MICA, which stands for Markets in Crypto-Assets Regulation, is a regulatory framework proposed by the European Commission to supervise and monitor crypto asset service providers (CASPs) in the European Union. MICA aims to create a harmonized and comprehensive regulatory framework for CASPs to ensure consumer protection and market integrity. MICA is important for CASPs because it represents a significant step towards regulating the crypto asset industry in the EU. Under MICA, CASPs will be subject to authorization, ongoing supervision, and monitoring by regulatory authorities. The proposed framework also sets out requirements for risk management and compliance functions, which will be mandatory for all CASPs operating in the EU.
MICA represents a significant milestone in the history of blockchain. It is the first regulatory attempt to standardize and define key industry concepts previously considered part of specialized jargon. MICA sets legal definitions for terms such as distributed ledger technology, electronic money tokens, the exchange of crypto assets for fiat currency, and the roles of issuers and service providers in the crypto asset ecosystem. These definitions are crucial in clarifying and establishing a framework for compliance and consumer protection in the rapidly evolving world of crypto assets.
Crypto-Assets
MICA clearly defines crypto assets as digital representations of value or rights that can be stored and transferred electronically using distributed ledger technology or similar technology. Within this broad category, MICA distinguishes three sub-categories of crypto assets, each with its unique characteristics:
Asset-Referenced Tokens: These crypto assets aim to maintain a stable value by referencing the value of one or more fiat currencies, commodities, other crypto assets, or a combination.
Electronic Money Tokens: This crypto asset is intended to be used as a means of exchange and maintain a stable value by referencing the value of a fiat currency that is legal tender.
Utility Tokens: These crypto assets are designed to provide digital access to goods or services available on distributed ledger technology and are only accepted by the token issuer.
MICA does not cover security tokens, as these are already regulated under the Directive on Markets in Financial Instruments (MiFID II) and are considered financial instruments.
Whitepapers
Issuers of Asset-Referenced Tokens, Electronic Money Tokens, and Utility Tokens under MICA must draft white papers that meet specific requirements. These white papers should include the following:
General information about the issuer and key project participants
A description of the project being offered to the public and the reasons for offering the crypto asset
Details about the number of crypto assets to be issued, as well as a comprehensive description of the rights and obligations associated with the crypto assets and the procedures and conditions for exercising those rights
Information about the technology and standards used by the issuer, as well as a detailed description of the risks associated with the crypto asset
In addition, appropriate risk warnings must be included in the white papers to caution prospective investors about the high-risk nature of crypto assets, the potential for loss of value, and the lack of liquidity.
It's clear from these requirements that drafting white papers for issuing crypto assets is similar to issuing a prospectus for a public company's offering. However, the drafting process for white papers is generally more relaxed and has fewer and simpler formalities compared to prospectuses for public offerings.
Taxation
The current stance on the taxation of crypto-assets is that funds obtained from initial coin offerings are taxable income and taxed at a standard rate of 12.5% for companies. The case of Hedqvist C-264/14 serves as the basis for the VAT treatment of transactions involving the exchange of traditional currencies for bitcoins and vice versa. The European Court of Justice (ECJ) determined that such transactions constitute a supply of services for consideration but are exempt from VAT.
Crypto-Asset Service Providers
MiCA sets out that only legal persons with a registered office in a Member State of the Union who have been authorized by their home member state's competent authority to operate as crypto-asset service providers are permitted to offer Crypto-Asset services. MiCA's Article 54 outlines the necessary information that must accompany an application for authorization of a crypto-asset service provider, while Article 61 specifies the organizational requirements that must be adhered to. According to MiCA, members of a crypto-asset service provider's management body must possess the qualifications, experience, and skills to fulfill their duties and demonstrate the ability to commit sufficient time to their functions. Natural persons who hold over 20% of the service provider's share capital and voting rights or exercise control over the provider must also demonstrate a good reputation and competence.
MiCA includes a significant feature allowing crypto-asset service providers to offer cross-border services throughout the EU. Under Article 58, such providers can operate in multiple Member States, subject to submitting certain information to the competent authority in their home Member State. The required information includes the following:
A list of the intended Member States where the services will be provided.
The start date of such provision.
A list of other activities the provider offers that MiCA does not cover.
Within 15 days of submitting this information, the crypto-asset service provider may begin operating in a Member State other than their own.
In general, MiCA introduces various regulations for CASPs that cover areas such as governance, capital, insurance, and transparency. Notably, despite the perception of crypto-assets as a riskier asset class than traditional financial instruments due to factors such as transparency, money laundering, and market volatility, the minimum capital requirement for major CASP players is set at €150,000. This contrasts the €750,000 minimum capital requirement for similar service types, such as dealing on own account and operating a trading platform, under MiFID II.
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At Prokopiev Law Group, we offer our expertise in EU crypto regulation. We are well-versed in the emerging field of Decentralized Autonomous Organizations (DAOs), providing comprehensive legal advice to businesses and individuals navigating the complex legal and regulatory landscape surrounding these innovative technologies.
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