MiCA – One New Uniform Regulation for Crypto-Assets, Many New Tasks for Investment Service Providers

With the integration of crypto-assets into investment services, the financial landscape is undergoing unprecedented change, a change that is progressing at a rapid pace. According to Research and Markets, the volume of crypto-assets in asset management today is around 1 billion US dollars and will quadruple by 2030. 

At the same time, there is still a certain Wild West atmosphere surrounding crypto-assets. With the MiCA Regulation (Markets in Crypto-Assets Regulation), the EU is now countering this sense of outlawry with a comprehensive set of rules.

MiCA defines the rules for the offer to the public and admission to trading of the following crypto-assets:

• E-money tokens: They are based on traditional currencies such as the euro or US dollar and derive their stability from them; for example, Tether or USDC.
• Asset referenced tokens: They can be based on various assets such as precious metals, commodities, cryptocurrency baskets or several traditional currencies at the same time; for example, PAX Gold or the defunct Facebook Libra.
• Other crypto-assets: They are not based on existing assets, but mostly enable access to services based on distributed ledger technology as utility tokens; for example, ether or Link.

MiCA applies directly to crypto-assets. Hence “traditional” financial products having a crypto-asset as underlying like ETPs do not fall within the scope of MiCA. ETPs – exchange-traded products – that are available on regulated exchanges and other market places allow investors to participate in the performance of the crypto-asset they track without having to invest directly in the crypto-asset itself.

MiCA is not a regulation for traditional financial instruments, even if they are issued and traded on the basis of distributed ledger technology. Hence, tokenized traditional financial instruments, as defined according to the yet to be finalized guidelines from the European Securities and Markets Authority (ESMA), are out of scope of MiCA.

More complex is the treatment of DeFI, decentralized finance: Where crypto-assets have no identifiable issuer (e.g. bitcoin), they do not fall within the scope of MiCA, given the potential lack of addressees of the regulation. However, crypto-asset service providers offering services in respect of fully decentralized crypto-assets (e.g. advising a client to buy, hold or sell bitcoin) are covered by MiCA.

Similarly, the provision of crypto-assets services in a fully decentralized manner without any intermediary is outside of the scope of the regulation.

Non-fungible tokens (NFTs) are generally not covered by MiCA. NFTs are, for example, digital certificates of authenticity or ownership of digital or analog assets that are stored using distributed ledger technology.

MiCA establishes the authorization requirements for crypto-asset service providers when it comes to, among other things, advice, portfolio management, orders execution, custody and administration of crypto-assets on behalf of clients or the operation of a trading platform for crypto-assets. “Traditional” finance institutions (including, e.g., credit institutions, MiFID II-authorized investment firms and UCITS companies) aiming at providing crypto-assets services will benefit from a fast-track.

For companies that provide advice and manage portfolios, MiCA, similar to MiFID II, lays down reporting obligations towards clients and thus strengthens investor protection. MiCA forces the market participants to establish new business processes and controls to ensure compliance with the legal requirements (e.g. know-your-customer and know-your-product processes, complaints-handling procedures, processes to identify and manage conflicts of interests, disclosures and reporting obligations, etc.). Investment service providers must ensure that the client suitability of the crypto-assets on offer is assessed correctly.

The enhanced level of investor protection will make the crypto-assets market safer and allow credit institutions and investment firms to step in and accommodate clients’ increasing demand for crypto-assets investments. In an upward spiral, this will make the market more mature, less volatile, and ultimately more attractive for retail investors.

MiCA establishes the authorization requirements for issuers of crypto-assets and regulates the admission of crypto-assets for trading by means of disclosure obligations to the market. With regard to the disclosure obligation, MiCA mandates the publication of “white papers,” which are to be drawn up for crypto-assets according to the templates provided by ESMA.

MiCA has gradually become applicable with a phased approach since 30 June 2024. It is a milestone in the development of the market: No other jurisdictions globally have yet taken a such comprehensive approach in regulating the crypto-assets space.

It is important to note that regardless of local rules in their home jurisdictions, even market participants from outside the EU must comply with MiCA if they want to compete in the European arena.