MiCA Regulation: Everything You Need to Know About the MiFID of Crypto-Assets

•  it provides a taxonomy of the crypto-assets, distinguishing between electronic money tokens, asset referenced tokens and other tokens;
  
• it regulates the public offering and admission to trading of crypto-assets by establishing which information must be disclosed to the market and how and the authorization requirements for the issuers. With regard to the disclosure of information, MiCA mandates the publication of crypto-assets “white papers”, to be drawn-up according to the templates provided by ESMA itself;
• in relation to the provision of crypto-assets services (advice, portfolio management, orders execution, custody and administration of crypto-assets on behalf of clients, operation of a crypto-assets trading platform, etc.), it establishes the authorization requirements for crypto-assets service providers (CASP). In particular, “traditional” finance institutions (including, e.g., credit institutions, MiFID II authorized investment firms and UCITS management companies) aiming at providing crypto-assets services will have a fast-track;
• for companies providing advice and portfolio management services, MiCA further reinforces investor protection by mandating to assess the suitability of investments and laying down reporting obligations vis-à-vis clients, along the same lines of MiFID II;
• it lays down a set of rules to prevent and fight market abuse in relation to crypto-assets and, for exchange platforms, rules on pre and post-trade transparency.
  

MiCA applies to crypto-assets. Hence investments in “traditional” financial products having a crypto-asset as underlying (e.g. an ETP – exchange traded product – tracking the spot price of a crypto currency) or having exposure to crypto-assets industry in general (e.g. an ordinary share or a bond issued by a CASP) do not fall within the scope of MiCA.

More broadly, MiCA does not regulate traditional financial instruments even if they are issued and exchanged on a distributed ledger. Hence, tokenized traditional financial instruments, as defined according to the yet to be finalized ESMA guidelines, are out of the scope of MiCA.

More complex is the treatment of decentralized finance: where crypto-assets have no identifiable issuer (e.g. bitcoin), they do not fall within the scope of MiCA’s provisions regulating the admission to trading and the offer to the public, given the potential lack of addressees of the regulatory measures and the absence of an issuer. However, crypto-asset service providers providing services in respect of fully decentralized crypto-assets (e.g. a CASP advising a client to buy, hold or sell bitcoin) are covered by MiCA.

Similarly, the provision of crypto-assets services in a fully decentralized manner without any intermediary is outside of the scope of the regulation.

Under a different perspective, the admission to trading and the offering to the public of in-scope crypto assets in the European Economic Area (EEA) will be subject to MiCA. With regard to the provision of crypto-assets related services, the provision of such services to clients domiciled in the EEA will be subject to MiCA, with the (very limited) exception of reverse solicitation. Hence, third-country service providers aiming at providing cross-border services to EEA domiciled clients must comply with MiCA.

Uniformity of the applicable rules across the EEA will be the primary advantage, along with the possibility to benefit from “passporting” for MiCA authorized players wanting to offer their services across the whole EEA market.

The regulation will also bring an enhanced level of investor protection, thus making the crypto-assets market safer and allowing credit institutions and investment firms to step in and accommodate clients’ increasing demand for crypto-assets investments. In an upward spiral, this will make the market more mature, less volatile and ultimately more attractive for retail investors.
 

An ETP (exchange-traded product) tracking the price of a cryptocurrency might constitute an alternative for investors wanting to take a first step into the crypto-assets investment. In fact, ETPs on crypto-assets are traditional financial instruments, available on regulated markets and other exchanges, that enable their holders to have exposure to the fluctuations of the asset they replicate, without need to directly invest in the asset itself. ETPs have recently come to the attention of the investors as in January 2024 the U.S. market regulator (SEC) approved the listing of a number of spot bitcoin and ethereum ETPs, which have become increasingly popular thereafter. However investing in an ETP tracking the spot price of a crypto-asset and directly investing in the crypto-asset itself are not the same thing.

As mentioned, the ETP allows the investor to have exposure to the fluctuations of the crypto-asset (if and when it is actually able to track 1:1 the spot price) but it obviously precludes the possibility for the investor to use the crypto-asset as means of exchange. Hence the time horizon of the investment must be taken into account to direct an investor towards the ETP or the direct investment.

Additional aspects to be taken into account when investing include the transaction costs and the legal and tax treatment of crypto-assets as opposed to the corresponding ETPs. Intermediation and brokerage costs in traditional finance and in the crypto-assets space are different and, depending on the jurisdiction, it may be different the taxation regime on the gains (both in terms of tax rate and tax triggering events).

Without forgetting that certain types of tokens such as stablecoins (i.e. e-money tokens and asset referenced tokens in the MiCA taxonomy – e.g. Tether tokens) have gained increasing popularity as vehicles to cash into and out of crypto-assets. Hence, they have developed a particular use case, which cannot be replaced through an ETP tracking the price of the crypto-asset itself.

In a nutshell: while there are good reasons to invest in an ETP tracking the price of a crypto-asset, this is not replacing the original investment as ETPs on gold and real estates have not replaced the direct ownership of the commodity or the real estate property.

The market that MiCA will impact, helping it to expand and become more mature, is the one of direct investments in crypto-assets – and in the light of the different purposes and use cases of the ETP and crypto-assets investments, this market does not seem to be absorbed by the traditional financial instruments market.
 

As mentioned, MiCA aims at enhancing investor protection by establishing differentiated and increasingly demanding requirements for the issuers and the crypto-assets service providers who want to enter the European market. It forces the market players to establish new business processes and controls to ensure compliance with the legal requirements (e.g. know-your-customer and know-your-product processes, complaints-handling procedures, processes to identify and manage conflicts of interests, disclosures and reporting obligations vis-à-vis clients, market abuse prevention and identification processes, etc.). This entails, for companies aiming at providing advisory and portfolio management to their clients, the need to establish an advisory process ensuring that the suitability of the crypto-assets offered is correctly assessed.

The crypto-assets white papers constitute a key source of information from which the market players may derive the information for assessing the suitability of crypto-assets. In fact, the white papers will include, among the others, information on the crypto-asset issuer, on the project, on the inflationary policy, on the reserves of assets and other safeguards for investors (including recovery and redemption plans), on the target holders and the holders restrictions, on the risks, on the subscription goals and on the costs. They will further include information related to the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism. Hence it will be key for the market players to access this complex set of information and ingest them in their business processes. In addition, going beyond compliance, the same information can be taken into account by the fund managers to identify the assets to target for their investments.

The increasing interest of investors worldwide for crypto-assets has lead regulators to take steps to set specific rules for the issuance of crypto assets and the provision of crypto related services to investors, with a view to enhance investor protection. Regulators have also been concerned with providing guidelines to ensure that the new assets do not become a tool for money laundering, terrorism financing and tax evasion. However, not all the jurisdictions have taken a comprehensive approach – as done by the EU – and have introduced rules either through enforcement or with limited amendments to already existing legislation: e.g. the U.S. have extended the coverage of the federal securities law to crypto-assets (“digital assets”) when the assets meet the well-established “Howey test”, thus qualifying as an investment contract and a security.

Anyway, the regulatory landscape is rapidly evolving and, while certain countries have already taken steps towards a more comprehensive set of rules (e.g. Switzerland, with the DLT-Law, enacted in 2021), others have announced their regulatory agenda (e.g. the UK, that announced in October 2023 a bi-phased legislative process, initially covering “fiat-backed” stablecoins and then other types of crypto-assets and, in parallel, the licensing of crypto-assets service providers).

An important role in the development of local rules is being played by global standard setters. E.g. the International Organization of Securities Commissions (IOSCO) set out its recommendations on how to regulate crypto-assets markets in a final report published in November 2023. The recommendations are aimed at crypto-asset service providers and cover areas such as market manipulation, insider trading and fraud; custody and client asset protection and retail access, suitability and distribution.

Similarly, the Basel Committee on Banking Supervision (BCBS) set its rules on the prudential treatment of crypto-asset exposures in December 2022 and the International Standard Organization issued its standard ISO 24165, defining the generation and assignment to crypto-assets of a unique digital token identifier (DTI).

All the mentioned initiatives will help alignment and standardization of regulations on crypto-assets and crypto-assets data globally, further providing a good proxy of how local rules in countries that have not yet adopted a specific crypto-assets legislation will look like. In any case, regardless of local rules in their home jurisdictions, even extra-EEA players wanting to compete in the European arena must comply with MiCA.