News - MiCA: first regulatory framework for crypto in Europe (and beyond)

30^th June 2022 will most likely remain bittersweet for most European companies active in the crypto sphere.

Sweet, because there is finally some progress in the adoption of a regulatory framework regarding cryptocurrencies in Europe, which will ultimately provide more legal certainty and harmonisation to this business area. Indeed, the European institutions have politically agreed on a first draft for the long-awaited MiCA (Markets in Crypto Assets) Regulation (the “Agreement”). The finalised text will hopefully be published soon.

Bitter (and in order not to rub salt in the wound, we will not mention the state of the markets), however, because the proposed Regulation already comes short on different points and is not as audacious as some may have hoped.

Negotiators decided that MiCA will cover crypto-assets that are not regulated by the existing financial services legislation (such as MiFID). The European Securities and Markets Authority (“ESMA”) will be tasked with providing guidelines in this respect.

While MiCA deals with many areas of the crypto-assets business, we will only focus of several interesting points for now:

Travel rule

Simply put, the travel rule means that some information about the transaction (source of the asset and the name/address of the beneficiary) will have to be shared in the context of investigations for money laundering or terrorist financing.

Crypto-assets service providers (“CASPs”) will be obliged to provide this information to competent authorities if an investigation is conducted into money laundering and terrorist financing.

The EU travel rule will ensure that CASPs can prevent and detect sanctioned addresses and that transfers of crypto-assets are fully identified and traceable (as required by the transfer of funds regulation (or “TFR”), also amended).

The draft text of MiCA foresees a particularly strict mechanism since there is no minimum thresholds nor exemptions for low-value transfers. Therefore, the travel rule will always apply.

If the recipient of a transfer cannot guarantee the privacy/confidentiality of personal data (name and address), this data should not be sent to the recipient. This is particularly interesting considering the current challenge of meeting GDPR compliance, especially for international transfers of data outside of the European Union.

Un-hosted wallets

The rules also apply to “un-hosted wallets” (wallets held by private users) when there is an interaction with hosted wallets managed by CASPs.

Indeed, the Agreement foresees the systematic verification of information on private wallet holders for transactions above EUR 1.000. Concretely, if a customer sends more than 1.000 EUR from its un-hosted wallet, the CASP will be required to verify whether the un-hosted wallet is effectively owned or controlled by this customer.

However, the rules do not apply in case of transfers between two private customers/wallets if there is no implication of a CASP (peer-to-peer trading).

Various

NFTs will be exempt from the scope of MiCA (however, a re-classification for NFTs is always possible if they qualify as a financial instrument or as a crypto asset).

In order to reduce the carbon footprint of crypto-currencies, CASPs will also be required to report their energy consumption. ESMA should prepare regulatory technical standards on these obligations to provide the market with clear guidance on how such disclosures should be carried out.

Decentralised finance (DeFi) and lending of crypto are not tackled (yet) in MiCA. However, a report with possible new legislative proposals shall be presented by 18 months after MiCA’s entry into force.

Last but not least, the political Agreement foresees the creation of a public register of non-compliant CASPs that may ultimately restrict their activity, e.g. in case of unfair competition or abuse to the detriment of customers.

Next steps

Now that the mains aspects of MiCA and TFR have been agreed between the Parliament, Council and Commission, the Agreement must still be approved by the Economic and Monetary Affairs and Civil Liberties and Justice Committees and Parliament as a whole.

MiCA and revised TFR will come into force 18 months after their entry into force, probably late 2022-early 2023 (that is to say that the revised texts won’t be applicable before 2024).

The text containing the practical details shall be available in the next weeks/months.