto-assets as NFTs in a large series or collection will therefore be considered an indicator of their fungibility and consequently captured by MiCA.

To support the market with these assessments, the European Securities and Markets Authority (ESMA) will further specify the conditions under which crypto-assets are considered to be financial instruments (i.e., in scope of existing financial service regulations) or vice versa and, as such, captured by MiCA.

The below graphic further helps to demonstrate classification.

Click here to enlarge the picture

Importance of secondary rulemaking

MiCA will start to apply from 30 December 2024. Exceptionally however, issuers and CASP for stablecoins (or in MiCA’s preferred terminology, asset-reference tokens or ARTs) and e-money tokens must comply by 30 June 2024 and will have to obtain authorization under MiCA before this date.

While the market should waste no time in developing their crypto strategy, many critical aspects about how the new rules should be implemented in practice are delegated to secondary rulemaking (known in the EU policy as “Level 2” measures). In most cases, it will be left up to ESMA to develop these rules as either regulatory or implementing technical standards (RTS/ITS). Practically speaking, this means crypto players will be left with another 12–18-months period of policy uncertainty in some areas of the law. To bridge this gap and considering the tight compliance deadlines, market players are advised to closely follow consultative versions of these technical standards when released, as in our experience these turn out to be very similar to the final texts.

What will MiCA entail for financial firms vs. unregulated entities?

Financial firms are already subject to strict sectoral rules notably in relation to capital requirements. Not to duplicate these requirements, financial entities will not need another authorization under MiCA in order to provide crypto-asset services that are equivalent to those services for which they are already authorized under existing financial services regulation. However, financial firms will still have to comply with most of the other MiCA rules, notably in relation to organizational and conduct requirements.

In this context, banks specifically are advised not to overlook the Basel Committee’s framework on prudential treatment of banks' exposures to crypto-assets that will complement MiCA. Even though subject to EU implementation, these international standards should be taken into account by EU banks that wish to engage in this market when they do their business and capital planning. This regulatory precision is particularly advantageous for less risky (Group 1) crypto-assets, as it provides clear regulatory capital and compliance requirements. Consequently, banks will be able to plan for adequate capital and compliance, fostering the growth of these crypto-assets.

On the other hand, presently unregulated firms operating in the crypto space must get used to the obligations that come with being a fully regulated entity. Such firms will need MiCA authorization and will be subject to an array of prudential and organizational requirements. Crypto firms with viable business proposition and consumer protection measures will have ample opportunities as they will stand out from the questionable projects and proceed to thrive in growing crypto economy.

Why choice of domicile for your crypto business is crucial

MiCA is a type of EU legislation – a “Regulation” – that will directly apply in each Member State as such (does not require national transposition). This said, not all Member States are the same and their crypto business maturity and the approach toward innovative projects vary widely.

Luxembourg is among a small number of Member States to have already established rules directly targeting CASPs by permitting such actors to register with the Commission de Surveillance du Secteur Financier (CSSF) to provide their activities. This national regime allows crypto players to bridge the legal void until MiCA comes into play and consequently, approach investors in Luxembourg with the support of the local regulator.

The future is even more promising. Once MiCA goes live, those already registered and familiar to the CSSF could be perceived positively as trusted local players. Once licensed in Luxembourg under MiCA, CASPs will benefit from an EU passport and can expand their activities to reach investors across the EU.

Furthermore, Luxembourg has already established an attractive legal framework for security tokens as provided under the following three Blockchain Laws:

• Blockchain Law I (March 2019) expressly allows securities to be registered and held via secure electronic registration devices, including distributed ledger technology (DLT).
• Blockchain Law II (January 2021) formally recognized the issuance and circulation of dematerialized securities based on DLT. Consequently, not only can a security circulate via blockchain (the result of the Blockchain Law I), but it can also be issued directly on such blockchain (as a native token). This law also broadens the scope of services that may be performed by providers acting as Central Account Keepers (CAK). For non-listed debt securities, the role of CAK is now open to all EU credit institutions and investment firms, to the extent that they meet the appropriate technical and organizational requirements to carry out such activities.
• Blockchain Law III (March 2023) implements the EU Pilot Regime Regulation in the Luxembourg national framework. In addition, this law recognizes the possibility of using DLT for financial collateral arrangements. Security tokens, therefore, are now allowed to constitute a financial collateral under the Collateral Law.

This legislative framework proved to be a great attraction for issuers and key stakeholders of the security value chain. Several digital assets projects have been launched based on the Luxembourg framework, including the HSBC Orion platform and Goldman Sachs’ project Venus.

MiCA’s arrival is the last piece of the puzzle to complement the existing Luxembourg regime and will position its marketplace as the place to be for forward-thinking actors that wish to fully tap the potential of digital assets and DLT.

¹ Source: Pitchbook

How Deloitte can help

Deloitte’s specialists and dedicated services can help you clarify the opportunity and impact of MiCA and Luxembourg Blockchain Laws and their regulatory and compliance requirements and to foster the way forward in your digital journey. We can support you in critical areas like the definition of your strategic security token value chain and definition of new business and client services, operating models efficiency, together with IT DLT and Blockchain expertise.

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