The increased adoption of digital assets and cryptocurrencies has attracted various retail and institutional interest globally. This has consequently informed the need for regulatory scrutiny, although the regulatory approaches to cryptocurrencies significantly differ across various jurisdictions. On one extreme, China, which previously had the largest concentration of Bitcoin miners initiated a mining crackdown in 2021, while El-Salvador on the other end, passed a law declaring Bitcoin legal tender. In recent times, the Central African Republic has become the first African country and the second globally to approve Bitcoin as a legal tender. The Markets in Crypto-Asset (MICA) proposed draft regulation is part of the European Union (EU) digital finance strategy which was introduced in 2020, and covers a wide range of rules for stable-coin issuers, cryptocurrency exchanges and service providers. Generally, the MICA framework focuses on four cardinal objectives namely:

1. Having a unified legal framework for crypto assets.

2. Consumer protection against market manipulation and financial crimes.

3. Specification of guidelines for the issuance and utilization of “stable-coins.”

4. Containing crypto-assets mining within the EU taxonomy for sustainable activities.

Having a unified legal framework for crypto-assets

The MICA regulation intends to standardize the Distributed Ledger Technology (DLT) and virtual assets rules in the European Union, while reducing uncertainties and maintaining the European economy’s financial stability. Thereby, propelling the need to create a unified set of rules for the providers and issuers of “crypto-assets” within the country. Firstly, the MiCA proposal defines crypto-assets as “a digital representation of rights or values that can be electronically exchanged and processed using distributed ledger technology or related technology.”

Similarly, it defines a Crypto-Asset Service Provider (CASP) as any party responsible for providing crypto-asset services professionally for third parties. Based on the MICA draft, providers of crypto-asset services (CASPs) will require prior authorization or license from the governments of the Member States. Also, CASPs will be subject to additional requirements relating to their capital needs, governance model and insurance coverage based on their size, services rendered and relevant risk. Furthermore, issuers of asset-referenced tokens or e-money tokens must produce a white paper containing key information including a description of the functions and obligations attached to the crypto-assets, which would be submitted to the home member state regulator. Once this regulation takes effect, MiCA will apply as a unified directive throughout all the European Union (EU) member countries and will provide a legal structure for crypto-assets and Crypto-asset Service Providers (CASPs).

Consumer protection against market manipulation and financial crimes

The MICA draft regulation addresses cryptocurrency exchanges (as ‘crypto-asset services’), and are tasked with maintaining transparency, consumer protection, and governance standards. Although the MICA draft makes cryptocurrency exchanges responsible for the loss of consumer assets because of cyber-attack, fraud, or negligence. However, it does not extend the compulsory insurance requirements. Also, “Consideration 8”, of the MiCA regulatory draft, specifically attempts to harmonize the proposed legislation with the existing Financial Action Task Force (FATF) recommendations on dealing with crypto crime and other Anti-Money Laundering (AML) regulations within the EU.

Furthermore, in a bid to enhance consumer protection against market manipulation, Consideration 64 of the MiCA draft highlights specific forms of cryptocurrency crimes, such as unlawful disclosure of inside information, insider trades, wash trading and market manipulation related to crypto-assets that could put other market participants at risk. As a result, the proposed MICA regulation stipulates that Virtual-Asset Service Providers (VASP) would be required to implement surveillance and enforcement mechanisms to deter potential market abuses, so as to protect users’ of crypto-asset and promote market integrity.

Specification of guidelines for the issuance and utilization of “stable-coins.”

A substantial portion of the MICA regulation was dedicated to “asset-referenced tokens” which are typically stablecoins that are designed to hold their value by being backed by other fiat currencies or other assets. The proposed MiCA regulation lays out some standard requirements for both established and prospective stablecoin issuers. One of which is that all stablecoin issuers are required to own and maintain capital funds equivalent to at least 2% of their total reserve assets. In addition, the MICA framework also lays out further requirements for the significant (larger) issuers i.e. (any stablecoin issuer with a market capitalization of at least €1 billion, and records at least 500,000 transactions per day). In this case, the significant stablecoin issuers, do have additional requirements to fulfill under MiCA, including maintaining capital funds equivalent to 3% of their reserve assets.

Including crypto-assets mining within the EU taxonomy for sustainable activities

A provision of the proposed MICA regulation seeks to prohibit crypto-based operations that rely on the Proof-of-Work (PoW) consensus mechanism which was regarded as “Environmentally Unsustainable”. The framework further asserts that energy-intensive crypto assets that are already in use in the EU will have to "set up and maintain a phased rollout plan to ensure compliance with the MICA requirements" before the legislation comes into effect. Another provision further requires white papers of PoW crypto assets to include an independent assessment of the network’s potential energy usage. This framework also asserts that “crypto-assets shall be subject to minimum environmental sustainability standards with respect to their consensus mechanism used for validating transactions, before being issued, offered or admitted to trading in the European Union." This generated massive uproar across the cryptocurrency community, as it was considered a direct attack on bitcoin. Although, based on a review of the proposed rule prohibiting proof-of-work assets, an exception was made for cryptocurrency mining operations conducted on a small scale, and in a manner that does not undermine the EU ability to reach its renewable energy goals. However, it is unclear how the regulators intend to distinguish between small and large-scale operations. Progressively, upon further amendment of the MICA regulation, the provision regarding “environmental sustainability” aimed to limit the use of “proof of work” regarding the mining of cryptocurrencies in the context of mining, was voted out of the proposed regulation.

In conclusion, it is evident that the speedy development in both DLT as well as crypto-asset technologies, which contributed to the introduction of new infrastructures such as decentralized exchanges and financial paradigms such as decentralized finance (DeFI), has led to a greater global discourse. Therefore, the MiCA’s framework aims to put an end to all segregated national crypto-policies within the EU Member States, in favour of a single, holistic regulatory approach, which could allow EU crypto-asset service providers to function more efficiently across all EU markets, but under a unified regulatory framework. The Blockchain Advisory Services (BCAS) provides regulatory advisory and token legal opinions for DLT companies or other Virtual Asset Service Providers (VASP) operating in the EU and beyond. Thereby ensuring that all services rendered are in compliance with the MICA proposed regulation and other existing legislations governing the European Union (EU) member states.