In an attempt to harmonize trading and post-trading operations, as well the crypto-asset operations, the EU Commission proposed the first European legislative framework regarding the digital finance trategy of all member states. The draft Regulation on markets in crypto-assets (MiCA), along with the draft Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLTR), were both published on September 23rd of 2020. The main goal is to cover all legal and practical voids in the issuance, application and service provisions which will shape the business conducting on the entire territory of the EU. The most important introductions are the following:
MiCA applies to persons and services operating and issuing crypto-assets on the territory of the EU. The Regulation focuses on a transparency and disclosure conditions highlighting the undermentioned key points: Issuance and admission to crypto-asset trading operations; Authorization and supervision of issuers and service providers; Organization, operation and governance of asset-referenced tokens and electronic money tokens issuers, as well as crypto-asset service providers; Consumer protection; Market abuse prevention; Market integrity.
ii) Harmonization of definitions:
MiCA sets official crypto-asset market definitions which shall be common for all member-states: Crypto assets; Crypto-asset services; Crypto-asset service providers; Tokens: asset-referenced tokens, significant asset-referenced tokens, utility, electronic money; Trading platform operations; Crypto-asset custody; Crypto-asset administration. DLTR defines the undermentioned terms: DLT MTF; DLT securities settlement systems; DLT transferable securities.
iii) Crypto-asset marketing:
The MiCA draft lists the conditions for the following crypto-asset operations on the territory of the EU: Crypto-assets offer to the public; Request for trading admission on crypto-asset trading platforms; Provisions for the legal operation of crypto-assets issuers, such as publication of white paper containing detailed information on the crypto-asset offer or trading admission; Marketing requirements; Obligations applicable to crypto-asset issuers: honesty, fairness, professionalism; Liability provisions regarding crypto-asset issuers.
iv) Asset-referenced tokens and electronic money issuance:
The issuance and admission to lawful trading on a trading platform of asset-referenced tokens is subject to specific conditions: Authorization issued by a National Competent Authority (NCA); Publication of a white paper approved by the aforementioned authority; Compliance with governance arrangements, disclosure conditions, conflict of interest mechanisms, bespoke own fund requirements, mechanisms of complaints handling, reserve assets, policies on reserve assets custody and investments. Categorization of certain asset-referenced tokens as significant, subject to further requirements. The Regulation establishes separate conditions for the electronic money tokens issuers: Obligation for authorization as a credit institution or e-money institution; Compliance with the legislation; White paper publication and notification to the NCA; Categorization of certain electronic money tokens as significant, subject to further requirements.
v) Operation of Crypto-asset service providers:
For the provision of crypto-asset services, the MiCA draft Regulation requires the following
conditions to be met:
Creation of a legal entity;
Registered office in an EU member-state;
Compliance with prudential requirements: own funding, insurance policy etc;
Compliance with disclosure requirements (outsourcing, clients funds safety etc);
Compliance with organizational requirements;
Compliance with further requirements for service providers authorized to offer custody services, operate on trading platforms, exchange services between crypto-assets or with fiat currency, order executions for third parties, placement service provisions, order reception and transmission, consulting etc.
vi) Third-country service providers:
Third-country services providers may offer services to EU-based clients solely upon request of the latter. In order to advertise, promote or solicit clients on the territory of the EU, the third-country service providers must first obtain an authorization to operate as an EU crypto-asset service provider.
vii) Anti-market abuse rules:
The MiCA Regulation draft establishes explicit rules to prevent market abuse in crypto-assets trading on trading platforms:
Privacy and disclosure of information; interdiction of unlawful disclosure;
Forbiddance of insider dealing;
Forbiddance of market manipulation.
viii) The pilot regime for DLT market infrastructures:
The Regulations’ first objective is to create legal security for the execution of such operations. The
Commission’s digital finance strategy’s primary goal is to ensure financial stability, through the protection of both consumers and investors, while creating a solid market integrity. Furthermore, the Regulation sets the grounds for the efficient promotion of new technologies and innovation through the new pilot regime.
The operations shall be executed by investment firms authorized by the MiFID or a market operator.
DLT market infrastructure operations shall be subject to a separate authorization, while the carriers must provide a detailed business plan on their services and activities, in compliance with all necessary requirements which have been set out by the legislation. A DLT market infrastructure is defined as DLT multilateral trading facility (DLR MTF) or a DLT securities settlement system.
ix) DLT market infrastructure exemptions:
DLT MTFs may apply for exemptions from the MiFID and MiFIR, provided that compensatory measures for the pursuance of the same objectives shall be proposed.
DLT securities settlement systems operators shall also reserve the right to apply for an exemption, in accordance with the provisions of the CSDR.
The initial establishment of the pilot regime shall last for a period of five (5) years. Upon expiration,
ESMA must send a report on the performance to the Commission.
The draft Regulations are currently to be transferred to the European Parliament and the Council of
Ministers for review, approval and adoption. Legislative amendments might be introduced to the proposals within the next eighteen (18) to twenty four (24) months, prior to the establishment of the final act.
By N. Kalifatidou
Advocate – Legal Consultant
Arsen Theofanidis LLC