The Regulation on Markets in Crypto Assets (MiCAR) is set to reach a significant milestone on 30 June 2024, with the provisions concerning stablecoins coming into effect. This brief explores the recent updates regarding Level 2 and Level 3 measures under MiCAR.
MiCAR Overview
MiCAR, an EU Level 1 legislative measure, establishes and harmonizes the regulatory framework for issuers and offerors of crypto-assets and crypto-asset service providers (CASPs). This regulation is directly effective across the European Union and fills the regulatory gaps not covered by existing EU financial services regimes.
Implementation of MiCAR
The implementation of MiCAR involves multiple EU Level 2 and Level 3 legislative measures, including Regulatory Technical Standards (RTS), Implementation Technical Standards (ITS), and Guidelines.
Level 2 Measures: MiCAR authorizes the European Commission to issue delegated acts autonomously. Additionally, it mandates the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), sometimes in collaboration with the European Central Bank (ECB), to develop RTS and ITS for subsequent adoption by the European Commission. These standards provide detailed requirements for the effective application of MiCAR.
Level 3 Measures: Level 3 measures encompass the development of Guidelines by EBA and ESMA. These Guidelines add clarity and direction to specific aspects of MiCAR.
Key Regulatory Bodies and Their Roles
European Commission: Empowered to create delegated acts and adopt RTS and ITS developed by EBA and ESMA.
European Banking Authority (EBA): Responsible for drafting RTS and ITS, particularly in areas requiring technical expertise and financial oversight.
European Securities and Markets Authority (ESMA): Shares responsibility with EBA in developing technical standards and producing Guidelines.
European Central Bank (ECB): Collaborates with EBA and ESMA where necessary, particularly on matters impacting financial stability and the broader economic environment.
European Commission Delegated Regulations Supplementing MiCAR
On 30 May 2024, the European Commission published several Delegated Regulations in the Official Journal, which supplement MiCAR. These regulations specify various operational and procedural aspects for the oversight and regulation of crypto-assets, particularly significant asset-referenced tokens (ARTs) and e-money tokens (EMTs). The regulations will become effective on 19 June 2024.
Specific Delegated Regulations
Commission Delegated Regulation (EU) 2024/1503: it outlines the fees charged by the European Banking Authority (EBA) to issuers of significant ARTs and EMTs.
Commission Delegated Regulation (EU) 2024/1504: it details the procedural rules for the EBA's authority to impose fines or periodic penalty payments on issuers of significant ARTs and EMTs.
Commission Delegated Regulation (EU) 2024/1506: it specifies criteria for classifying ARTs and EMTs as significant. The criteria include factors such as market size, transaction volume, and systemic importance.
Commission Delegated Regulation (EU) 2024/1507: it outlines the criteria and factors to be considered by the European Securities and Markets Authority (ESMA), the EBA, and competent national authorities (e.g., the Central Bank of Ireland) in relation to their intervention powers.
EBA Final Reports
On 7 May 2024, the European Banking Authority (EBA) published four final reports detailing regulations for market access by issuers of asset-referenced tokens (ARTs) and those seeking significant influence through qualifying holdings.
Final Reports on Market Access
1. RTS on information required for applicants seeking authorisation to offer and trade ARTs: The Regulatory Technical Standards (RTS) specify the information required from applicants seeking authorization to offer and trade ARTs. Notably, the RTS clarify that:
Applicants must be legal entities or undertakings established within the EU.
The authorization pertains only to public offerings or admissions to trading, not to issuance itself.
Only issuers can apply for and be granted authorization.
2. ITS on information required for authorisation application: The Implementing Technical Standards (ITS) provide further details on the information requirements for authorization applications, including standardized forms, templates, and procedural guidelines.
3. RTS on information for assessment of a proposed acquisition of qualifying holdings in issuers of ARTs: These RTS outline the information for assessing proposed acquisitions of qualifying holdings in ART issuers. Required information includes:
Identity and background of the acquirer.
Financial soundness and past convictions of the acquirer.
The acquirer's management body must have good repute, knowledge, skill, and experience.
4. RTS on the approval process for white paper of ARTs issued by credit institutions: These RTS harmonizes the approval process for white papers issued by credit institutions.
Governance, Conflicts of Interest, and Remuneration Reports
On 6 June 2024, the EBA released three final reports addressing governance, conflicts of interest, and remuneration policies for issuers under MiCAR.
1. Guidelines on the minimum content of the governance arrangements for issuers of ARTs: The guidelines specify the minimum content for governance arrangements, emphasizing proportionality and sound risk management, including risks related to money laundering, fraud, cyber threats, and compliance.
2. RTS on Remuneration Policies: These RTS define the main governance processes and policy elements for the remuneration of significant ART issuers and electronic money institutions.
3. RTS on Conflicts of Interest: The RTS provide detailed policies and procedures for identifying, preventing, managing, and disclosing conflicts of interest, particularly those related to asset reserves. They align with frameworks under Directive 2014/65/EU (MiFID) and Directive 2013/36/EU (CRD), tailored for ART issuers.
Prudential Requirements Reports
On 13 June 2024, the EBA published six further reports covering own funds, liquidity, and recovery plans.
1. Guidelines on Recovery Plans: These guidelines specify the format and content of recovery plans, including governance, recovery options, and communication strategies.
2. RTS on Liquidity Management: These RTS outline the content and procedures for liquidity management policies, drawing from Basel Standards and adapting them to the crypto-asset context.
3. RTS on Highly Liquid Instruments: These RTS identify financial instruments with minimal market, credit, and concentration risks, incorporating standards from the UCITS Directive and LCR Delegated Regulation.
4. RTS on Liquidity Requirements for Reserve Assets: These standards specify the liquidity requirements for reserve assets, considering international regulatory frameworks and reports on crypto activities.
5. RTS on Own Funds Adjustment Procedure: These RTS detail the procedures and timeframes for adjusting own funds to 3% of the average reserve assets for significant ART issuers, as outlined in MiCAR Articles 43 and 44.
6. RTS on Stress Testing and Own Funds Requirements: These RTS provide criteria for competent authorities to assess the need for issuers to increase own funds, applying to both ART and EMT issuers.
Next Steps
The EBA’s draft RTS will come into force 20 days after publication in the Official Journal of the European Union. The Guidelines will apply two months after the publication of all translations on the EBA website.
ESMA Final Reports on MiCAR Implementation
First Final Report on MiCAR (25 March 2024)
On 25 March 2024, ESMA released its first final report on MiCAR, focusing on several key areas to ensure comprehensive regulatory oversight and investor protection. The report includes proposals on:
1. CASP Authorisation: The report outlines the information requirements for CASPs seeking authorization to operate within the EU. This includes criteria that CASPs must meet to obtain and maintain their licenses, ensuring they comply with the necessary regulatory standards.
2. Notification by Financial Entities: Financial entities intending to provide crypto-asset services must notify their intent. The report specifies the notification process, ensuring that these entities provide all necessary information to the relevant authorities before commencing operations.
3. Acquisition of Qualifying Holdings: The report details the assessment criteria for the intended acquisition of qualifying holdings in a CASP. This includes evaluating the financial soundness, reputation, and suitability of the acquirer to maintain the integrity and stability of the crypto-asset market.
4. Complaint Handling by CASPs: The report proposes requirements for CASPs to effectively address and resolve complaints from investors and consumers.
Second Final Report on MiCAR (31 May 2024)
On 31 May 2024, ESMA published its second final report on MiCAR, focusing on rules concerning conflicts of interest for CASPs. This report includes Regulatory Technical Standards (RTS) to provide a clear framework for identifying, managing, and disclosing conflicts of interest.
1. Conflicts of Interest Policies and Procedures: The RTS set forth requirements for the policies and procedures CASPs must implement to identify, prevent, manage, and disclose conflicts of interest. These requirements take into account the scale, nature, and range of crypto-asset services provided by CASPs, ensuring that all potential conflicts are adequately addressed.
2. Disclosure Methodology: The report outlines the methodology for the content of conflict of interest disclosures. This includes specific details on how CASPs should disclose conflicts to ensure transparency and inform investors and stakeholders about potential issues.
Prokopiev Law Group provides extensive legal support to ensure your compliance with MiCAR and other global regulations. Our expertise spans key crypto jurisdictions, including the EU, the US, Singapore, and Hong Kong. We are well-versed in navigating complex regulatory landscapes, covering areas such as CASP authorization, conflict of interest management, and liquidity requirements. With our global network of partners, we ensure your project is compliant worldwide. Contact us for tailored advice on developing a legal strategy for your Web3 project. For more information, write to us today.
The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.
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