MiCAR: an important step in regulation of crypto markets (status update)

1.MiCAR

MiCAR is a European Regulation that will regulate the issue of crypto assets, including so-called stablecoins (crypto assets that purport to represent a stable monetary value) and the provision of services related to crypto assets. Currently, only certain crypto-asset service providers are subject to anti-money laundering and terrorist financing rules under the 5th Anti-Money Laundering Directive (AMLD5). In the Netherlands, these rules have been implemented in the Dutch Money Laundering and Terrorist Financing Prevention Act (Wet ter voorkoming van witwassen en financieren van terrorisme).

MiCAR provides an additional layer of regulations and contains requirements in the areas of consumer protection, countering market abuse, and requirements in the prudential field. In addition, MiCAR will introduce an authorisation requirement for issuers of stablecoins and for crypto-asset service providers.

Process

In June 2022, agreement was reached between the European Commission, the European Council and the European Parliament on the final text of MiCAR.

Once MiCAR has been published in the Official Journal of the European Union, an 18-month entry into force period will apply. The parts on the issue of stablecoins will go into effect after 12 months already.

After the publication of MiCAR, the Minister of Finance will as soon as possible submit the necessary legislative proposals to implement the relevant MiCAR sections into Dutch law.

The final text of MiCAR is expected in spring 2023. The implementation process in the Netherlands will be initiated soon afterwards.

Content

Many obligations in MiCAR are inspired by existing rules governing financial services and products, such as the rules governing financial instruments and payment services.

MiCAR includes rules on the issue of crypto assets. The issuer must prepare a white paper, describing the general characteristics of the crypto asset, the rights of the buyer of the crypto asset, and the additional risks. If there is no clearly identifiable issuer, the obligations apply to the service provider where the crypto asset first becomes publicly tradable. These white papers must be notified to the national competent authority (NCA). In addition, requirements will apply to the communication and marketing of crypto assets: this information must be fair and clear, and may not be misleading.

A stricter regime applies to the issue of so-called stablecoins. There are two types of stablecoins: the electronic money token (EMT) and the asset referenced token (ART). An EMT is a crypto asset that is backed by one single currency of a specific EU Member State; an ART is a crypto asset that is funded by other means, such as currencies of a non-EU Member State, or other assets. If a party wishes to issue an EMT or ART, it must be authorised, with EMTs being issued only by credit institutions and electronic money institutions. Both EMTs and ARTs will be subject to strict prudential requirements, such as requirements for own funds, custody and deposit taking of assets, and it will be mandatory for an issuer to have a recovery plan.

Furthermore, MiCAR will regulate a wide range of crypto-asset service providers, including wallets, exchange services, trading platforms and parties that advise on crypto assets. These service providers must be authorised. The authorization requirements are extensive and address, among other things, the conduct of operational integrity, internal control mechanisms, governance security measures, business continuity and risk management.

Moreover, MiCAR contains rules to deter market abuse, similar to the rules that exist for trading in financial instruments under the EU Market Abuse Regulation. Although many forms of market abuse are already punishable, with MiCAR there will be financial oversight to counter it. For example, there will be requirements to counter insider trading, but also other practices, such as pump-and-dump schemes, that involve artificially inflating the price of a crypto asset, after which the asset is dumped. Powers of the NCAs

MiCAR gives NCAs far-reaching powers. For example, they may request information at any time, require white papers to be amended if they believe that not all information is included, prohibit the provision of services for non-compliance with the law, and disclose the names of parties that have acted in violation of the law. The NCAs are additionally given intervention powers whereby the sale of certain crypto assets, or the provision of certain services, may be suspended or even terminated.

2. Appreciation of the final text of the MiCAR

The Minister of Finance regards MiCAR as an important step in the regulation of crypto assets. Despite the fact that MiCAR will not be the solution to the specific problems currently created by crypto assets, the Minister of Finance believes that it provides an initial basis for financial oversight of the sector.

The Minister of Finance notes that the final text of MiCAR is in line with efforts of the Dutch government, but also with the 2019 advice on crypto-asset regulation from the AFM and the Dutch Central Bank (De Nederlandsche Bank), in which these NCAs advised to work towards a harmonized framework at an EU level, which should also be proportionate and should take into account the small-scale and innovative nature of the sector.

MiCAR will contain several mandates for the European Commission and the European Supervisory Authorities to conduct investigations and provide reports on any omissions under MiCAR. These include the areas of decentralized finance, non-fungible tokens and the energy consumption of crypto asset mining. Furthermore, there will be an annual report on the development of crypto asset markets in the EU to monitor the risks of the sector. The first reports on this should be delivered as early as 12 months after MiCAR enters into force.

Lastly, the Minister of Finance points out that, despite the absence of financial supervision until the entry into force of MiCAR, the existing rules of criminal law and general consumer law continue to apply. In addition, the Minister of Finance will continue to invest in communicating the risks of crypto assets to the wider public.

3. Recent problems

Recently, the FTX case made it clear what risks an unregulated crypto market and crypto exchanges without licences entail.

The Minister of Finance believes that the likelihood that these problems will occur in the Netherlands will be significantly reduced under MiCAR. This is due to the fact that, under MiCAR, parties will be required to provide consumers with adequate and non-misleading information, there will be rules on holding (and investing) equity, and liability provisions will apply.

Despite the Minister of Finance’s confidence, it remains to be seen whether MiCAR is sufficient for the regulation of crypto-asset service providers.

In the summer of 2022, the European Systemic Risk Board (ESRB) started exploring how legislators might consider extending MiCAR. Ms Lagarde, President of the ESRB, outlined the four potential areas of focus for MiCAR2.

MiCAR2 should:

• address the risks of interconnectedness with traditional financial institutions;
• regulate cryptocurrency staking and lending;
• address the regulation of decentralized finance where there are no intermediaries; and
• regulate the issue of crypto assets where there is no identifiable issuer such as Bitcoin.