What is the MiCA law?

Brief summary

• The MiCA law was approved by the European Parliament on April 20, 2023, with more than 90% of the vote.

• MiCA focuses on European regulation of crypto to eliminate regional differences and national legislation in key areas and better protect consumers.

• MiCA focuses on regulating all crypto activities not yet covered by existing EU laws.

• Preparations for MiCA began as early as 2015 with research by EBA and ESMA on cryptocurrency and blockchain.

• From December 30, 2024, the application of MiCA will be mandatory in the European Union.

• All crypto-asset service providers must comply with strict regulations, including transparency, risk communication and data privacy.

• There are potential negative consequences, such as a possible slowdown in crypto-innovation within the EU.

Why does the European Union need MiCA?

On April 20, 2023, the MiCA law was approved by the European Parliament with more than 90% of the votes. Earlier, the European Council had already agreed with 28 to 1 votes in 2022. However, in 2018, the EU had already started working on gradually better regulating crypto. That year, an action plan was launched to better manage FinTech (Financial Technology) through financial regulation.

The Purpose of MiCA

The aim was to create a Capital Markets Union and a Digital Single Market so that the EU becomes a hub for future developments in FinTech and other rapid technological advancements, such as distributed ledger technology.

Ease of use for consumers and user protection were paramount. This digital transformation will be supported by various regulations and platforms in the EU, making them ready for the inevitable transformation in blockchain, cryptocurrency, technology, and AI, while promoting financial stability.

The Road to MiCA

Preparations for these plans began as early as 2015.

The European Banking Authority (EBA) and the European Security and Markets Authority (ESMA) conducted research into cryptocurrency and blockchain and concluded that crypto tokens did not fall under existing legal frameworks of EU law and that there were risks for consumers and money laundering.

These two bodies are the competent authorities for implementing this law, along with the authorities of each EU member state, such as the tax authorities or regulators. This can be supplemented if contact with third-country authorities is necessary.

These competent authorities will also impose any sanctions for violations. They also have the right to conduct investigations, to which cooperation must be given, and to conduct on-site inspections if necessary. The Court of Justice has the final say in this matter.

With MiFID 2 (Markets in Financial Instruments Directive part 2, 2018), the regulation of financial services, including cryptocurrency, had already begun, but many aspects of the crypto market were excluded.

The Road After MiCA

Ultimately, these studies led to the proposal for MiCA, which was finally passed by the European Parliament in April 2023. The aim is for all crypto activities to fall under MiCA or other laws of the European authority.

From December 30, 2024, the application of MiCA will be mandatory in the European Union. MiCA does not apply to DeFi and other trading without intermediaries and to Central Bank Digital Currencies (CBDC). On this date, a report on the latest developments in crypto-assets will also be published, possibly accompanied by a legislative proposal covering matters not yet regulated by the MiCA law.

By June 30, 2025, an interim report will be prepared, and by June 30, 2027, a report on how this law has worked will be published. If necessary, a new legislative proposal or an amendment will be submitted by the European Commission.

Main Components of the MiCA Law

• All crypto activities not yet covered by EU laws will now fall under the MiCA law.

• Uniform rules will apply to all EU countries regarding crypto trading.

• Tokens deriving their value from underlying assets (Asset Referenced Tokens, ART), such as gold, oil, or other commodities, will be regulated through MiCA and must provide guarantees for their coverage.

• Electronic money tokens or E-money tokens, known as stablecoins, must offer guarantees for the stability of their tokens through guaranteed coverage in the same official currency to which the stablecoin refers. They must also have a repayment plan if there are problems with the issuers of the stablecoin.

• E-money tokens can only be marketed if the issuer has a license as a credit institution or electronic money institution and has published a whitepaper. In case of violations of the law regarding the whitepaper, the issuer is liable for any losses of holders.

• E-money tokens can be exchanged at any time for other means than electronic money at nominal value without charging a fee. Granting interest on e-money tokens is prohibited by this law.

• E-money tokens must place 30% of their funds with a credit institution, with the rest invested only in highly liquid investments with a low degree of risk.

• Significant e-money tokens must meet very stringent conditions, as indicated below for significant asset-related tokens (ART).

• Other crypto-assets not covered by any other law (such as utility tokens) will fall under the MiCA law, ensuring no cryptocurrency escapes a legal framework.

• Regarding NFTs (Non-Fungible Tokens), a distinction is made between truly unique NFTs and NFTs of which there are more, the latter falling under MiCA.

• Anyone bringing a crypto-asset to the market is required to submit a whitepaper to their national financial authority 20 days before the market launch, containing clear technical information on various matters such as price, transfer of tokens, risks, and other important information for investors. The competent authority will review this whitepaper and make a decision within 60 working days.

• Issuers of crypto-assets must register as a legal entity in an EU member state and are legally responsible in case of fraud or overly optimistic representation of matters when selling to the public.

• Asset-related tokens must report on matters such as the number of holders, the value of the token, reserves, and volumes. Especially tokens with a total value exceeding 100 million euros are required to provide quarterly figures. If such a token is clearly used as a medium of exchange and daily volumes exceed 1 million transactions and 200 million euros, trading must be halted.

• This law appears to contradict itself in discussing significant asset-related tokens. A token is designated as such if there are more than 10 million holders, the market capitalization exceeds 5 billion euros, the volume is more than 500 million euros, and the number of transactions exceeds 2.5 million. Such an issuer will be considered a gatekeeper, but it seems illogical to ever reach this point if activities must be halted once the previous point is met. Although the law later states that you can apply to be considered as such, you must do so before achieving significant market capitalization.

• The own funds of Asset Referenced Tokens must be 350,000 euros, or 2% of the asset reserve, or 25% of the fixed costs of the previous year, whichever amount is highest. If risks increase, a higher amount may be required.

• Asset-related tokens must have a clear organizational structure in which responsibilities and risks are clearly articulated.

• Major changes in the way an ART operates must be reported to the authorities.

• Buyers of crypto are protected by issuers of crypto being required to act fairly and reasonably when selling.

• Issuers of a cryptocurrency must continuously keep their clients informed of ongoing matters.

• Internal conflicts of interest are prohibited.

• Influencers are not allowed to try to influence the price of a crypto.

• Insider trading and market manipulation are prohibited.

• Investor crypto-assets must be protected by security.

• Crypto-assets not yet available on an exchange, such as during an ICO purchase, may be returned free of charge within 14 days with a full refund if requested by the buyer.

• Whitepapers are not required for airdrops or for tokens offered for less than one million euros or only to professional investors.

• Rewards for maintaining the distributed ledger, such as validating transactions, fall outside MiCA.

• Utility tokens providing access to an existing service are also exempt from this law.

• Bringing unique NFTs to the market will also not require a whitepaper.

• Mining must become more environmentally friendly and produce less waste.

• Under the MiCA law, competent authorities can suspend or prohibit the trading of a crypto-asset, in addition to imposing various sanctions for violations.

• If you want to read the entire law once or just see how long it is, you can follow the previous link if you have a few days off.

Advantages and Disadvantages of the MiCA Law

The intended regulation of the crypto market will have several positive effects for both consumers and businesses:

• Consumers will be much better protected against fraudulent projects. Rug pulls, exit scams, pump and dump schemes, and ICO fraud will occur much less frequently as providers or violators can be held personally liable under MiCA. Irresponsible cryptocurrencies will be exposed more quickly due to these stricter requirements.

• Stablecoins will be more stable than ever under threat of prosecution.

• Asset Referenced Tokens, such as those backed by gold, must also have sufficient collateral for the amount of tokens in circulation.

• Traders will be better protected against theft of their funds as exchanges and brokers, for example, must prevent hacks and other fraud.

• Money-back guarantee within 14 days of purchase during an ICO.

• Crypto providers, such as brokers and exchanges, will only need to register once under MiCA, instead of in each EU country separately.

• An end to the fragmentation of rules in various EU countries through EU-wide regulation.

Potential Negative Consequences for the Crypto Market

• The requirement of a whitepaper will incur high costs. This will delay the emergence of new cryptocurrencies from the European Union, potentially putting the EU at a disadvantage regarding innovation in the crypto world. Only well-capitalized companies or individuals with a large network will be able to bring a token to market.

• Due to the extensive text of this EU law, legal costs for various crypto market participants could rise significantly, potentially narrowing business activity to well-capitalized firms with enough lawyers. Overregulation is also a possibility. Decentralization could be at risk as centralized and wealthy companies have more money to comply with the rules, pushing "the little ones" out of the market or even preventing them from entering the market.

• Regulators could increasingly restrict crypto trading, causing traders, brokers, and exchanges to feel more pressured. The aversion that certain lobby groups, such as banks and other intermediaries, have towards crypto could become palpable under the pressure of authorities.

• Cryptocurrencies launched in countries outside the EU could gain competitive advantages as they do not have to comply with MiCA. This law could also cause significant delays in bringing a crypto-asset to market due to the ample time given to reviewers of the whitepaper.

Rules for Providers of Crypto Asset Services

These providers, known as CASPs (Crypto Asset Service Providers), have been given various responsibilities under the MiCA law. This includes the well-known brokers and exchanges. These service providers must adhere to the following rules:

• Act professionally in the interest of their clients.

• Clearly state their fees.

• Prevent money laundering and terrorism financing through KYC, CTF, and AML (Know Your Customer, Counter Terrorism Financing, and Anti Money Laundering). Detect and report suspicious transactions.

• Ensure crypto trading is clear and secure.

• Insider trading is prohibited.

• Market manipulation is prohibited.

• Orders must be executed according to clear policies, without the service provider benefiting from them.

• Have own funds to cover any losses.

• Have an insurance policy against unforeseen and foreseen events.

• Ensure the security of ICT systems.

• Communicate risks to their clients.

• Portfolio management must be in order, and the ownership rights of clients' crypto-assets must be clear in the event of bankruptcy.

• When holding clients' crypto-assets, an agreement must be made, clearly indicating the rights and obligations of both parties.

• Guarantee data privacy.

• Provide a cost-free complaints procedure that takes a reasonable amount of time.

• Manage conflicts of interest through policies and procedures.

• Customer advice must be very careful and not intended to benefit the provider. Risks must be clearly stated.

• When outsourcing related services or activities, the provider remains fully responsible for the execution.

• Have an office in the EU and at least one director residing in the EU.

• Shareholders and directors must be able to provide a certificate of good conduct.

• Have a license to offer both payment services and crypto-asset services in the EU.

• Notify authorities in case of a takeover of a provider.

MiCA and the Future

The crypto market is becoming more mature and requires new rules to both protect consumers and remind businesses of their responsibilities. Without legislation, it is impossible to take action against fraudulent activities.

The MiCA law seems especially beneficial for users of trading platforms such as brokers and exchanges. Consumers are much better protected through various guarantees and conditions for providers.

Regarding brokers and exchanges, not much will change as most aspects of the MiCA law are part of normal business operations.