How MiCA Regulation will change the European crypto sphere

As soon as Facebook launched its Libra stablecoin, European regulators began discussing the need for the Markets in Crypto-Assets (MiCA) regulation. The French finance minister made the statement just minutes after the project's launch, saying that Libra “cannot and must not become a sovereign currency, with all of attributes of a currency.” The collapses of FTX, Terra, and Celsius Network only strengthened the resolve of the authorities.

When will MiCA go into effect?

Europe has determined that existing laws cannot be applied to the majority of “crypto assets” and “crypto assets service providers”. Therefore, new regulations were created to control cryptocurrencies and crypto companies’ operations. The European Parliament is expected to vote on MiCA in April 2023. When the document is approved, it will become law in all 27 EU member countries. After an 18-month transition period, the Regulation will be fully implemented. It should be noted that they are developing Ukrainian legislation based on MiCA regulations.

The essence of the requirements for tokens

A crypto asset will be considered “a token based on distributed ledger technology used as a means of exchange.” The MiCA regulations will only apply to tokens issued after the laws go into effect, not to tokens that have already been issued.  New projects will require:

1. To register a legal entity in any EU country;
2. To produce and publish a white paper – a document outlining the project;
3. To submit the document for review to the National Competent Authority (NCA) in the country of registration.

The important thing now is that the NCA does not “reject” the white paper. Legislators believe that the phrase “approved by the NCA” should not appear in advertising for tokens.

What is a white paper

In some ways, a white paper resembles a description of a project that is about to go through an IPO. The document must contain all the necessary details about the project, including the biographies of the managers, the core of the business concept, the technology required for its implementation, as well as the responsibilities of token issuers and the rights of buyers. The white paper will have legal consequences. The company must provide accurate information and follow through on its promises. If not, the issuers could end up in court or even prison.

The white paper may not be submitted to the NCA if the tokens are offered to fewer than 150 buyers or are worth less than $1 million, or if they are only offered to qualified investors, with a few other exceptions. Another consideration is if your client base exceeds 2 million people, the value of tokens exceeds EUR 1 billion, the number of daily transactions exceeds 0.5 million or EUR 100 million, and so on. Generally speaking, your technical documents will be transferred from the national regulator to the European one if you are a “big man.”  There are already higher capital requirements, as well as EU interference in the company's internal politics. 

Obligations of CASPs

There is a list of requirements for Crypto Asset Service Providers (CASP). Companies, for example, must keep sufficient reserves to cover losses (ranging from a small fixed amount to certain annual operating costs, depending on the type of service). CASPs must demonstrate that internal company rules prohibit market manipulation and other abuses. The funds of the service provider must be kept separate from the funds of its customers. The CASP will also store and provide all necessary information, including customer transaction data, to the NCA.  The requirement that CASPs have “appropriate” shareholders and managers is another excellent innovation. Shareholders must not have a criminal record, and managers must have specific experience and qualifications.

MiCA's advantages and disadvantages

Europe is preparing to take the lead in cryptography on a global scale. Legislators believe that the development and implementation of MiCA is an important step towards future leadership. The majority of market participants support MiCA, despite its severity and burden. It makes the game's rules clear and understandable.

Another significant benefit is the pan-European registration, which will enable cryptocurrency companies to quickly expand their business to any EU nation. White paper requirements will increase responsibility: simply downloading a white paper template from the Internet will no longer suffice. However, the costs of compiling such an analogue of the IPO prospectus will be prohibitively expensive for businesses.

At the same time, the industry's quick development is the clear “bottleneck” in efforts to regulate the crypto market. As an illustration, NFTs were viewed as odd experiments when the MiCA project was first introduced to the public in 2020. Everyone is talking about non-fungible tokens today, when the Regulations are ready for voting. As a result, they reached an agreement that NFTs will not be regulated by MiCA. One can only guess what innovations might emerge over the next 18 months, when the regulation will be fully in effect.