MiCA regulation in Europe: a jargon-free guide
The EU’s new regulatory framework for crypto assets aims to establish a clear set of rules for the crypto sector across Europe. This article unpacks some of the technicalities to explain what MiCA covers and how it affects businesses.
In June 2023, following more than two years of intense discussions between European Union lawmakers, the long-awaited regulation on markets in crypto-assets (MiCA) came into force.
The regulation paved the way for the EU to become the first major jurisdiction with a comprehensive regulatory framework on crypto assets, and has been seen as an indicator of crypto assets becoming increasingly mainstream.
As the European Commission puts it, financial services within the bloc must be “fit for the digital age”.
Digital finance has a key role to play in shaping a more competitive, sustainable, resilient economy – and a more inclusive, modern, prosperous society.
As the end of 2024 will mark a key milestone for the implementation of MiCA, let’s take a look at this important piece of legislation. We’ll cover its scope, timelines for implementation, and some essential takeaways for businesses looking to explore crypto asset activity in Europe.
What is MiCA?
MiCA is a regulatory framework developed to establish clear and consistent rules for the cryptocurrency industry across the EU. Its goal is to ensure legal clarity, safeguard consumers and investors, and maintain market integrity, all while encouraging innovation in the digital assets space.
MiCA addresses multiple areas of the crypto market, such as the classification of crypto tokens, standards for service providers, and responsibilities for issuers.
Understanding the terminology
Before exploring the scope of MiCA and its intended effects in more detail, let’s first unpack some of the key terms used in, or in relation to, the regulation.
Firstly, the regulatory bodies involved:
- ESMA: The European Securities and Markets Authority is the European Union’s financial markets regulator and supervisor. This body plays a pivotal role in ensuring that MiCA is applied consistently across the EU, providing regulatory oversight, market monitoring, and technical guidance.
- EBA: European Banking Authority. Alongside the ESMA, the EBA has a key supervisory and market oversight role in MiCA, for example in relation to the issuance and use of crypto tokens.
- NCAs: National Competent Authorities. The term used in MiCA to refer to the watchdogs that each member state appoints to oversee their implementation of MiCA at a national level. For example, Spain has delegated its National Securities Market Commission (CNMV) and the Bank of Spain.
Secondly, the types of assets covered by MiCA.
The term stablecoin is widely used in the crypto assets world to refer to an asset that is designed to maintain a steady value. To keep this stability, they are “pegged” or tied to something with relatively low volatility, such a traditional currency (for example USD or EUR) or a commodity such as gold.
Let’s say a company issues 100,000 in USD-pegged stablecoins. It would need to have the equivalent cash reserves in a bank to “back” these dollar-for-dollar.
MiCA divides what are commonly called stablecoins into two main categories: ARTs and EMTs.
- EMTs are E-Money Tokens. These are tied to a single currency that is legal tender. One example would be the stablecoin USD Coin (USDC), which is pegged to the US dollar.
- ARTs are Asset-Referenced Tokens. These are backed by a broader class of assets including commodities, including “baskets” of more than one. ARTs may also be tied to traditional currencies, but only in combinations (ie, they do not have a strict one-to-one relationship like EMTs).
MiCA also specifies a third category of assets under the catch-all term Other Crypto Assets. These include established, decentralized cryptocurrencies like Bitcoin and Ethereum. These are not backed by any underlying assets and can be more volatile in nature.
A final piece of terminology worth noting is Crypto Asset Services Provider (CASP). This is the term MiCA used to refer to any provider that offers services related to crypto assets, such as trading platforms, exchanges, and custodians. CASPs must comply with MiCA rules to operate legally in the EU.
A note: you may hear VASP (Virtual Asset Service Provider) used in relation to crypto assets. This is a term used by the global Financial Action Task Force (FATF). It is often used in anti-money laundering (AML) and counter-terrorism financing (CTF) contexts.
Although CASP and VASP refer to similar kinds of service providers and have a lot of overlap, the terms should not be used interchangeably in the context of MiCA because of regulatory variances. To name just one example of this, the Central Bank of Ireland has noted that a CASP authorisation assessment is more involved than a VASP registration.
The scope of MiCA regulation
The key goal of the MiCA regulation is harmonizing the regulatory approach to crypto assets across EU member states. What does this mean, and how will it work?
To date, there has been a lot of variation in the regulatory approach across the bloc, leading to inconsistencies and legal complexities for businesses operating in multiple countries.
By harmonizing the rules, MiCA removes these disparities, ensuring that crypto businesses, investors, and consumers across the EU operate under the same regulatory framework. This simplifies compliance and encourages cross-border operations, which digital assets are particularly well suited to.
It’s important to note that harmonizing does not mean applying one blanket rule or timeline across the whole bloc. For example, EU member states have some discretion in how they implement certain aspects, as overseen by their NCA.
What MiCA means for crypto service providers
Under MiCA, Crypto-Asset Service Providers (CASPs) must meet several requirements to operate legally in the EU. Here’s a simple breakdown of some key rules:
Authorization: CASPs must get authorized by the NCA in the EU country where they are based before they can offer crypto services.
Consumer protection: CASPs need to provide clear information about the risks involved in crypto services, ensuring that customers are aware of what they are investing in or using.
Transparency: CASPs must be transparent about their operations, including fees, how they handle customer assets, and any conflicts of interest.
Capital requirements: CASPs are required to hold a certain amount of financial reserves (capital) to prove they can operate safely and protect customer funds in case of financial trouble.
Security and risk management: CASPs need to have strong security measures in place to protect against hacks or fraud. They also need plans for managing risks and responding to problems.
AML/CTF compliance: CASPs must follow strict anti-money laundering and counter-terrorism financing (CTF) rules, which include verifying customer identities (KYC) and monitoring transactions for suspicious activity.
Cross-border services: Once authorized in one EU country, CASPs can offer their services across the entire EU, making it easier for them to operate in multiple countries under a single authorization. This is known as passporting.
In short, CASPs under MiCA must be licensed, protect customers, operate transparently, hold enough financial reserves, and comply with security and anti-money laundering rules.
CASPs also need to make sustainability disclosures on the environmental impact of their crypto operations, both within the “white papers” (project prospectus) they submit under MiCA, and also on their websites.
What’s not within the scope of MiCA
MiCA has no way of regulating the supply and issue of completely decentralized crypto assets such as Bitcoin. However, MiCA can and does address the activities of companies and services that manage crypto assets like Bitcoin (buying, selling, and storing it).
For example, If a company runs a platform where people can buy and sell Bitcoin, MiCA makes sure that the company follows rules to protect users, such as making transactions more transparent and ensuring that funds are safe.
NFTs (non-fungible tokens) are not regulated under MiCA if they are considered “unique and not fungible with other crypto assets”. Digital art and collectibles would fall into this category.
Other functions of of decentralized finance (DeFi), such as smart contracts, are also outside the scope of the current MiCA legislation, as are assets that are already covered by existing legislation.
What about companies with existing licences?
Companies already licensed as e-money institutions (EMIs) may face some new requirements to be fully MiCA-compliant, depending on the kind of services they offer.
Timeline for MiCA rollout
MiCA will be fully implemented by the end of 2024, with a phased approach focusing first on stablecoins and then on broader crypto service providers and activities.
Key milestones
- June 2024: Rules for stablecoins (ARTs and EMTs) came into effect.
- December 2024: Full MiCA rules apply for all CASPs and other crypto-assets.
Although MiCA will fully apply from the end of 2024, existing CASPs and issuers will have a transition period of up to 18 months (until mid-2026) to complete the necessary adjustments and authorization.
Who does the MiCA transition period apply to?
Grandfathering for existing CASPs and issuers: CASPs and issuers operating under national laws before MiCA takes full effect in December 2024 can continue operating during a so-called grandfathering period. They have until mid-2026 to become fully authorized and compliant, although the ESMA has encouraged member states to limit the transitional period to 12 months.
Simplified authorization for Pre-MiCA compliant providers: CASPs already authorized under national regulations before MiCA will benefit from a simplified process to transition to MiCA compliance without starting from scratch. For example, this may apply to CASPs that were authorized under national regulations but had not yet begun operations, or were in the early stages of setting up their services before MiCA came into full effect.
Within the permitted transition period, each country’s NCA sets the timeline for compliance.
For example:
- Spain has opted to bring forward the end of the transition period, with full MiCA compliance necessary by December 2025.
- In Ireland, a group representing some of the EU’s largest FinTech and crypto companies is lobbying the NCA to apply the maximum transition period of 18 months.
There are more examples at a national level in this article by the law firm Freshfields.
Stablecoins: MiCA in action
Since the MiCA stablecoin regulations came into effect in June 2024, there has already been significant activity in the market, especially regarding licenses and launches.
One notable development is Circle, the issuer of USDC and EURC, becoming the first global stablecoin issuer to secure a license under MiCA. Circle obtained an Electronic Money Institution (EMI) license from the French regulatory authority, which allowed it to issue both stablecoins in full compliance with MiCA.
The regulation’s early effects indicate a focus on consumer protection, compliance, and transparency, which may encourage more stablecoin issuers to seek licenses, improving market stability.
Global banking conglomerate Societe Generale is another example of a major player that is launching a MiCA-compliant stablecoin, in partnership with Bitpanda.
Considerations for non-crypto firms
Most discussions around MiCA center on its impact on crypto issuers, offerers and builders — those actively shaping the crypto asset ecosystem. Given that they are responsible for implementing MiCA's requirements, this focus is understandable.
However, what about businesses primarily rooted in traditional finance, now exploring diversification into crypto assets with no previous involvement? Their opportunities and challenges under MiCA are also important to address.
Potential benefits of MiCA include:
Streamlined compliance: MiCA creates a unified regulatory framework across the EU, simplifying compliance and reducing legal complexities for companies expanding across multiple countries by replacing varied national laws with one standardized set of rules.
Market opportunities: MiCA opens up new market opportunities by creating a level playing field across the EU. A non-crypto-native company can more easily explore cross-border transactions, partnerships, or service offerings within the EU using crypto.
Regulatory reassurance: Companies may feel more comfortable accepting crypto payments or incorporating blockchain technology into their operations due to the legal clarity provided by MiCA.
More efficient cross-border payments: Stablecoins are one of the great enablers of efficient cross-border payment flows. The EU has taken a proactive stance on stablecoins, since it has stated that stablecoins have the potential to enhance financial inclusion and reduce transaction costs.
While there are clear opportunities for non-crypto companies under MiCA, there are also inherent challenges. A specialized crypto asset treasury operations platform like Fortris can help companies meet their compliance obligations in the following ways:
Treasury integration: Fortris enables businesses to incorporate digital assets into their existing financial workflows, ensuring compliance with MiCA's reporting and transparency rules. This simplifies the management of digital assets and allows companies to maintain clear records, critical for regulatory compliance.
Payments and transactions: The platform facilitates crypto payments and cross-border transactions, ensuring these are conducted in a MiCA-compliant way. Fortris helps businesses adhere to regulations around transaction tracking, which is crucial for complying with anti-money laundering (AML) and counter-terrorism financing (CTF) laws required under MiCA.
Compliance-driven solutions: By partnering with risk intelligence platforms like Merkle Science, Fortris provides tools to manage financial crime risks, helping businesses comply with MiCA’s stringent requirements for mitigating risks like money laundering and fraud.
By offering an easy-to-integrate, compliance-focused platform, Fortris ensures that businesses can meet MiCA's regulatory demands while efficiently managing their crypto assets.
Disclaimer: The information provided in this document is for informational and educational purposes only, and does not constitute legal advice, investment advice, financial advice, trading advice, or any other sort of advice. Crypto asset regulations vary by country and region, and you should conduct your own due diligence in consultation with experts.
Fortris handles digital asset treasury operations for enterprise business.
Want to learn more? Book a demo today.