By Stephan Roth on Thursday 6 October 2022
The European Union has agreed on the legal text for licensed crypto firms.
The European Union (EU) has reached an agreement for its Markets in Crypto Asset regulation (MiCA), setting precedence for the broader crypto landscape in Europe.
Approved on Wednesday morning, the legislation will now need to pass through a further vote in the European Parliament next week and if approved, the laws under MiCA would commence at the start of 2024.
The scope of MiCA covers issuers of unbacked crypto assets, stablecoins, trading venues, and wallets alongside rules to reveal the identity of persons transacting cryptocurrencies.
In June, the European Council and European Parliament reached a provisional agreement on MiCA, marking the first comprehensive EU stance on cryptocurrencies.
Under MiCA, any credit institution, cryptoasset service provider (CASP), or investment firm that provides custodial services must be based in the EU. In particular, this will impact crypto exchanges and stablecoin issuers, with the vast majority of these players headquartered outside of the EU.
Additionally, the above-mentioned institutions will have to respect strong requirements to protect consumer wallets and will be liable if they lose an investor's crypto assets – unless they can prove that the loss was out of their control.
MiCA will also include legislation to minimise insider trading, unlawful disclosure of inside information and other market manipulation concerts related to cryptocurrencies to preserve the integrity of the market.
Importantly, cryptocurrency firms will have to declare information on the environmental footprint. However, no ban on a proof-of-work consensus mechanism is apparent in the regulation.
The European Securities and Markets Authority will be tasked with maintaining a register of all non-compliant cryptoasset firms.
Under MiCA, cryptocurrencies have been categorised into three different types:
"Utility tokens", are issued with non-financial purposes to digitally provide access to an application, services or resources available on blockchain networks
"Asset-referenced tokens"(ART) that maintain stable value by referencing several currencies that are legal tender, one or several commodities, one or several cryptoasset, or a basket of such assets.
"E-money tokens" (EMT), are crypto assets with a stable value based on only one fiat currency that aims to function similar to electronic money.
According to MiCA, stablecoins that are not denominated in Euro and are issued by an entity that is based outside the EU and used by a non-EU bank for custody of its cryptocurrencies is considered an ART. Conversely, EMTs are Euro-denominated and EU-bank-backed firms.
The European Banking Authority will take control over the determination and classification of ARTs, with national competent authorities, able to withdraw authorisation of any ART issuers when the European Central Bank determined that they pose a threat to EU monetary sovereignty.
The split between ARTs and EMTs was undertaken to preserve the sovereignty of the Euro and prevent the rise of projects like Meta's Libra which could threaten the European Central Bank's money.
Other legislation pertains to NFTs, where a substance over form approach is set to be used by MiCA. MiCA will seek to determine the uniqueness and non-fungibility of the NFT of other crypto assets.
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