This article was penned by Dr Justine Scerri Herrera - LL.B, LL.D, LL.M (Uni of Groningen), Managing Partner at MK Fintech Partners Ltd

Anyone operating in the cryptocurrencies space in Europe has most likely heard of the Markets in Crypto-Assets Regulation (MICA) by now.

For good or for bad, the final text (which is for your information 167 pages long) has been approved, and the proposal has been moved to the EU Parliament for a vote. Many are of the view that this will be the end of the crypto “wild west” in Europe.

The regulation divides crypto assets into three main categories:

• Utility tokens: A crypto value that is intended to provide digital access to a good or service that is available via Distributed Ledger Technology (DLT) and is only accepted by the issuer of that token. Examples of utility tokens include Bitcoin, MANA, and Ethereum.
• Asset references tokens: Asset-referenced tokens that aim to maintain a stable value by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets. Examples include DAI and PAXOS.
• Electronic Money Tokens (EMT): An EMT is a type of asset that aims to stabilize its value by referencing a single fiat currency. Such stablecoins are primarily used as a means for payment and share similarities with the instruments defined as “e-money” under the Electronic Money Directive. Examples of these include USDT, USDC, and BUSD.

Security Tokens (STOs) are tokens that qualify as financial instruments, and these will be governed by the EU Securities directive, MIFID 2. It is worth mentioning there is a DLT pilot regime in place, which aims at providing a legal framework for the trading and settlement of transactions in those crypto assets that qualify as financial instruments and digital securities.

Token Issuers (ICOs) offering their coin in EU markets or that want to be listed on EU exchanges must provide a detailed whitepaper to be registered with the relevant regulators. The whitepaper must follow various requirements and disclosures which aim at raising investor protection and filtering out all the sh** coins being dumped on the market.

Virtual Asset Service Providers!

Anyone who is a crypto asset service provider, such as introducers, portfolio managers, custodians, market makers, crypto exchanges, portfolio managers and brokers will need to obtain authorisation from an EU competent authority when operating in Europe. These include minimum share capitals, good governance, approved key roles, complying with various policies and procedures, reporting and more!

Does MICA table decentralised finance (DeFi) and non-fungible tokens (NFTs)?

Short answer is no, not really.

With regards to DeFi MICA states that “where crypto assets services as defined in this regulation are provided in a fully decentralized manner without any intermediary, they do not fall within the scope of this regulation”.

Which leads me to my next question – what does ‘decentralisation’ mean? Nowadays only few projects are truly decentralised (such as Marker Dao). Even Ethereum is questionable post-merge event. But this monologue is for another day. However, don’t get too excited yet. European regulators said that they will be drafting a report next year on DeFi. Time to prepare the crypto lobbyist armies.

NFTs are largely left out with the exception for those which form part of a collection or contain elements of fractional ownership (due to securities characteristics).

What does the Stablecoin landscape look like?

• MICA makes it clear that it does not want any competition from decentralised stablecoin issuers.
• ARTs will be restricted by limitations of market caps and daily trading volume (200 million in transactions per day).
• EMTs such as EuroC (circle euro dominated stablecoin) will not be restricted in the same way as ARTs.
• ARTs and EMTs containing a non-EURO currency denomination will have additional restrictions, requirements and limitations (such as holding higher ‘own funds’). A special ‘college’ is being set up to supervise these. The college shall consist of, among others, the competent authority of the home Member State where the issuer of the asset-referenced tokens has been authorised, the EBA, ESMA, the competent authorities with supervision of the most relevant crypto-asset trading platforms, custodians, credit institutions etc. What will this mean for USD based stablecoins which account for 75 per cent of crypto trading volume?
• ERTs nor ARTs can offer bearing interest or yield generating tokens.

When do the games begin?

“Article 126 indicates that this regulation shall enter into application 18 months after its entry into force, except for the provisions related to e-money tokens and asset-referenced tokens that shall enter into application on the date of entry into force of this regulation” – Just in time for the next bull run?

Good news for Malta?

Malta’s Virtual Financial Asset Framework is already largely in line with MICA and has been since November 2018. Therefore, providers or issuers with a license or registration in Malta will have a seamless transition. For those players jurisdiction shopping, look no further!

About the author and the firm

Dr Scerri Herrara is Managing Partner at MK Fintech Partners Malta Ltd which forms part of top tier international legal and advisory group Michael Kyprianou Group. Michael Kyprianou Group has established an enviable reputation as a broad-based legal practice. Having its guiding principle to always exceed its clients’ expectations, it has grown to become one of the largest law firms in Cyprus with offices in Nicosia, Limassol and Paphos. Michael Kyprianou Group’s international presence also includes fully fledged offices in Greece (Athens and Thessaloniki), Malta (Birkirkara), Ukraine (Kiev), the United Arab Emirates (Dubai), United Kingdom (London), Israel (Tel Aviv), and Germany (Frankfurt).