Publications

In the last few years, the European Union (“EU”) has been creating a package of measures to enable and support the potential of digital finance. More recently, as part of the European Digital Finance package and seeing that the market of crypto assets is evolving, the European Commission introduced a proposal for implementing a regulation on Markets in Crypto-Assets (“MiCA”) as part of its digital finance strategy. As demonstrated by the recent experiences the industry has had with the likes of FTX, 3AC, Voyager, BlockFi and others, the need for regulation has become increasingly important.

In this regard, MiCA seeks to regulate all those assets and asset classes that currently fall outside of the EU regulatory parameter, such as e-money tokens, utility tokens or asset-referenced tokens (“crypto assets”). It is anticipated that MiCA will come into force in April 2023 and will, no doubt, introduce a major change in the crypto industry. Without going into a deep dive on the text and requirements of MiCA, MiCA’s main objectives are as follows:

• ensure legal certainty by establishing a sound legal framework for crypto assets in its scope that are not covered by existing financial services legislation;
• support innovation and fair competition in order to promote the development of crypto assets by instituting a safe and proportionate framework;
• protect consumers, investors and market integrity in consideration of the risks associated with crypto assets; and
• ensure financial stability, with the inclusion of safeguards to address potential risks.

The question that everyone has been asking themselves is whether these objectives can be achieved whilst the industry can continue to grow albeit sustainably, or whether the implementation of MiCA will unavoidably favour big firms over smaller firms (e.g., fintech start-ups) by burdening the latter with requirements that they will not be able to adhere to and thus, hinder competition and innovation. In other words, will regulation of crypto assets be central in addressing the current failures and deficiencies? The answer may well depend on perspective, but the truth lies (unsurprisingly) somewhat in the middle.

On the one hand, crypto asset firms do not currently enjoy the benefits of EU’s internal market, as they cannot passport their licenses/registrations across the EU in the same way that other financial services providers can. In addition, the absence of a coherent set of uniform rules gives certain businesses an unfair advantage over others, as it precludes them from being able to compete; something that, arguably, will no longer be the case with MiCA. From an investor protection perspective, MiCA introduces market abuse and consumer protection to crypto assets and activities; a move that will admittedly boost public confidence and integrity in the market.  

On the other hand, however, regulation can create significant hurdles to crypto assets providers. To contextualise:

• if a MiCA authorised entity uses another provider to have custody of customer assets, such other provider must be a MiCA authorised entity itself;
• the MiCA authorised firm must be appropriately set up to operate as a standalone regulated firm; the management must have appropriate powers to run the business and oversee it as a regulated operation; governance must be set up to make ensure adequate and effective risk management, things that are not always feasible within small firms / start-ups;
• if a firm is to issue a crypto asset, in most circumstances, it will need to prepare a whitepaper which will be published in accordance with MiCA. Although this will not be prescribed under a prospectus regime, it may be difficult, or even impossible, for smaller firms to comply with this requirement. In hindsight, this will create an obligation on all firms to act honestly, fairly and professionally vis-à-vis investors, and in particular in relation to conflict management and prevention or maintenance of security access protocols, something that is not the case currently.

Concerns regarding disruption of innovation in the crypto space and the adverse effect MiCA may have thereon will persist, however, it is helpful to note that a comprehensive regulatory framework constitutes one of the cornerstones of a healthy economy. It of course remains to be seen whether MiCA will prove to be an effective regulation, and in this regard whether it will achieve its desired aims and objectives.