There has been a welcome change in the way regulators are perceiving cryptocurrencies. What once started off as a fad is now the disruptor of financial markets. Cryptocurrencies aren’t merely assets that have become extremely popular for a short time just to quickly fade away. They’re here to change the way we recognize money. To embrace this reformation, many jurisdictions across the globe have come up with their legislation to regulate crypto as an asset class. Be it the Virtual Assets Regulatory Authority (VARA), Dubai or the Swiss Financial Market Supervisory Authority (FINMA), every prominent jurisdiction in the world is looking forward to adopting crypto assets and making them a part of the regulated ecosystem.
Where is the European Union in the Crypto Race?
The European Union (EU) has always been at the forefront of any significant change in the industry. In September 2020, the EU announced its proposed framework to the world called the Markets in Crypto-Assets Act, also abbreviated as MiCA and MiCAR. After three years of rigorous development and agreement, the act was approved in April 2023 and enacted on December 30th, 2024.
The fundamental objective of this regulation is to help streamline the adoption of blockchain and distributed ledger technology (DLT) as a part of virtual asset regulation in the region. It also aims to protect the investors, users and other stakeholders in the crypto assets arena. MiCA intends to remodel Europe’s economy by participating in its digital finance package.
Applicability of MiCA
To Individuals
MiCA is applicable to three major categories of people:
Crypto Assets Issuers: With reference to MiCA, crypto assets issuers do not necessarily imply an organization or an entity that has produced the crypto assets. It means any legal person who offers to the public any type of crypto assets or pursues the admission of such crypto assets to a trading platform for crypto assets. This framework will vary based on the kind of crypto asset offered.
Crypto Asset Service Providers (CASPs): This is inclusive of any individual whose profession or business involves the offering of one or more services related to crypto assets to third parties on a professional level.
Any individual involved in the activities connected with exchanging crypto assets that are already listed for trading on a trading platform operated by an authorized CASP or will be listed in the future on such a platform.
To Crypto Assets
MiCA identifies a crypto asset as a digital representation of value or rights that can be electronically transferred and stored, and utilizes distributed ledger technology or similar systems to do so. In order to keep track of and regulate these assets, MiCA divides them into three broad classifications:
- Electronic Money Tokens (EMTs) – Crypto assets pegged to a single official fiat currency. EMTs are subject to stringent requirements set forth in Title IV of MiCA, which have been applicable since 30 June 2024.
- Asset-Referenced Tokens (ARTs) – Tokens that seek to maintain a stable value by referencing either one or more official currencies, a combination of different values and rights. Requisite provisions for the regulation of ARTs are set forth under Title III of MiCA, effective from 30 June 2024.
- Other Crypto Assets – This broad category ensures that the tokens that do not fall under class as EMTs or ARTs can still be considered. Specifically, utility tokens that are not captured under the definition of financial instruments under MiFID II are addressed here. Regulation of this group is handled under Title II of MiCA.
Non-Fungible Tokens (NFTs): MiCA does not cover all NFTs, but if an NFT has characteristics of an asset that falls under MiCA, such as utility tokens or even financial instruments, it may fall under the regulations. Just because a token is unique does not necessarily mean it is non-fungible. A token that is issued in large quantities with the same characteristics may still be fungible under MiCA and thus could still need authorization. This is particularly relevant for projects involving fractionalized NFTs.
Decentralized Entities: Decentralized actors such as DAOs, DeFi, or dApps, which are completely decentralized, are not directly regulated under MiCA. However, because decentralization can be defined in different ways, projects offering products or services to EU users should get legal opinion to determine whether MiCA could apply, including aspects such as progressive decentralization, undertaking a “decentralization test”, and governance minimization activities to achieve adequate decentralization.
Enforcing Authorities
Within the European Union framework, MiCA is principally enforced through two centralized supervisory bodies:
However, each member state must appoint its national authority to administer and enforce MiCA in that member state, apart from the EU-level authorities.
If there is a violation of MiCA, the national authorities can impose appropriate penalties (and administrative action). This ability to enforce MiCA, in countries where there are also criminal penalties for similar violations, lends some assurance to national regulators that there is some harmonization with the two EU-level authorities (ESMA and EBA).
The following businesses (CASPs) will have to comply with MiCA:
- Custodial wallet providers – Institutions that hold crypto assets for users.
- Crypto exchanges – Platforms that facilitate trades of crypto assets or crypto for fiat currency.
- EMT or ART issuers – An Entity that issues electronic money tokens or asset-referenced tokens.
- Crypto trading platforms – A venue where users can buy, sell and trade crypto assets.
- Crypto-asset advisors and portfolio managers – Institutions that provide investment advising and portfolio management services in crypto assets.
MiCA’s Function in Preventing Money Laundering and Terrorist Financing in the Crypto Industry
The crypto-assets regulatory landscape must embrace technological advances while remaining consistent with the EU’s objectives about anti-money laundering (AML) and counter-financing terrorism (CFT).
Important Directives from the European Parliament and Council provide the following framework of AML obligations for CASPs:
AML and CFT Requirements: Any legal framework for governing crypto assets should support the EU’s AML and CFT models. Accordingly, all entities subject to MiCA must provide services that conform to these requirements.
Fit and Proper Management: CASPs’ management must be of good character when it comes to experience in the field of compliance. They should be free from money laundering or terrorist financing convictions or any other offence that would cause reputational damage in their home state for shareholders and influential individuals.
Withdrawal of Authorisation: Regulators are required to withdraw a CASP’s license when that CASP does not appropriately identify or block money laundering and terrorist financing due to inadequate screening systems.
Transparency and Due Diligence: CASPs that operate trading platforms must implement strong measures to ensure transparency with customers and implement adequate customer due diligence processes to protect against illicit financial activity.
High-Risk Jurisdictions: As highlighted in Article 77 of EU Regulation 2023/1114, CASPs are expected to make greater checks on their customers and institutions related to high-risk jurisdictions, as a means of providing protection for the EU financial system.
MiCA represents a basic step towards a regulated environment for improving crypto security in the EU and requires that exchanges based in the EU must have approval from national AML authorities, considering certain recent developments in crypto.
Furthermore, to protect users, all CASPs that operate in the EU must also develop clear and concise terms of service that would protect customers from emerging threats.
Major Highlights of MiCA Regulation
Prohibition of Algorithmic Stablecoins
Under MiCA, algorithmic stablecoins are not recognized as asset-referenced tokens (ARTs) because they lack explicit reserves linked to traditional assets. As a result, these types of stablecoins are effectively prohibited within the EU regulatory framework.
For stablecoins that are allowed under MiCA, such as those backed by fiat currency, the rules require them to be supported by liquid reserves in a 1:1 ratio with the underlying currency. This measure is part of MiCA’s broader goal to safeguard the EU’s monetary sovereignty and financial stability.
The regulation imposes strict conditions on stablecoin issuance, especially for ARTs and electronic money tokens (EMTs). Any entity intending to issue these tokens must first obtain authorization before offering or listing them in the EU. This authorization must typically come from the issuer, unless they have granted written consent for another party to act on their behalf.
For EMTs, licensed credit institutions can issue or list sanctioned tokens after notifying their competent authority with the issuance of the customary whitepaper. If an ART is being issued, the issuer must still be an established entity in the EU but must also secure approval of the white paper before presenting it to the public.
MiCA does not utilize the term “stablecoin” as such, but would encompass both EMTs and ARTs as the concept of stablecoin. Depending on certain circumstances, the EBA may also classify the tokens as “significant,” which would subject the tokens to a heightened degree of regulatory scrutiny.
Additional Rules for Token Issuance Under MiCA
For web3 project founders issuing a crypto asset that does not qualify as either an EMT or an ART, they must comply with specific conditions. They should:
- Publish a whitepaper, which is similar to a prospectus and provides potential investors with insight into the characteristics of the token.
- Create a legal entity that will issue and manage the tokens according to the terms of the whitepaper.
Unlike stablecoins, these tokens do not need prior authorisation for issuance. The whitepaper is the primary compliance document.
Under this regulatory framework, anonymous token launches via decentralized token generation events (TGEs), non-custodial treasuries, Initial Exchange Offerings (IEOs), Initial DEX Offerings (IDOs), etc., are effectively illegal. However, there are certain exemptions which include:
- Offerings to less than 150 persons,
- Token sales raising no more than EUR 1million over a rolling 12-month period,
- Sales are directed only to qualified investors.
If a token does not have a promoter like Bitcoin, the exchange that lists the token must provide a whitepaper to potential purchasers outlining the risks for users. In this instance, the exchange takes on all the responsibility for the offering of the tokens.
To reconcile both issuers and platforms, MiCA provides clear guidance on the structure of whitepapers mentioned in Title II, Article 6 and the content of whitepapers. MiCA brings clarity to what was previously obscured.
MiCA also introduces a 14-day right of withdrawal for retail purchasers for tokens not yet listed when the purchase was made.
Businesses in the European Union Will Need Fewer Licenses
Projects operating within the EU will benefit from a simplified licensing framework under MiCA. Instead of navigating separate national authorization systems, MiCA establishes a single EU-wide licensing regime. Once a crypto asset service provider (CASP) is authorized in its home member state, it can legally operate across all 27 EU countries without needing additional approvals. This unified approach significantly reduces regulatory burdens for regional Web3 businesses, enabling them to offer services throughout the EU with just one license.
Increased Obligations and Disclosure Requirements for CASPs Under MiCA
MiCA represents a significant advancement for crypto-asset service providers (CASPs) – defined as professional persons or entities whose activity is principally the offering of professional crypto-asset services. The MiCA regulation makes it clear that to operate in the EU, CASPs require authorization and are not permitted to operate without the same. The services which require authorization include custodial services and safeguarding of client crypto-assets, operating trading venues, facilitating transactions and crypto-to-fiat exchange services.
The regulation introduces detailed compliance standards for these services, encompassing governance structures, capital adequacy, and asset custody protocols. To qualify for authorization, CASPs must:
- Have an establishment within the EU
- Have at least one director, who is a member of the executive body, residing in an EU member state.
Once authorized, CASPs may “passport” their services throughout all EU member states. However, non-EU firms are restricted to reverse solicitation, meaning they can only serve EU customers if those customers initiate contact.
CASPs with more than 15 million active EU users on average annually will be designated as significant CASPs (sCASPs) and will be subject to enhanced regulatory oversight by national supervisory authorities.
Key New CASP Requirements Under MiCA
- Physical Presence: Have an office in the EU and a resident director.
- Policy Implementation: Establish policies for AML, business continuity, data security, etc.
- Marketing Standards: Marketing and other information provided by CASPs must be fair, accurate, and not misleading. This will require CASPs to develop high standards for their promotional information.
- Market Integrity and Complaints Procedures: CASPs will have to take measures to combat market abuse and provide procedures for handling user complaints on their services. This means providing appropriate information to users, including sending warnings related to transaction risks.
- Ethical Standards: CASPs must act honestly, in good faith, and professionally at all times, and put their clients’ best interests first.
- Transparency: CASPs must disclose their pricing structure, costs and fees and the carbon-impact of their crypto-asset business.
MiCA signifies a huge step towards a harmonized regulatory framework for the crypto industry across the European Union. With bright lines defining rules and regulations around crypto asset classification, issuance and AML obligations, the regulation can provide clarity and investor protection that is desperately needed in the industry. It simplifies market entry for CASPs as it gives CASPs a single license for operations across EU member states. However, it imposes new restrictions as it relates to governance, transparency, and risk management obligations. MiCA aims to promote innovation in a safe and stable way.
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