It’s almost time: The first provisions of MiCAR will be applied from June 2024 (provisions around ARTs and EMTs), with the remaining regulations from December 2024. The following blog post serves as another recap of what is coming for institutions and what next steps need to be taken to act in compliance with the new regulation as a company.
Content:
- Introduction to MiCAR: A New Era of Crypto Asset Regulation
- Case Studies and Practical Application: MiCAR in Action
- Deep Dive: Requirements for Token Sales under MiCAR
- MiCAR and Its Impact on Switzerland and Swiss Companies
- Outlook: Navigating Opportunities and Challenges
Introduction to MiCAR: A New Era of Crypto Asset Regulation
With the increasing popularity and acceptance of cryptocurrencies and other digital assets worldwide, the need for clear and uniform regulation in this rapidly growing sector has become apparent. In this context, the introduction of the Markets in Crypto-Assets Regulation (MiCAR) by the European Union marks a decisive step towards a comprehensive regulatory landscape for digital assets.
Scope of Application
MiCAR is to be considered in distinction to MiFID II regulation. Accordingly, financial instruments are also to qualify as such if they are issued using distributed ledger technology. This means that tokenized securities fall within the scope of “financial instruments”, more specifically under the category of “transferable financial instruments” according to MiFID II.
MiCAR, on the other hand, addresses all other types of tokens that do not qualify as financial instruments under MiFID II. The regulatory framework is deliberately formulated as a catch-all, so that any types of tokenized assets are covered by legislation. In doing so, the regulatory framework names the following token categories:
- E-money tokens (EMT): Tokens whose main purpose is to serve as a means of exchange and which use a nominal currency, which is legal tender, as a reference basis to achieve value stability. This category corresponds to off-chain secured stablecoins with a traditional currency as security. EMTs must be redeemable at any time at a 1:1 ratio by the issuer, i.e., for 100 Euro EMTs, the investor would have a claim to 100 fiat Euros at any time. EMTs may not pay interest. Tokens classified as EMTs automatically fall under the European E-Money Directive (EMD) as “electronic money” in addition to MiCAR.
- Asset-referenced tokens (ART): Tokens that use various nominal currencies that are legal tender, or one or more goods or one or more crypto values or a combination of such values as a reference basis to achieve value stability. This category thus includes, among others, off-chain secured stablecoins with multiple fiat currencies or other real values as security.
- All other tokens: This catch-all category is intended to encompass all digital assets that do not qualify as ART or EMT. For example, utility tokens are included in this category. Financial instruments according to MiFID II are explicitly excluded from the entire MiCAR regulation and are therefore not part of this catch-all category.
Challenges may arise when ARTs resemble financial instruments according to MiFID II. Since ARTs can have various underlying assets (e.g., a basket of commodities) and thus are very similar to financial instruments, distinguishing between these categories can sometimes be challenging.
Background and Objectives
MiCAR was conceived as part of the EU’s digital finance package, an initiative aimed at preparing Europe for the digital age. The regulation addresses a wide range of crypto assets that previously fell outside the traditional financial regulatory framework, thus closing an important regulatory gap. Through the introduction of MiCAR, the EU intends to achieve the following main objectives:
- Investor protection: By introducing standards for transparency, disclosure, and governance, investors are to be protected against fraud, market manipulation, and other risks.
- Promoting market integrity: MiCAR aims to ensure a fair, safe, and efficient market environment by setting clear rules for issuers and service providers in the crypto asset sector.
- Contributing to financial stability: By regulating crypto asset activities and minimizing systemic risks, MiCAR supports overall financial stability in the EU.
Key Areas of Regulation
MiCAR covers various aspects of the crypto asset market, including:
- Classification of crypto assets: A clear definition and classification of different types of crypto assets.
- Requirements for issuers and service providers: Establishing admission procedures, operational conditions, and organizational requirements for companies that issue crypto assets or offer related services.
- Market supervision: Provisions for monitoring and supervising the crypto asset market to ensure compliance and prevent abuse.
Case Studies and Practical Application: MiCAR in Action
The introduction of MiCAR has significant implications for the European crypto market. By highlighting specific case studies, we can better understand the practical application of MiCAR and its impact on various market participants. In this chapter, we examine some key cases that illustrate how MiCAR transforms the practice of token sales, the operation of crypto exchanges, and the provision of crypto services.
Case Study 1: Adjusting Token Sales
Background: A startup plans to raise capital through an Initial Coin Offering (ICO). Before MiCAR, the process was less regulated, offering both opportunities and risks for issuers and investors.
MiCAR Application: Under MiCAR, the startup now has to create a detailed whitepaper that must be submitted to the relevant supervisory authority. The whitepaper must contain comprehensive information about the project, the risks, the team, and the use of the capital proceeds. More details on this in the next chapter.
Case Study 2: Regulation of Crypto Exchanges
Background: A European crypto exchange offers trading opportunities for various crypto assets. Before the introduction of MiCAR, such platforms operated in a relatively unregulated environment.
MiCAR Application: With MiCAR, the exchange now must ensure that all traded crypto assets comply with regulatory standards. Additionally, extensive compliance measures are required, including customer identity verification (KYC) and anti-money laundering (AML) measures.
Case Study 3: Providers of Crypto Wallets
Background: A company offers digital wallets for storing crypto assets. Before MiCAR, there were different guidelines across Europe regarding the security and compliance requirements for such services.
MiCAR Application: Under MiCAR, the wallet provider now must implement strict security protocols and ensure that its services comply with regulatory requirements, including the security of customer funds and data protection regulations.
Deep Dive: Requirements for Token Sales under MiCAR
MiCAR sets different requirements for the issuance, depending on whether a token is classified as an ART (asset-referenced token), EMT (e-money token), or neither.
The least requirements exist when a token falls under MiCAR but is not classified as ART or EMT. In this case, four prerequisites must be met for a public offering in the EU:
- Legal entity: The issuer must be a legal entity.
- Creation of a whitepaper: A whitepaper must be written according to clear guidelines and include information about the issuer, the offering, the technology, and the rights contained in the asset. The same whitepaper, which is submitted to the supervisory authority (see next point), must also be published publicly. In certain exceptions, no whitepaper needs to be created. This is particularly the case when the assets are offered for free, it is a small offering (under 150 investors per member state or under a total volume of EUR 1 million), or it is offered only to qualified investors. Unique NFTs are also exempt from creating a whitepaper.
- Notification of the whitepaper: The whitepaper must be submitted to the supervisory authority of the EU state where the issuer is based. This submission should include the whitepaper, a statement why the asset should not be considered a financial instrument according to MiFID II, and a list of countries where a public offering is planned. After submitting the whitepaper, the digital asset can be offered publicly in all desired EU countries. This process is intended only as a notification to the authority, meaning there is no prior approval of the whitepaper by the authority. However, the authority has various options for intervention, such as a veto right to publish the whitepaper or the power to prohibit the issuer’s business activities.
- Compliance with additional rules: Issuers must comply with certain conditions, such as the obligation to act and communicate “honestly, fairly, and professionally” and to avoid conflicts of interest.
ARTs and EMTs are more strictly regulated. ARTs may only be offered in the EU if they are issued by a legal entity based in the EU. This company must also have been approved by the national supervisory authority. To obtain approval, submitting a whitepaper is necessary, which must also contain information about the reserve positions and their custody. The need for approval is waived for ARTs only if it is a small offering (volume in the EU under EUR 5 million), the assets can only be purchased and held by qualified investors, or the issuer is a bank. Authorities can refuse approval if the financial market stability or the monetary integrity of the eurozone is threatened.
EMTs may only be publicly offered in the EU if they are issued by approved banks or e-money institutions. The same exceptions apply as for ARTs in the case of a small offering or for qualified investors only. A whitepaper is also necessary for EMTs. If EMTs are denominated in euros, it is generally assumed that this asset is offered in the EU.
MiCAR and Its Impact on Switzerland and Swiss Companies
Although MiCAR is a legal framework of the European Union (EU), it nevertheless has significant implications for Switzerland and Swiss-based companies.
- Access to the EU market: Swiss companies active in crypto assets and targeting the EU market must comply with MiCAR regulations to offer their services to EU citizens. This may require additional compliance efforts and adjustments in business models.
- Competitiveness: Compliance with MiCAR can be an opportunity for Swiss companies to increase their competitiveness in the EU market by positioning themselves as fully compliant and therefore as a trustworthy partner.
- Regulatory harmonization: The introduction of MiCAR could pressure Swiss regulatory authorities to enact similar regulations to achieve harmonization with the EU and facilitate market access for Swiss companies.
Strategies for Swiss Companies
To navigate the challenges and opportunities arising from MiCAR, Swiss companies should consider the following strategies:
- Proactive compliance: Familiarize themselves with the requirements of MiCAR early on and take proactive measures to build or adjust compliance structures.
- Strategic partnerships: Forming partnerships with EU-based companies could be an effective strategy to strengthen presence in the EU market and overcome regulatory hurdles.
- Promoting regulatory dialogue: Engage in constructive dialogue with Swiss regulatory authorities to influence the development of crypto-specific regulations that harmonize with MiCAR while also considering the unique needs of the Swiss market.
The MiCAR regulation presents both challenges and opportunities for Switzerland and Swiss-based companies. Through strategic adjustment and proactive efforts, these actors can not only ensure compliance but also strengthen their position in a rapidly changing global crypto market.
Outlook: Navigating Opportunities and Challenges
Successfully navigating the opportunities and challenges of MiCAR requires careful planning and adjustment by market participants. Companies must view regulation as an opportunity to strengthen their business models and gain investor trust. At the same time, it is important for regulatory authorities to pursue a dialogue-oriented approach to ensure that regulation does not hinder but promotes innovation.
vision& supports Swiss and European companies, together with BDO Liechtenstein, in transitioning to the MiCAR world. With our combined expertise and experience in corporate, regulatory, and compliance consulting, we enable a customized solution for a company’s products and services in connection with MiCAR. More information is available in our MiCAR brochure.
