MICA in full swing: dusting off obligations for CASPs

The EU is set to introduce a comprehensive regulation for crypto-assets, known as MiCA, that will create a common framework for the emerging sector across the bloc. The regulation aims to foster innovation while ensuring investor protection and market integrity. However, it also poses significant challenges for virtual asset service providers (VASPs), who will have to comply with complex and stringent rules or face sanctions and penalties.

This article is written by Cem Adiyaman ([email protected]). Cem is part of RSM Netherlands Business Consulting Services with a specific focus on International Trade and Strategy matters.

MiCA: A game-changer for crypto regulation

MiCA stands for Markets in Crypto-Assets Regulation, and it is part of the EU's Digital Finance Package that was proposed by the European Commission in September 2020. The regulation covers all types of crypto-assets that are not already regulated as financial instruments under existing EU law, such as utility tokens, stablecoins, and e-money tokens. It also covers crypto-asset service providers (CASPs), such as exchanges, wallets, custodians, brokers, and issuers, who will have to obtain an authorization from a competent authority in the EU and follow a set of rules on governance, capital, disclosure, consumer protection, and supervision.

MiCA's main objectives are to provide legal certainty and clarity for crypto-asset activities within the EU, to support innovation and competition in the crypto sector, to protect investors and consumers from risks and fraud, and to ensure financial stability and market integrity. MiCA will also create a passporting regime, allowing CASPs to operate across the EU with a single authorization, and a sandbox mechanism, enabling regulators and innovators to test new products and services in a controlled environment.

MiCA, which officially entered into force on June 29, 2023, represents a comprehensive effort by the EU to regulate the burgeoning crypto market. The regulation aims to provide a clear legal framework for crypto-assets, ensuring investor protection, market integrity, and financial stability. Over the next two years, MiCA will be rolled out in stages, with full implementation expected by December 30, 2024.

MiCA's main challenges for VASPs

While MiCA promises to create a harmonized and conducive regulatory environment for crypto-assets in the EU, it also imposes significant obligations and costs on VASPs, who will have to adapt their business models and operations to the new rules. Some of the main challenges for CASPs include:

• Obtaining an authorization: CASPs will have to apply for an authorization from a national competent authority in the EU, which will assess their compliance with MiCA's requirements on governance, capital, organizational arrangements, risk management, and internal controls. VASPs will have to demonstrate that they have adequate policies, procedures, systems, and resources to ensure the soundness and security of their activities, as well as the protection of their clients' interests and assets. CASPs will also have to pay fees and contribute to a resolution fund to cover potential losses of clients in case of insolvency or failure.
• Disclosing information: CASPs will have to provide clear and comprehensive information to their clients and the public about their services, fees, risks, and rights. They will also have to disclose information to regulators and supervisors on a regular basis, such as financial statements, risk assessments, complaints, breaches, and incidents. CASPs will have to ensure that their information is accurate, complete, and up-to-date, and that they comply with data protection and privacy rules.
• Protecting consumers: CASPs will have to comply with high standards of conduct and fairness when dealing with their clients, such as providing best execution, avoiding conflicts of interest> and acting honestly, professionally, and in the best interest of their clients. CASPs will also have to implement effective complaint-handling and dispute-resolution mechanisms, and provide access to compensation or redress schemes in case of harm or loss. CASPs will have to ensure that their clients' assets are segregated, safeguarded, and insured against theft, loss, or damage.
• Preventing money laundering and terrorism financing: CASPs will have to comply with the EU's Anti-Money Laundering Directive (AMLD), which requires them to apply customer due diligence, transaction monitoring, record-keeping, and reporting obligations. CASPs will have to identify and verify their clients and beneficial owners, monitor their transactions and behavior, keep records of their activities and documents, and report any suspicious or unusual transactions or activities to the relevant authorities. CASPs will also have to cooperate with law enforcement and regulators in case of investigations or inquiries.
• Complying with stablecoin rules: MiCA introduces specific rules for stablecoins, which are crypto-assets that claim to maintain a stable value by referencing an underlying asset, such as a currency, a commodity, or an algorithm. MiCA distinguishes between two types of stablecoins: e-money tokens, which are backed by fiat currency and offer redemption rights to their holders, and asset-referenced tokens, which are backed by a basket of assets and do not offer redemption rights. MiCA imposes stricter requirements on issuers and providers of asset-referenced tokens, such as ensuring the stability of the reserve, disclosing the reserve assets and their valuation, and having a clear governance and risk management framework. MiCA also introduces additional rules for significant asset-referenced tokens and e-money tokens, which are those that have a large market size, customer base, or interconnectedness, and may pose systemic risks to the financial system. These include having a higher level of capital, liquidity, and operational resilience, as well as being subject to enhanced supervision and oversight by the European Banking Authority and the European Central Bank.

The opportunities and benefits of MiCA compliance

Despite the challenges and costs of MiCA compliance, CASPs can also benefit from the regulation in several ways, such as:

• Gaining market access and legitimacy: MiCA will create a level playing field and a single market for crypto-assets within the EU, allowing CASPs to operate across the bloc with a single authorization and a common set of rules. This will reduce the regulatory fragmentation and uncertainty that currently hamper the development and growth of the crypto sector in the EU. MiCA will also enhance the reputation and credibility of CASPs, who will be able to demonstrate their adherence to high standards of prudence, transparency, and accountability, and gain the trust and confidence of investors, consumers, and regulators.
• Leveraging innovation and competition: MiCA will support innovation and competition in the crypto sector by providing a clear and predictable regulatory framework that fosters legal certainty and clarity for crypto-asset activities. MiCA will also promote experimentation and testing of new products and services through the sandbox mechanism, which will enable VASPs to collaborate with regulators and supervisors in a safe and controlled environment. MiCA will also encourage the development and adoption of common standards and best practices for crypto-assets, such as interoperability, security, and resilience (DORA).
• Creating value and differentiation: MiCA will create opportunities for CASPs to create value and differentiation for their clients and stakeholders, by offering high-quality, reliable, and compliant services that meet their needs and expectations. MiCA will also enable CASPs to leverage their expertise, experience, and capabilities in the crypto sector, and to explore new markets, segments, and niches that may emerge as a result of the regulation. MiCA will also allow CASPs to capitalize on their first-mover advantage and competitive edge, by being among the first to comply with the regulation and gain a foothold in the EU market.

Forward Thinking

MiCA is a game-changer for the regulation of crypto-assets in the EU, as it will create a comprehensive, harmonized, and balanced framework for the emerging sector. While the regulation poses significant challenges and costs for CASPs, it also offers opportunities and benefits for those who can successfully adapt and comply. The road to MiCA compliance will be demanding, but rewarding, for VASPs who want to thrive in the EU crypto market.

MiCA's staggered implementation timeline and transitional periods are likely to prompt market consolidation. Not all existing service providers will secure MiCA licenses, leading to a shakeout in the industry. Jurisdictions within the EU are competing to become the primary hub for crypto activities, with France, Malta, and Ireland among the frontrunners​. Regulators are also facing their own set of challenges as they adapt to the new regulatory environment. Upskilling staff to process MiCA applications and developing expertise to supervise a diverse range of crypto products will require significant effort and resources.

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