The Markets in Crypto-Assets Regulation: Paving the way for change

Firms in the crypto-asset sector have enjoyed relative anonymity to date, given crypto-assets and the activities relating to them have generally sat outside the scope of regulation. But change is coming, with the EU’s proposed Markets in Crypto-Assets Regulation (MiCA) set to create a harmonised regulatory framework for crypto-assets and related services. It also aims to strengthen confidence in the EU crypto-asset market.

MiCA is currently under consultation but scheduled to come into effect within the next three years. After that, EU firms who issue e-money tokens (which are not caught under the Electronic Money Directive), asset-referenced tokens and any other crypto-assets, plus any firms providing services related to these crypto-assets must comply with MiCA. Firms that come into scope of the new regime must be authorised and supervised by a national competent authority (NCA) in an EU Member State.

MiCA requirements are broad and cover areas such as consumer protection, capital and liquidity requirements, operation organisation and governance, and prevention of market abuse.

Given the imminent departure of the UK from the EU, MiCA may not at first glance appear relevant to UK firms, but it indirectly impacts them. Furthermore, the direction of travel suggests the UK’s own regulated regime may not be far off.

The principal downside to UK firms not being subject to MiCA will be their inability to benefit from the EU cross-border passport for the issuance of crypto-assets and performance of related services. But the UK may benefit from a competitive advantage, at least in the short term, as smaller technology firms will find it easier to anchor their business in the UK due to lack of regulation. Longer term, the UK may start to lag behind given the credibility MiCA will bring to the EU crypto market.

Once MiCA comes into force, post-Brexit, UK firms seeking to issue crypto-assets in the EU will be required to be incorporated as a legal entity (which may be seen as unusual given the decentralised existence of some crypto-arrangements). They will also need to issue a MiCA-compliant whitepaper. The whitepaper and marketing materials must be submitted to the NCA where they plan to offer or admit to trading for the first time.

Additional requirements will apply to UK issuers of asset-referenced tokens who want to issue their tokens into the EU. These firms must establish an authorised entity in the EU (unless the offer is to certain “qualified investors” or below a set threshold) and will be subject to more onerous requirements relating to reserve assets, systems and controls and conduct of business. As a result, UK firms intending to issue stablecoins in the EU will need to establish a local presence before offering tokens in the EU. This will lead to significant additional costs and regulatory headaches.

EU banks and authorised e-money firms will be the only permitted issuers of e-money tokens under MiCA. They will also have to produce a whitepaper and requirements relating to redemptions and the investment of reserve funds will apply. So UK banks and e-money issuers will be unable to access the EU market without establishing an authorised local presence.

UK crypto-asset service providers, from crypto-exchanges and wallet providers to trading platforms, will be unable to solicit business in the EU, relying on reverse solicitation instead, unless they are authorised and comply with MiCA requirements. This means UK crypto-asset service providers with an EU client base will need to establish a local branch or subsidiary to be authorised in an EU member state.

MiCA will undoubtedly make it harder for UK firms to continue business as usual in the EU. Nonetheless, given the UK Government’s July 2020 consultation on the financial promotion of crypto-assets, and Chancellor Rishi Sunak’s November statement where he committed to consult on UK crypto-asset regulation, UK crypto-asset firms may need to get comfortable with the thought of being authorised firms and should consider what changes that may bring.

Whether any UK regime will be MiCA equivalent, MiCA-lite or something else, and when it will come into force, is all to be determined. But UK firms should also enjoy the unregulated status quo, while it lasts.

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