“Crypto” is no longer just a buzzword for tech geeks and financial futurists — it’s going mainstream, and fast. With this explosive growth comes the inevitable: rules.
During my master’s thesis for the LL.M. in Tax Law, I explored the growing intersection between DAC8 and MiCAR — two pillars of the EU’s evolving regulatory approach to crypto-assets. In this article I will focus on the Markets in Crypto-Assets Regulation (‘MiCAR’), Europe’s new framework aimed at bringing some regulation to the European crypto space. Whether you’re in the business of offering crypto services or just dipping your toes into the world of digital assets, MiCAR is about to shake things up.
So, what’s MiCAR all about, and why should you pay attention? Well, in a world where Bitcoin, alt-coins and stablecoins are becoming daily business, MiCAR aims to set the stage for a safer, more transparent playground. It’s important to ensure that European legislative acts on financial services are ready for the digital age, and contribute to a future-proof economy that works for people.[1] MiCAR tries to aim to achieve this by providing a regulatory framework that embraces innovation while ensuring stability and consumer protection in the ‘wild-west’ crypto market.
The Definition of a ‘Crypto-asset’
Before diving into the scope of the MiCAR regulation, it’s important to understand what exactly a crypto-asset represents in line with the regulation, and what makes it unique. For the purposes of MiCAR, a crypto-asset is defined as: ‘a digital representation of value or rights that can be transferred and stored electronically using distributed ledger technology or similar technology’.[2] The MiCAR distinguishes between three types of crypto-assets: Asset-referenced tokens (“ART’s”), Electronic money tokens (“EMT’s”), and Crypto-assets other than asset-referenced tokens or electronic money tokens (“ORT’s”). Important to note is that MiCAR only applies to crypto-assets, which are not already covered by other European financial frameworks and classified as a financial instrument, payment service or deposit.
Asset-referenced token (ART)
Asset-referenced token is a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.[3] For instance, an ART could be linked to a basket of currencies, shares or even the price of gold. Tether Gold and DAI are good examples of ART’s. Also stablecoins linked to a non-European fiat currency falls under the scope of ART’s, think about Tether (USDt).
Electronic money token (EMT)
Electronic money token means a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.[4] So in short, a E-money token can only be linked one-on-one to the value of a European fiat currency. For example, Eurite (EURI) and EURC (a Euro-Backed Stablecoin) are Electronic money tokens.
Other regulated tokens (ORT)
Crypto-assets, other than asset-referenced tokens or e-money tokens, covers a wide variety of crypto-assets, including utility tokens.[5] Binance Coin (BNB) and Bitcoin (BTC) are good examples of this category. To ensure a proportionate approach, MiCAR does not apply to crypto-assets that[6]:
- Offers the asset to fewer than 150 persons per Member State; or
- The assets are only addressed to qualified investors; or
- Over a 12-month period starting from the beginning of the offer, the total consideration does not exceed EUR 1,000,000 or the equivalent amount in another official currency or crypto-assets
Non Fungible Token (NFT)
Non Fungible Tokens (“NFT’s”) represents unique assets, such as digital collectibles, that is linked to an underlying asset. Each NFT cannot be exchanged with another NFT, which makes it not fungible. MiCAR says it should not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles.[7] NFT’s are therefore outside the scope of MiCAR.
Who’s subject to MiCAR?
The scope of MiCAR applies to natural and legal persons and certain undertakings that are engaged in the issuance, offer to the public and admission to trading of crypto-assets or that provide services related to crypto-assets in the European union.[8] In MiCAR, crypto-asset service providers (“CASP’s”) fall in the scope.
CASP’s are entities that provide services related to crypto-assets on a professional basis. Think about operating digital trading platforms, exchanges, and custody and administration services.[9] Article 2 of MiCAR provides a list of exemptions. For example, MiCAR does not apply to central banks, public international organizations, and persons who provide crypto-asset services exclusively for their parent companies or own subsidiaries. In short:
- CASPs are companies that perform one or more the following services:
- Store and manage crypto-assets from clients. This primarily includes services offered by crypto wallets. Notable examples include Binance, TrustWallet and Coinbase. These companies provide storage, transfers and management of different cryptocurrencies;
- Operate crypto-asset trading platforms. These platforms process buy and sell orders from their clients; for example the market leader in the Netherlands, Bitvavo;
- Exchange crypto-assets for cash or other crypto-assets on behalf of clients;
- Receive, transmit and execute crypto-asset orders on behalf of clients;
- Issue crypto-assets on the market;
- Provide advice on crypto-assets;
- Provides crypto-asset management on behalf of clients, and/or;
- Provides crypto-asset transfer services.
To provide a clear and structured approach in determining whether an entity falls within the scope of MiCAR, the following flowchart has been designed: (CASP) are subject to MiCAR regulations.
Flowchart – Am I a CASP, and in Scope of MiCAR?
Ensuing obligations
The MiCAR establishes various obligations for different activities of crypto companies. For example, the requirements for ORT’s differ from those for EMT’s and ART’s. Additionally, CASP’s do also have to comply with specific obligations. In the next paragraph, the different obligations will be explained for each category.
Obligations for CASP’s
The general obligations arising from the MiCAR for crypto-asset service providers can be summarized as follows:[10]
- CAPS’s must apply for a MiCAR license from the regulator of the country in which the CASP is based. With this license, CASP’s have the right to provide services through Europa.
- CASP’s have the obligation to act fairly and in the best interests of their clients. Besides that, they have to make sure to publish weblinks to all relevant whitepapers of crypto-assets and all the published information must be clear and non-misleading.
- CAPS’s must comply with certain prudential requirements, governance arrangements, asset custody, complaint handling procedures and conflicts of interest.
- A CASP can be classified as ‘significant’ if they have more than 15 million active users in a calendar year. In that case, the CASP is obliged to notify the regulator and provide extra information.
Obligations for issuers of ORT’s
The issuance of ORT’s to the public are made primarily through initial coin offerings (“ICO’s”). In this process holders get a coin or a token which they can use on the connected ecosystem of the issuer. MiCAR gives specific obligations for issuers of crypto-assets (other than ART’s and EMT’s). The main obligations for ORT’s can be summarized as follows:[11]
- The issuer of a crypto-asset has to be a legal entity and has to publish a whitepaper. A whitepaper is a document that summarizes all the necessary information for interested buyers of the issued crypto-asset. Consider a description of the goals and features of the project and the associated risks.
- Any advertisements for new crypto-assets must be clearly identifiable and not misleading. Besides that, every advertisement needs to contain a cautionary clause.
Obligations for EMT’s and ART’s
MiCAR gives specific obligations to the issuers of Electronic Money Tokens and Asset-referenced Tokens. This is because the issuers made the promise to their holders that the token will represent a stable value. In 2022 we have seen the collapse of the stablecoin TerraUSD (UST), this resulted in a loss of 40 billion USD market value where lots of particular investors lost their savings.[12] For that reason, MiCAR sets stricter requirements for ART’s and EMT’s. Below, we will list the most important obligations:
- Issuers of ART’s need a MiCAR license. To get this license, they have to show that they have adequate governance arrangements and sufficient knowledge and skills to perform.
- Issuers of EMT’s must be licensed as a credit or electronic money institution, since MiCAR classify EMT’s as electronic money based on the E-money Directive.
- Issuers of ART’s and EMT’s must adhere to prudential requirements. Therefore, issuers must have enough assets at all times to ensure the stable value of the asset.
- Issuers of ART’s and EMT’s have to publish a whitepaper containing all the relevant information.
- Some ART’s and EMT’s can be qualified as significant. This means that more than 10 million people holding the token. This size of holders can cause risks that impact the monetary sovereignty and therefore have to be reviewed every year by the European Banking Authority (EBA).[13]
Prevention of market abuse
MiCAR also provides provisions relating to market abuse in addition to all the obligations mentioned earlier. These provisions primarily address issues where inside information and client order details are followed by market manipulation. In addition, MiCAR provides rules regarding the monitoring, detection and reporting of market abuse.[14] These specific rules aim to prohibit certain behaviours, such as trading on inside information, improper disclosure of such information, and market manipulation in connection with crypto-assets. These rules strengthen user trust and the overall integrity of the crypto market.
Sanctions and enforcement
Under MiCAR, member states have their own competence on how to address violations of the regulation. Article 111 of the MiCAR outlines a range of administrative sanctions. These sanctions vary from statements, cease orders, fines up to 700.000 EUR for individuals, and up to 15% of annual turnover for legal entities.[15] These sanctions are depending on the type of breach. Member states also have the permission to opt for criminal charges. Ultimately, the specific sanctions that apply will depend on how each member state chooses to implement MiCAR within its national legal framework.
So… What Should I Do?
The introduction of MiCAR marks an important moment for companies that offer crypto-related services, as MiCAR aims to create more transparency and compliance within the crypto space. At the same time, upcoming reporting obligations such as the Crypto Asset Reporting Framework (“CARF”) and the seventh amendment of Directive on Administrative Cooperation (“DAC8”) will intensify the regulation and obligation to information exchange. Therefore, it is crucial to take action now – not only to meet the MiCAR requirements but also to prepare for the future regulations.
This action can consist of assisting you with the application process for a MiCAR license in the Netherlands and review your whitepaper to ensure MiCAR compliance. We are happy to assist, and while we’re at it, we may as well optimize the taxes — both for your CASP Company and for your Traders/Investors.
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[1] Paragraph 1 Introduction MiCAR Regulation (EU) 2023/1114.
[2] Article 3 paragraph 1 under 5 MiCAR Regulation (EU) 2023/1114.
[3] Article 3 paragraph 1 under 6 MiCAR Regulation (EU) 2023/1114.
[4] Article 3 paragraph 1 under 7 MiCAR Regulation (EU) 2023/1114.
[5] Paragraph 18 Introduction MiCAR Regulation (EU) 2023/1114.
[6] Paragraph 27 Introduction MiCAR Regulation (EU) 2023/1114.
[7] Paragraph 10 introduction MiCAR Regulation (EU) 2023/1114.
[8] Article 2 paragraph 1 MiCAR Regulation (EU) 2023/1114.
[9] Article 3 paragraph 1 no. 15 MiCAR Regulation (EU) 2023/1114.
[10] Title V MiCAR.
[11] Title II MiCAR Regulation (EU) 2023/1114.
[12] https://corporatefinanceinstitute.com/resources/cryptocurrency/what-happened-to-terra/
[13] Article 57 MiCAR Regulation (EU) 2023/1114.
[14] Article 87-90 MiCAR Regulation (EU) 2023/1114.
[15] Article 111 MiCAR Regulation (EU) 2023/1114.
