The MiCA regulation is the European Union’s first project oriented toward regulating cryptoassets, cryptoasset issuers and cryptocurrency service providers. It will come into force in mid-2023, so it is worthwhile to get an idea of the topic in advance and illuminate the various issues. Do supporters of digital currencies have anything to fear? Or, on the contrary? We invite you to read the article prepared together with legal counsel and tax advisor specializing in cryptocurrencies, Maciej Grzegorczyk!

What is the Market in Crypto-Asset (MiCA) Regulation?

The MiCa or Crypto Markets Regulation is a regulation that will redefine the approach to cryptocurrencies within the European Union in the near future.

What does the MiCA regulate?

The act lays out specific obligations for crypto asset service providers, cryptocurrency issuers, bidders and, in a nutshell, those permitted to trade crypto assets.

Which cryptocurrencies will be covered by the regulation?

The regulation will specifically cover electronic money tokens, reference tokens known as ART, as well as crypto assets other than those mentioned.

Will there be new definitions related to digital currencies in general as a result of the regulation?

The MiCA makes three clear distinctions for cryptocurrencies and establishes three distinct frameworks for such digital assets:

– Asset Reference Token (“ART” eng. Asset Reference Token) – a token designed to maintain a stable value by referring to one or more assets. It is usually a combination of assets (for example, a token referring to gold, several currencies or other cryptocurrencies).

– E-Money Token (“EMT” eng. E-Money Token) – electronic substitutes for coins and banknotes that are likely to be used to make payments. The key feature is the backing of the official state currency.

– Other Crypto-Asset (eng. Other Crypto-Asset) – a digital representation of value or rights that can be transferred and stored electronically (any other crypto-asset that is not excluded from the above exclusion list).

A new category of entities is provided for, namely “cryptocurrency advisory services providers.” This catalog will mainly include various types of advisors urging investment in the area of digital assets.

How will MiCA affect the operation of cryptocurrency exchange offices?

Business activity as an exchange of crypto-assets into FIAT currency is defined in Article 3 of the MiCA, it means entering into contracts with third parties to buy or sell crypto-assets in legal tender fiat currency, using equity. Under the new regulations, conducting business as a cryptocurrency service provider will require a license. Only legal entities with a registered office in a European Union member state will be able to apply for a permit to provide cryptocurrency services.

Are NFTs (non-exchangeable tokens) covered by the MiCa regulation?

DeFi and NFT tokens have not been included in the area of MiCA legislation. However, the EU does not rule out that subsequent acts in the future will not deal with regulating these sectors separately. However, NFTs with fractional ownership fall within the scope of the act. NFTs will be affected to some extent by the DAC8 directive, among others.

What is DORA?

Digital Operational Resilience Act for Financial Services. The Digital Operational Resilience Act (DORA), which aims to increase resilience to incoming cyber attacks in the financial sector. Among other things, it will introduce an additional internal framework for the management and control of risks associated with ICTs, i.e. modern information technologies used in the financial sector (Article 4 and Article 5). It will also become necessary to take care of business continuity and provide backups and ways to make systems operational again (Article 11 (1) and (2)). In addition to this, it will become necessary to manage ICT-related incidents (Article 15(3)):

1. establish procedures for identifying, tracking, recording, categorizing and classifying ICT incidents,

2. assign roles and responsibilities to be put in place for different types and scenarios,

3. defining outreach plans targeting employees, as well as external stakeholders and the media, providing information to financial entities acting as contractors,

4. reporting serious ICT incidents to relevant senior management and informing the governing body,

5. establishing procedures for responding to ICT-related incidents.

What is the DLT regulation?

DLT is a Regulation on a pilot system for market infrastructures based on distributed registry technology.   The purpose of the Ordinance is to create conditions for the provision of services for trading in financial instruments using distributed ledger technology (DLT). The provisions of the Ordinance, among other things, amend the catalog of financial instruments contained in the Markets in Financial Instruments Directive (“MiFID II”) so that, once in force, it will also include in its scope financial instruments issued using DLT technology, such:

– that fall within the catalog of financial instruments contained in that directive

and

the rights of which have been created by writing in distributed ledger technology (“DLT”), including blockchain.

Only financial instruments issued, transferred and registered using DLT technology that meet the quantitative criteria set forth in the Regulation will be allowed to be traded. However, the Regulation itself narrows the subject matter of financial instruments to:

– shares,

– bonds and debt securities,

– depository receipts (for shares that meet quantitative criteria),

– money market instruments, excluding instruments containing an embedded derivative or others that prevent the client from understanding the nature of the risk,

– titles of collective investment institutions of the UCITS type.

The regulation excludes from the possibility of organizing DLT MTFs:

– derivatives (derivatives) and

participation titles of alternative investment funds (on the Polish market: investment certificates issued by closed-end investment funds and participation units of specialized open-ended investment funds).

How will MiCA regulate DeFi?

DeFi is not covered. However, the EU does not rule out that further acts in the future will not deal with regulating these sectors separately.

Is MiCA really the end of the cryptocurrency eldorado?

To some extent, yes, but at the same time it opens up new opportunities for financial institutions to look at the cryptocurrency industry more favorably.   It will be necessary to obtain the appropriate authorization to actively seek users within the EU.   Only legal entities with a registered office in an EU member state will be able to apply for a permit.  Authorization can be obtained by cryptocurrency issuers that make a public offering of tokens linked to assets in the Union or apply for the admission of such assets to trading on a crypto-asset trading platform.

However, the MiCA itself does not mean the end of the cryptocurrency Eldorado. It is worth considering from the perspective of the full package of laws that will apply to cryptocurrencies. In this aspect, in addition to the aforementioned DORA regulation, the DAC8 directive should be mentioned. It will improve the ability of member states to detect and prevent tax fraud, tax evasion and tax avoidance by, among other things, requiring all reporting cryptocurrency service providers, regardless of their size or location, to report the transactions of customers domiciled in the EU. The proposal covers both domestic and cross-border transactions. In some cases, reporting obligations will also extend to non-transferable tokens (NFTs). If MiCA requires authorizations, DAC8 will to some extent further limit the anonymity that is very much at the heart of the cryptocurrency and blockchain market. The end of the cryptocurrency eldorado should therefore be considered from a broader perspective than the MiCA Regulation itself.

Ideally, the fight against fraud should not be carried out with such a deep intrusion into users’ privacy. It remains to be hoped that the final shape of all regulations and their practical use will not oppress the cryptocurrency market. However, if this happens then surely foreign exchanges – disregarding European regulations – will enable their use.

Compiled with r. pr. dor. pod. Maciej Grzegorczyk of www.kryptoprawo.pl