Arjen Schram, 25 March 2022

The new crypto regulation (“MiCA”) and the voted-down PoW ban

MiCA should ensure more regulation in crypto market

Within the crypto market, there has been a need for more regulation for years; and this is currently being worked hard within the European Union. Indeed, a new regulation is in the pipeline, the Regulation on Markets in Crypto Assets, also abbreviated as “MiCA”(Regulation on Markets in Crypto Assets). This new regulation aims to create a uniform European regulatory framework around crypto and create a robust legal framework. All of this to promote crypto innovation, consumer and investor protection, market integrity and financial stability.

MiCA voted down by European Parliament

However, on 14 March 2022, the proposal was voted down by the European Parliament. Indeed, the draft regulation included a provision that was interpreted as prohibiting crypto asset services from offering cryptocurrencies based on the Proof-of-work mechanism, such as Bitcoin and Ethereum, for example. Such crypto-currencies are “mined” using processors that solve complicated arithmetic calculations, which requires a lot of computing power – and thus a lot of energy; not exactly a sustainable exercise. The “PoW ban” has since been removed from the draft regulation and such a ban now seems to be off the table for good. So the draft regulation could be voted on again soon.

New MiCA on the way

All the more reason to talk about this new “crypto regulation”. Which, by the way, does not contain the first European legislation on crypto. In 2018, the fifth Anti-Money Laundering Directive was adopted, now implemented in our Dutch Wwft (Wet ter voorkoming van witwassen en financieren van terrorisme). That already contained some provisions dedicated to crypto, incidentally without actually mentioning the term. However, the purpose of that legislation was to bring “gatekeepers to virtual currencies” under anti-money laundering regulations. We wrote two blogs(I)(II) about this directive at the time. The purpose of the new MiCA regulation is entirely different: to remove obstacles to freedom of establishment and make the single market for crypto services work better.

Background

The MICA regulation is itself part of the Digital Finance package, a package of measures from the European Commission aimed at creating more space and boosting the potential offered by new digital financial services. As such, the regulation is part of a broader strategy for crypto assets and blockchain technology within the European Union. One of the priorities in that strategy is that the European regulatory framework for the relevant services should be made “innovation-friendly” and not hinder the adoption of new technologies. To date, Member States all deal with crypto assets and crypto asset services differently. First of all, this leads to crypto companies in Europe finding it difficult to scale up. For instance, different licensing regimes apply in member states and these companies sometimes have to adapt their business model if they become active in another member state. This obviously leads to higher costs. The difference in legislation also creates an uneven playing field for crypto businesses within the European Union as a whole. The new regulation aims to give crypto companies access to the full internal market and promotes the legal certainty needed to foster innovation in the crypto market within the European Union. Uniform European crypto legislation simultaneously ensures greater market integrity and better protection for consumers and investors. This, in turn, should result in greater market confidence.

Content at a glance

The new regulation will apply to crypto asset service providers and crypto asset issuers and contains uniform definitions for the different types of crypto assets, crypto services and crypto issuers. Unlike the somewhat broadly defined terms in the Fifth Anti-Money Laundering Directive – in which we got no further than “virtual currency” and “custodial wallet providers” – the MiCA Regulation includes “real” crypto definitions such as “Utility tokens”, “asset-referenced tokens” (aka: stablecoins) and “Distributed Ledger Technology” (aka: blockchain). Without wanting to give an exhaustive overview – this blog is not suitable for that – below is a staccato sample of the content of the new regulation.

• Providers of all crypto asset services will be subject to rules on licensing and operating conditions.
• In addition, a number of general requirements will soon apply to all crypto asset services, such as the obligation to act honestly, fairly and professionally, organisational requirements will be set and, for example, having a complaints procedure will be mandatory.
• The regulation also provides rules on the safekeeping of crypto assets and client funds.
• Specific crypto services, such as custodian services, trading platforms and exchange services, will be subject to specific rules.
• Issuers (issuing entities) of cryptocurrencies will be required, among other things, to publish an information document (a so-called “white paper”) that will have to comply with certain requirements (to avoid the resulting regulatory burden, SMEs will be exempted from this. The threshold will be for issuing crypto assets worth less than €1,000,000 over a 12-month period).
• Issuers of stablecoins will be subject to a specific licensing requirement unless the outstanding amount of stablecoins is less than €5,000,000. They will also be subject to rules on holding asset reserves covering the value of stablecoins and requirements on the safekeeping of those reserves.

The regulation further contains – among other things – rules on the supervision to be carried out by national authorities, prohibitions to prevent market abuse and rules on offers and advertisements to the public of crypto assets. In short, the regulation contains a very comprehensive regulatory framework on crypto assets and crypto asset services.

What Wieringa Advocaten can do for you

Want to know more about the new European crypto regulation MiCA or have other questions about crypto? We have extensive experience litigating and advising on crypto. Wieringa Advocaten is happy to assist you.

Questions?