The EU’s Markets in Crypto-Assets (MiCA) regulations are now all but final and may take effect this year. MiCA will provide new regulatory frameworks, including licensing and disclosure obligations, for participants in the cryptocurrency ecosystem, including token issuers, financial intermediaries (exchanges, brokers, etc.) and custodians.
The Economic and Monetary Affairs Committee of the European Parliament gave its approval to MiCA on October 10, 2022, the latest step in a process that has lasted more than two years.
This paves the way for the larger European Parliament plenary to approve the regulations, a step that often is merely procedural. Once the plenary approves MiCA, it will become effective and mark the beginning of 18 months in which firms must become compliant, with the regulations coming into full effect in the second or third quarter of 2024.
While the text of MiCA helps provide regulatory certainty for crypto-asset businesses and consumers in the EU, additional practical guidelines for implementation will also be drafted to further elaborate MiCA.
MiCA’s main objective is to provide a level of regulatory and economic harmonization to crypto-asset businesses and consumers across Europe. Guiding principles of MiCA include:
- Providing legal certainty through clear definitions of crypto assets and activities in relation to those crypto assets that are in scope;
- Providing for consumer protection and market integrity alongside financial stability of crypto-asset businesses; and
- Encouraging innovation and fair competition in the European crypto-assets markets and avoiding regulatory arbitrage between member states.
Businesses engaged in activities that are within the scope of MiCA will, at a minimum, be required to register with the competent regulatory authorities and produce a detailed white paper for their business, in a form and content specified by MiCA.
MiCA will not apply in the United Kingdom or Switzerland as they are not member states of the European Union. While similar principles of regulation may apply in these two jurisdictions, separate analysis is needed to understand what crypto-asset businesses must do to achieve compliance with local regulation.
What MiCA Missed
The final text of MiCA omits treatment of Non-Fungible Tokens, Decentralised Finance, Decentralized Autonomous Organizations and Proof of Work consensus mechanisms. European regulators are expected, however, to treat fractionalized NFTs as utility tokens governed by MiCA.
How Will MiCA Impact the U.S. Market?
MiCA reflects the EU’s acknowledgement that digital assets are a persistent part of a modern financial system. Whether the EU’s steps to define and regulate digital assets will influence U.S. regulators remains to be seen.
The Biden Administration’s March 2022 Executive Order on Ensuring Responsible Development of Digital Assets remains the most comprehensive U.S. policy statement on the topic. While there are numerous proposed legislative efforts in the U.S. Congress, the U.S. has yet to produce comprehensive legislation or regulatory guidance. Instead, regulators have relied on enforcement actions and individual agency guidance to inform market participants. We expect the U.S. regulatory regime to continue, at least in the short term, to take coordinated but separate action aligned with the Executive Order’s primary objectives of protecting consumers and investors.
The Orrick fintech team takes an international approach to digital asset markets. We will continue to monitor regulatory developments in both the U.S. and Europe to support our clients and innovation in crypto.