Are You Ready for MiCA Implementation?

On June 30, 2024, the new Markets in Crypto-assets (MiCA) regulation, which affects stablecoins in the European Union, went into effect. This client alert outlines the critical obligations and considerations for stablecoin issuers, holders, investors, and crypto-asset service providers (CASPs). Some platforms have already updated their holdings of stablecoins, putting those that are not MiCA-compliant out of reach for EU customers.

Scope of MiCA Regulation

MiCA aims to provide a harmonized regulatory framework for crypto assets across the EU. It applies specifically to the issuance, offering to the public, and trading of crypto assets (including stablecoins) within the EU market. The regulation targets three main types of crypto assets:

1. E-money tokens (EMTs): These are crypto assets that stabilize their value by referencing a single official currency. They are often used for payment purposes.
2. Asset-referenced tokens (ARTs): ARTs are crypto assets that stabilize their value by referencing multiple assets, including currencies, commodities, or other crypto assets.
3. Other crypto assets: This is a catchall category for all other types of crypto assets, including utility tokens and those not covered by existing financial services legislation.

Tether (known as USDT), which is based in the United States, needs to register in the EU to continue its operations. Bitstamp has already delisted Euro Tether (EURT) because of a lack of authorization for Tether under MiCA. Circle had previously applied for its conditional CASP authorization with the securities commission (Autorité des marchés financiers, or AMF) in France. Additionally, Circle, a global financial technology company and issuer of USDC and EURC, announced on July 1st that it has become the first global issuer of stablecoins to comply with the European Union's (EU) historic Markets in Crypto-Assets (MiCA) regulatory framework. This achievement was made possible through obtaining authorization as an electronic money institution (EMI) from the French financial regulatory authority, the Autorité de Contrôle Prudentiel et de Résolution (ACPR). With this license, USDC and EURC are now issued in the EU in compliance with the MiCA regulatory requirements for stablecoins or stable electronic money tokens backed by the euro or the dollar, which came into effect on June 30th.

Obligations for Issuers

Issuers of EMTs and ARTs are subject to rigorous requirements under MiCA for qualifying as electronic money institutions or applying for authorization under Article 19, respectively. As of June 30, 2024, they must:

• Obtain authorization: Issuers of e-money tokens must be authorized as electronic money institutions or credit institutions. Asset-referenced tokens require a different form of authorization, depending on the nature of the underlying assets. Issuers must demonstrate compliance with prudential requirements, liquidity management, and governance standards.
• Publish a white paper: A comprehensive document detailing the key aspects of the token, including stabilization mechanisms, investment policies, custody arrangements, and rights of token holders, must be approved by the home member state National Competent Authority (NCA).
• Governance and risk management: Issuers must have robust governance structures, clear organizational responsibilities, and effective risk-management processes. These include measures to handle conflicts of interest, ensure business continuity, and maintain the integrity and confidentiality of information. 
• Custody and safeguarding of assets: Reserve assets must be fully segregated from the issuer’s own assets and safeguarded adequately.
• Transparency and reporting: Issuers are required to maintain transparency through regular reporting to NCAs. This includes the composition, management, investment, segregation, and custody of reserve assets to meet redemption requests.
• Suitability assessments: MiCA mandates rigorous suitability assessments for members of the management body and significant shareholders of issuers, ensuring that key individuals are fit to operate within the regulatory framework.

Implications for CASPs

Crypto-asset service providers are defined under MiCA as entities offering a range of services related to crypto assets, such as custody, trading, exchange, execution of orders, and advisory services. They may also be issuers of service provisions, for which there is a different notification and authorization required under Article 60. The regulation imposes several obligations on these providers:

• Notification requirement: Service providers must notify the NCA of their home member state at least 40 working days before commencing any crypto-asset service, as per Article 60.
• Authorization and compliance: Service providers must obtain authorization from relevant NCAs and demonstrate compliance with MiCA’s prudential and operational requirements.
• Transparency and reporting: Similar to issuers, service providers must maintain high levels of transparency through regular reporting on their activities, governance, and financial health.
• Consumer protection: Service providers must implement measures to protect consumers, including safeguarding client funds and providing clear, accurate information about their services.
• Market integrity: Providers are required to implement robust systems to prevent market abuse, ensuring fair and transparent operations.

In Luxembourg, the Commission de Surveillance du Secteur Financier’s (CSSF’s) MiCA questionnaire for financial entities considering provision of crypto-asset service under Article 60 should start their application now given the deadline of July 26, 2024.

ESMA Guidelines

The European Securities and Markets Authority (ESMA) has issued guidelines to ensure consistent and effective implementation of MiCA across the EU. These guidelines cover:

• Assessment of suitability: This includes detailed criteria for assessing the suitability of management and key shareholders in issuers of ARTs, comprising an evaluation of their reputation, knowledge, skills, experience, and financial soundness.
• Prudential requirements: These are specific requirements related to the financial health and operational soundness of issuers, including liquidity management and anti-money-laundering measures.
• Notification and approval: Procedures for notifying NCAs of significant changes in ownership or control ensure ongoing compliance with regulatory standards.

Impacts on Investors and Holders

Investors and holders of stablecoins will benefit from enhanced protections under MiCA, including:

• Transparency: Issuers are required to disclose detailed information through the white paper, promoting transparency about the token’s structure, backing assets, and associated risks.
• Redemption rights: Holders of e-money tokens have the right to redeem their tokens at any time at par value in the referenced official currency.
• Market integrity: The regulation aims to prevent market abuse and ensure the fair treatment of token holders by imposing strict operational and security standards on issuers.
• Consumer protection: MiCA imposes strict rules on the marketing and sale of stablecoins, which are aimed at preventing misleading practices and ensuring that investors have access to reliable information.
• Supervisory oversight: NCAs will have increased oversight, with powers to monitor and enforce compliance. This means holders and investors can expect a more secure and regulated environment for their investments.

Key Considerations Moving Forward

As the implementation date approaches, issuers should:

• Review compliance requirements: Issuers need to align their operations with MiCA’s requirements, including authorization, governance, and disclosure obligations. They should also strengthen internal compliance mechanisms to meet the new transparency and reporting requirements.
• Evaluate business strategies: Investors and holders should assess how these regulations affect their portfolios and consider the stability and compliance of the tokens they are involved with.
• Monitor regulatory developments: Regularly review updates from ESMA and other regulatory bodies. Stay informed about additional guidelines and technical standards that may be issued by regulatory authorities.
• Seek authorization: Ensure compliance with authorization procedures and prepare for detailed supervisory reviews.

By proactively addressing these new requirements, stablecoin holders, investors, issuers, and crypto-asset service providers can ensure a smooth transition into the MiCA regulatory environment, fostering a more secure and transparent crypto-asset market in the EU.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.