MiCA Regulatory Roll-out Begins
Stablecoin issuers brought into regulatory line
In June 2023, the Markets in Crypto-Assets regulation (MiCA) entered into force, becoming the first comprehensive regulatory regime, globally, that is tailored specifically to cryptoassets trading.
MiCA aims to provide regulatory certainty and stronger protections for consumers in the crypto market without stifling innovation in the sector. MiCA covers cryptoassets that are not currently regulated by existing financial services legislation. The legislation creates key provisions for cryptoasset service providers (CASPs) and stablecoins— including asset-reference tokens and e-money tokens, — covering transparency, disclosure, authorisation and the supervision of transactions. CASPs include crypto exchanges, crypto trading platforms and crypto custody/advisory firms. Ultimately, the MiCA framework will support market integrity and financial stability by regulating the provision of cryptoassets and by ensuring consumers are better informed about their associated risks.
In addition, MiCA seeks to establish mechanisms that ensure stablecoins remain pegged to the asset that they track, provide enhanced transparency and prevent market players from creating excessive risk, while also ensuring that the assets under custody are protected. Interestingly, MiCA seeks to mitigate the environmental impact of cryptoassets by regulating crypto mining processes, which are typically a major source of greenhouse gas emissions.
After entering into force last year, MiCA is now coming into effect via a two-staged approach, with rules for stablecoins applying from 30 June 2024 and rules for cryptoasset service providers applying from December 2024.
With the new rules for stablecoins now in application, stablecoin issuers must now obtain approval from relevant member state authorities before offering their tokens within the EU, or when offering stablecoins pegged to the euro or other member state currency. The requirements that stablecoin issuers must address under MiCA include:
Ensuring that their token is backed by adequate reserves;
Honouring the redemption rights of token holders;
Establishing governance arrangements to ensure risk mitigation, business continuity, and to avoid conflicts of interest;
Ensuring reserve assets are segregated from the issuers’ own assets and are custodied in a safe and sound manner;
Undertaking regular reporting to their relevant national supervisory authority; and
Issuing a white paper detailing the stablecoin’s arrangements and how it plans to mitigate associated risks.
Since these rules were originally proposed roughly two years ago, the crypto industry has generally reacted positively to MiCA’s stablecoin framework, hailing it as an example of robust and comprehensive regulation that offer innovators clarity about the future trajectory of cryptoasset adoption. In general, the industry has seen MiCA as a welcome alternative to the current state of regulatory affairs in the United States, where Congress still has yet to make substantial progress on stablecoin legislation with its legal definition still open to interpretation.
In recent weeks, however, as the implementation deadline under MiCA has approached, the crypto industry has expressed increasing concern about how member state regulators will interpret the rules in practice - and whether that interpretation might result in certain stablecoins being forbidden in Europe, or whether the practical requirements might prove so onerous as to discourage issuers from seeking licensure.
However, in what could be a positive sign of things to come, on July 1 2024, the US-based stablecoin issuer Circle announced that it has received a license from the Autorité de Contrôle Prudentiel et de Résolution (ACPR), France’s primary supervisory agency, to operate as an Electronic Money Institution (EMI). With EMI status, Circle will be permitted to issue its stablecoins USDC and EURC within the EU, subject to the firm’s compliance with MiCA. This makes Circle the first fully compliant stablecoin issuer to receive approval in Europe under MiCA. In many ways, this suggests that the new MiCA regulations will encourage rather than deter stablecoin issuers.
With the rules for CASPs not taking effect until later this year, CASPs have a little more time to prepare for the MiCA regulations. CASPs are facing more obligations and disclosures than stablecoin issuers. Some of the new requirements for CASPs under MiCA will include:
Having an office in an EU country and having at least one director-resident of the EU country;
Implementing anti-money laundering (AML), continuity of services, and data security policies and procedures;
Following EU rules on marketing communication;
Adopting certain practices for preventing market abuse and handling complaints correctly (this is aimed at avoiding more cases such as Terra Luna and FTX). An example of a new practice is that CASPs will need to warn both their clients and their users about risks of transactions they make;
Acting honestly, fairly and professionally, and;
Publicly sharing pricing, cost, and fee policies along with information on the environmental impact of the crypto-asset activities.
With specialist cryptoasset regulation now integrating into capital markets, the foundations for greater institutional adoption are undoubtedly being laid.