After two years of discussion and negotiation, the European Parliament and the European Council reached a provisional agreement on the Markets in Crypto-Assets (MiCA), a framework of regulations for digital asset businesses. The framework is subject to approval by the Council and Parliament and then must go through the formal adoption process. The agreement when adopted will provide a framework across the EU, bringing clarity to the covered issues; some EU members have already implemented national level regulations of crypto assets and businesses.

Like the GDPR’s influence on global privacy standards, MiCA will likely have an impact on crypto asset regulation around the world.

What will this regulation agreement entail?

The regulations will cover issuers of unbacked crypto assets, stablecoins, trading venues, and crypto wallets. Following recent volatility in the crypto currency markets, the framework will provide more stability and structure.

“Recent developments on this quickly evolving sector have confirmed the urgent need for an EU-wide regulation. MiCA will better protect Europeans who have invested in these assets, and prevent the misuse of crypto-assets, while being innovation-friendly to maintain the EU’s attractiveness. This landmark regulation will put an end to the crypto wild west and confirms the EU’s role as a standard-setter for digital topics.”  - Bruno Le Maire, French Minister for the Economy, Finance and Industrial and Digital Sovereignty

A key focus of framework is consumer protection from some investment risks and fraud schemes. Under the rules:

  • Crypto asset service providers (CASPs) will have obligations to protect wallets and reimburse investors if they lose their crypto assets, and
  • Market abuse, including market manipulation and insider dealing will be tightly regulated.

What does this agreement mean for consumers?

Participants in the crypto assets markets will also be obligated to publish details of their environmental and climate footprint. The framework does not include anti-money laundering provisions since the EU’s newly updated funds transfer rules already cover crypto assets. The regulations do include a mandate to the European Central Bank (ECB) to maintain a public register of non-compliant CASPs. Providers with connections to high risk third countries will have to the comply with the EU AML framework.

The framework includes significant regulation of stablecoins[1] to protect consumers. All entities issuing coins in the EU will need to establish and maintain a presence in the EU. Issuers will be required to establish and maintain a liquid reserve equal to the value of issued coins; part of the reserve must be in deposited funds. Holders of stablecoins will have a continuing redemption right. All stablecoins will be supervised by the ECB.

Under the provisional agreement licensing of CASPs is left to the member countries; each of which must periodically provide designated information to the European Securities and Markets Authority (ESMA), the EU securities market regulator.

Will this agreement cover NFTs?

Non-fungible tokens (NFTs) (digital assets representing actual items like art, collectibles, videos, and music) are generally outside the scope of the framework. The European Commission will prepare an evaluation of the emerging risks of the NFT market. If appropriate under the evaluation, the Commission will also prepare proposed legislation to manage the risks of the NFT market. If you're interested in NFTs, listen to our discussion in AML Conversations.

For financial service providers in the EU, you should begin preparing for implementation of the framework. If you are a CASP operating or looking to operate in the EU, you should be closely following the adoption process of the framework and planning to operate within its confines going forward.

For more information about crypto assets see Know Your Crypto: How KYC and AML are Helping Cryptocurrencies Go Mainstream.

 

[1] Stablecoins are a class of cryptocurrencies that attempt to offer investors price stability by being backed by specific assets The main disadvantage associated with stablecoins is counterparty risk. Counterparty risk describes the likelihood that another party involved in an agreement might default. In this case, a stablecoin issuer may not have the reserves they claim to have or may refuse to redeem tokens for their reserves. (cointelegaph.com)