Crypto market regulation: The European Parliament adopts the relevant law

After a period of lengthy discussions, the European Parliament voted to create a single legal framework for the regulation of digital assets in the EU. On 20 April 2023, two documents were adopted at once: MiCA and TFR (Regulation on Information Accompanying Transfers of Funds and Certain Crypto-Assets). After the vote, at the end of June, the texts of these acts are likely to be published in the Official Journal of the EU and will enter into force later in July 2023. The provisions on stablecoin regulation should come into force in July next year, and the rest of the MICA and TFR provisions should come into force in January 2025. Chainlock.pro lawyer Denys Kastin told Mind what it means, and what the advantages and disadvantages are.

MICA comprehensively regulates relations in the field of digital asset circulation in the EU. All regulatory entities and activities can be divided into two categories: those subject to regulation and those not covered by this act.

Assets subject to MISA regulation

Regulated activities:

• custodial storage of cryptocurrency (i.e., in cases where you are not responsible for your crypto assets)
• crypto exchanges (when the exchanger company acts as a party to the transaction in an exchange operation);
• trading platforms (classic exchanges);
• crypto portfolio managers and some advisors in the field of digital assets;
• ICOs/IEOs/IDOs (but under certain criteria and conditions, they may be exempt from regulation).

It should be noted here that clear definitions of different categories of crypto assets are being introduced, which will now be divided into three subgroups with corresponding requirements:

1. Electronic money (stablecoins pegged to the value of fiat currency and are fully backed by money exclusively).
2. Asset-Referenced tokens (tokens also pegged to the value of fiat, but are backed not only by money but also by other assets. USDT currently belongs to this category.
3. Other tokens, including utility tokens.

Exchanges, exchangers, custodians, and others will be covered by the concept of a Crypto-Asset Service Provider (CASP).

Assets outside of regulation

ChainLock experts identify the following exceptions to regulation:

• Decentralised projects (truly decentralised projects, not those that only pretend to be such). This conclusion is based on the fact that when using dApps, you do not have contact with an intermediary whose activities, if any, would fall within the scope of the act. The importance of properly structuring dApps now comes to the fore.
• NFT tokens (if they actually meet the criteria for the impossibility of replacing such a token). Note that the exception may not apply to intermediaries providing certain NFT-related services(!).
• Landing and Borrowing (but it does not mean an exemption from national legislation), etc.

Main obligations of CASP

• Having an office in the EU and at least one director who is a resident of an EU country;
• implementing AML procedures in its activities, establishing procedures for the "smooth provision of services", etc;
• compliance with the requirements for preventing market manipulation (the lawmakers were inspired by the existing regulation of the financial assets market);
• compliance with certain rules of ethics and professionalism;
• publication of a White Paper, registration of a legal entity, fulfilment of other requirements for token issuers, etc.

Pros and cons of MiCA

Pros:

• A single regulatory landscape for cryptocurrencies across the EU. Obtaining a licence in one country means the ability to provide services in all EU member states.
• Regulatory certainty. Companies will finally have clarity and transparency in the requirements for their activities, which allows them to predict risks. In its turn, predictability can lead to a rapid increase in investments from 'old' market players;
• Lack of regulation of dApps. Unlike the regulatory trends of early 2023 (see the example of Hong Kong), decentralised projects are not subject to regulation.
• Project safety. The fulfilment of CASP's duties will allow it to defend its rights and interests against unlawful claims from various authorities and institutions.
• Investor security. Retail customers will be able to trust compliant projects more, which may also contribute to the growth of the popularity and adoption of cryptocurrencies.

Cons:

• Monopolisation. The new rules of the game are quite voluminous and large-scale for small companies and projects (especially in terms of AML implementation), which can lead to the absorption of small market participants by large ones and monopolisation of the industry.
• Law enforcement. The actual effect of any law will depend heavily on the practice of its enforcement in real life.

At ChainLock, we believe that the advantages of the new approach to regulation outweigh the disadvantages, and it is time for crypto companies to review their structures to comply with the law.