What is MiCA, the European regulation that will regulate crypto-assets?

On March 14, the Economic and Monetary Affairs Committee of the European Parliament spoke about the draft European regulation Markets in Crypto-Assets, known as “MiCA”. This text is part of the package of measures on digital finance, and contains a set of provisions aimed at “to ensure that the Union’s regulatory framework for financial services is conducive to innovation and does not hinder the use of new technologies”.

Creation of a European “PSAN”
In concrete terms, the project aims to regulate service providers offering crypto-assets in a harmonized way throughout the territory of the EU, as is already the case via the PSD2 and DME2 directives in the other areas of financial services. With the difference that this is a regulation, therefore a text of direct application (it does not need to be transposed into national law). The aim is to provide legal certainty and guarantee financial stability, while supporting innovation and protecting consumers.

“The flagship contribution is the creation of a European status for a service provider on crypto-assets, inspired by the ‘PSAN’ regime (service provider on digital assets) in France, and the definition of what is a crypto-asset”analyzes Sonia Gudjhani-Rogez, lawyer at Racine.

Stablecoins on a leash
The text adopts a definition of crypto-assets distinguishing three subcategories: tokens that refer to one or more assets, such as stablecoins, which will be supervised by the European Securities and Markets Authority (ESMA); electronic money tokens, which will be supervised by the European Banking Authority (EBA); and “utility tokens”, which are linked to the operation of a platform and are used to provide digital access to a good or service. NFTs are excluded from the scope of MiCA unless they fall into the latter category.

This means that all players who will offer this type of service will be subject to registration, including stablecoin issuers. There are several differences with the French PSAN status, which served as a model for the new European status.

Higher demands
On the one hand, the requirements will be higher. “This will be closer to the approval procedure than the PSAN registration procedure”, says Sonia Gudjhani-Rogez. Currently, in France, no service provider has obtained approval. The thirty or so existing PSANs are simply “registered”, which does not involve the same constraints, particularly in terms of the IT system and capital. The status of European service provider, which will replace de facto the PSAN status in France but will give access to a European passport allowing it to offer its services directly in all the countries of the Union, contains prudential requirements, respectability of managers, and KYC (information which must be requested from users) .

On the other hand, the status of European service provider widens the types of services concerned by the obligation of approval. “For example, today in France, the advisory service for subscribers on digital assets is only subject to the optional approval of PSAN. in the MiCA regulations.”

No formal ban on “proof of work”
But what caused a lot of talk was another provision of this text, referring to the “consensus” methods used by cryptocurrencies, in other words, the methods of crypto-monetary creation. The “proof of work”, used by Bitcoin and Ethereum, is in the sights of the legislator. Initially, the text sought to eliminate this block validation system, deemed incompatible with sustainable development because it requires significant electricity expenditure linked to the computer calculation capacities implemented during the process. This would have signed the death warrant for bitcoin and ether in Europe. Finally, the voted text proposes to include mining in the European taxonomy for sustainable activities (which itself has not yet been decided upon). Everything remains open.

The MiCA regulation will now enter the trilogue phase, the rounds of negotiations between the Commission, the Council and the Parliament. There is talk of coming into force in 2023 or 2024. The text is part of the digital finance package, which also includes a proposal for a pilot regime to regulate the use of digital assets as financial assets (in other words, decentralized finance).

Synchronize the application with the new anti-money laundering package
In parallel, other negotiations are taking place at European level, within the framework of the legislative package relating to the fight against money laundering, adopted by the European Commission on July 20, 2021. This includes a proposal aimed at the transfer of cryptocurrencies, integrated into revision of the regulation on information accompanying transfers of funds. This proposal would consist of imposing obligations on payment service providers to provide information on the sender and beneficiary of cryptocurrency transfers. In concrete terms, the various service providers (exchanges, etc.) should exchange the personal information of their customers with each other during each transfer.

The draft compromise submitted to the vote of the Commission for Economic Policy on March 31 further proposes that providers verify the information concerning the holder of a wallet that they do not host (whose keys are not stored by the platform, such as Ledger or Metamask), and that they inform the competent LCB-FT authorities of each transaction above 1000 euros involving a non-hosted wallet. These measures are intended to undermine the anonymity of cryptocurrency transactions in order to better combat illegal practices, but blow the ceiling of cryptocurrency lawyers, staunch defenders of anonymity.

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What is MiCA, the European regulation that will regulate crypto-assets?

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