The cryptoasset market has experienced exponential growth over the past decade, leading to increased participation from both general and institutional investors. However, this growth has also highlighted significant regulatory challenges, particularly in the EU, where a fragmented regulatory approach has led to legal uncertainty and inconsistency across member states. The lack of a unified structure hinders market development, creates barriers to market entry, and raises concerns about consumer protection and market integrity.
objectives of regulations
MiCA aims to address these challenges by:
Establish a single regulatory architecture: Create a comprehensive set of rules that applies to all EU member states and the European Economic Area (EEA).
Strengthen consumer and investor protection: Implement measures to protect investors and reduce risks associated with crypto-assets.
Ensure market integrity and financial stability: Introduce supervisory mechanisms to prevent market abuse and systemic risks.
Promote innovation and competitiveness: Encourage the development of cryptoassets and blockchain technology in a regulatory environment that promotes trust and transparency.
Overview of MiCA
Scope and applicability
MiCA is suitable for:
Crypto-asset issuer: An entity that offers crypto-assets to the public or wishes to be traded on an EU trading platform.
Cryptoasset Service Providers (CASPs): Companies that provide services related to cryptoassets, such as custody, exchange, and operation of trading platforms.
Stablecoin issuer: An entity that issues asset-linked tokens (ARTs) and electronic money tokens (EMTs).
MiCA does not apply to:
Regulated crypto-assets: Financial instruments covered under existing EU financial services legislation such as MiFID II, EMD and PSD2.
Central Bank Digital Currencies (CBDCs): Digital currencies (CBDC) issued by central banks.
Key definitions and classifications
Cryptoassets
A cryptoasset is defined as a digital representation of value or rights that can be transferred and stored electronically using distributed ledger technology (DLT) or similar technologies.
Classification of crypto assets
Asset-linked tokens (ARTs):
Designed to maintain stable value by being pegged to multiple fiat currencies, commodities or crypto-assets.
Example: Tokens pegged to a basket of currencies or commodities.
Definition of Electronic Money Tokens (EMTs):
Reference to a single fiat currency.
It functions similarly to electronic money and is regulated under the Electronic Money Directive.
Example: Stablecoin pegged 1:1 to the euro.
Other crypto assets:
Includes all other cryptoassets not classified as ARTs or EMTs.
Includes utility tokens and certain payment tokens.
Example: Tokens used to provide access to services or products.
Overview of the regulatory framework
Requirements for Crypto-Asset Issuers
utility token
Definition: A token designed to provide digital access to a good or service, based on decentralized ledger technology (DLT), and accepted only by the issuer.
Regulatory requirements:
White paper: The issuer must draft and publish a white paper containing detailed information about the project, rights and obligations, risks and technology.
Notice: The White Paper must be submitted to the competent national authority prior to publication.
Disclaimer:
If the tokens are provided for free.
If the issuance is limited to less than 150 persons per member state.
The total consideration shall not exceed €1 million over a 12-month period.
Definition and regulatory requirements for asset-linked tokens (ARTs)
Definition: A token that maintains a stable value by referencing multiple assets.
Regulatory requirements:
Authorization: The issuer must obtain authorization from the competent authority.
White Paper: Stricter white paper requirements apply and are subject to approval by the competent authority.
Governance and Compliance: Enhanced obligations on governance, conflict of interest policies and complaints handling.
Reserve assets: Reserve assets are required to support the issuance of tokens and include relevant rules for custody and investment.
Definition and regulatory requirements for electronic money tokens (EMTs)
Definition: A token that references a single fiat currency.
Regulatory requirements:
Authorization: The issuer must be authorized by a credit institution or electronic money institution.
Right of Redemption: The obligation to offer redemption at face value at any time.
Robustness requirements: Capital requirements and capital protection standards should be comparable to those under the Electronic Money Directive.
Cryptoasset Service Providers (CASPs)
Obligations and Licensing
Service scope:
Custody and asset management of crypto assets.
Operation of the trading platform.
Exchange services between crypto assets and fiat currencies.
Exchange services between crypto assets.
Execute orders on behalf of customers.
Investment of crypto assets.
Receiving and transmitting orders.
Provide advice on crypto assets.
Portfolio management of crypto assets.
Authorization process for cryptoasset service providers (CASPs)
Authorization process:
To apply: Submit detailed information including business plan, governance arrangements and internal controls.
Capital Requirements: Minimum capital requirements range from €50,000 to €150,000, depending on the services provided.
Suitability and Integrity: Assessing the suitability of management and key shareholders.
Passport rights: Once authorized, CASPs can use passport rights to provide services across the EU.
Operational Requirements for Cryptoasset Service Providers (CASPs)
Operational requirements:
Organizational structure: A sound governance structure, including a clear organizational structure and effective operating procedures.
Protecting Customer Assets: Measures to protect customers’ crypto assets, including asset segregation and security protocols.
Complaint handling: Establish procedures for handling customer complaints promptly and fairly.
Conflict of Interest Policy: Identify and manage potential conflicts of interest.
Outsourcing: Ensure that outsourcing arrangements do not impact the quality of internal controls and the regulator's obligations on compliance monitoring capabilities.
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June 9, 2023: MiCA comes into force.
June 30, 2024: Rules related to stablecoins (ARTs and EMTs) begin to apply.
December 30, 2024: Full applicability of MiCA to other cryptoassets and CASPs.
Transitional provisions:
Grandfather clause: CASPs that already provide services under current state law can continue to operate until December 31, 2025, or until they obtain MiCA authorization, whichever comes first.
National opt-out: Member states can opt out of grandfather clauses, thereby requiring early compliance.
Impact on Swiss Web3 companies
Although not located within the EU, Swiss companies often interact with European markets. Understanding the impact of MiCA is critical for Swiss Web3 companies to ensure their continued market access and compliance.
Application 1: Issuance of utility tokens
Scenario: A Swiss company forms a foundation and issues utility tokens intended for use within its ecosystem, with the goal of being classified as a utility token under Swiss law.
Impact of MiCA:
Token Classification: Under MiCA, these tokens may be classified as cryptoassets that require a whitepaper, unless an exemption applies.
White Paper Requirements
Content: Must contain comprehensive information about the issuer, project, rights attached to the token, risks and underlying technology.
Notification: If the offering is intended for EU residents, the EU competent authority must be notified of the white paper.
Reverse request limit
MiCA limits the ability to rely on reverse requests. Active marketing to EU residents will trigger compliance obligations.
strategic considerations
Avoid unsolicited marketing: Limit marketing activities within the EU to avoid triggering MiCA requirements.
Establishing an EU presence: Consider setting up a subsidiary within the EU to facilitate compliance.
Legal Advice: Engage EU legal counsel to help navigate regulatory obligations.
Application 2: Provision of custody and transaction services
Scenario: A Swiss company provides custody and trading services for digital assets, targeting EU customers.
Impact of MiCA:
Authorization as a CASP: The company must be authorized by the competent authorities of EU member states to provide services within the EU.
Establishing an EU Presence: Requires establishing a legal entity within the EU and following MiCA’s authorization process.
Operational Requirements: Implement a robust governance, risk management and compliance structure in accordance with MiCA.
Tax considerations:
Substance requirements: Ensure that EU entities have sufficient substance to satisfy regulatory and tax-related obligations.
Cross-border taxation: Solve tax liabilities that may arise due to cross-border operations.
strategic considerations
Jurisdiction selection: Choose an EU member state with a friendly regulatory environment (e.g. Liechtenstein, France, Germany).
Leverage existing architecture: Leverage existing compliance architecture to streamline the authorization process.
Interacting with regulators: Early communication with regulators in selected member states can help achieve smoother authorization.
Strategic considerations for compliance
Dealing with reverse solicitation restrictions
Definition: Reverse solicitation means the provision of services on the independent initiative of the customer, without any solicitation or advertising by the service provider.
MiCA Limitations:
Limit reliance on reverse requests to circumvent regulatory requirements.
Unsolicited marketing or actions directed at EU customers will trigger MiCA's compliance obligations.
suggestion:
Marketing Practices: Review and adjust marketing strategies to ensure compliance.
Documentation: Maintain clear records proving that any service provided under a reverse request was initiated by the customer.
Establishing a presence in the EU
benefit:
Helps comply with MiCA regulations.
Access to the EU single market through passport rights.
Things to consider:
Jurisdictional selection: Assess the regulatory environment, costs and regulator readiness.
Substantive requirements: Ensure that the EU entity has actual operational, management and control capabilities in the jurisdiction.
Tax implications: Address potential tax residency and cross-border tax issues.
Take advantage of regulatory advantages in specific EU member states
Active jurisdictions:
France: Early implementation of crypto regulations and integration with financial regulators.
Liechtenstein: Comprehensive legislation consistent with MiCA, including provisions for staking and NFTs.
Germany: Established a structure for crypto assets and plans to interface with MiCA.
Advantages:
Regulatory clarity: Clear guidelines and supportive regulators.
Fast Authorization: May speed up the authorization process.
suggestion:
Regulatory interactions: Open a dialogue with regulators to understand their expectations.
Local partnerships: Consider partnering with local companies that have extensive experience in regulatory environments.
tax impact analysis
Cross-border tax considerations
Tax residence: Tax residence is determined based on the management and control of the EU entity.
Permanent establishment: The risk of creating a permanent establishment within the EU will result in profits being taxed.
Transfer Pricing: Comply with transfer pricing regulations for transactions between Swiss companies and EU entities. Substance and connection requirements
Economic substance: Demonstrate genuine economic activity in the jurisdiction to satisfy tax authorities.
Allocation of functions and risks: Clear delineation of functions, assets and risks between entities.
Documentation: Maintain robust documentation to support tax positions and meet compliance obligations.
Policy and regulatory developments
Enforcement environment in EU member states
Differences in law enforcement:
Some regulators may adopt more stringent enforcement measures (e.g., Germany's BaFin).
Other regulators may be less prepared, resulting in inconsistent enforcement.
Industry response:
Companies may face uncertainty about regulatory expectations.
The importance of monitoring regulatory developments and adjusting accordingly.
Relationship to existing regulations (e.g. MiFID II)
MiCA vs. MiFID II: MiCA covers cryptoassets that are not classified as financial instruments by MiFID II.
Reclassification: Adjustments to national laws to avoid duplication and ensure clarity.
Regulatory scope: An assessment needs to be made as to whether the activity falls within the scope of MiCA, MiFID II or other regulations.
suggestion:
Conduct a comprehensive legal analysis to determine applicable regulations.
Keep abreast of revisions to national laws that interface with MiCA.
International Coordination and Comparative Research
Global Regulatory Environment:
UK: is developing its own regulatory framework, taking a nuanced approach.
United States: The regulatory environment is fragmented and policy debate continues.
Asia Pacific: Leading the way in regulating centralized intermediaries, but approaches to decentralization vary.
Impact on Swiss companies: Cross-border compliance: There are multiple regulatory systems to contend with when operating internationally.
Regulatory arbitrage risk: Different standards and enforcement practices need to be paid attention to.
suggestion:
Participate in policy discussions and industry groups to influence and maintain awareness of global dynamics.
Consider aligning internal policies with international best practices.
Cryptocurrency regulations outside the EU
USA
The U.S. cryptocurrency regulatory environment is complex and evolving, with frequent enforcement activities and ongoing legal debate.
In 2022, the United States introduced a new structure that enables regulatory agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to regulate the crypto industry. The SEC has been particularly active, having filed lawsuits against major companies such as Ripple, Coinbase, and Binance, alleging violations of securities laws. In 2023, a district court ruled that Ripple’s sales of XRP to institutions were securities offerings, but sales on exchanges were not. Additionally, in November 2023, a court overturned the SEC’s rejection of Grayscale’s Bitcoin ETF, leading to the approval of Bitcoin and Ethereum spot ETFs in early 2024. Despite these developments, SEC Chairman Gary Gensler stressed that the ETF’s approval should not be viewed as a broader adaptation of other crypto securities. As a result, the U.S. regulatory environment remains uncertain and challenging, requiring companies to follow federal and state laws and establish robust compliance programs, with the help of legal counsel.
Cryptocurrency Regulation in China
China has taken strict measures against cryptocurrencies, banning all related activities.
The People’s Bank of China (PBOC) banned crypto businesses, claiming they were illegal public financing. Bitcoin mining was banned in 2021, and all cryptocurrency trading was also declared illegal in the same year. Companies must exit the Chinese market and relocate operations to more favorable jurisdictions, as any contact with China carries significant legal risks.
Cryptocurrency Regulation in Hong Kong
Hong Kong is emerging as a key player in the cryptocurrency industry, with a regulatory framework designed to encourage innovation while protecting investors. The Securities and Futures Commission (SFC) is responsible for the licensing and compliance regulation of virtual asset service providers, including centralized and decentralized exchanges. In 2023, Hong Kong launched a new licensing regime for crypto exchanges, implementing strict anti-money laundering (AML) and customer identification (KYC) requirements to ensure market transparency and security. The city has also embraced security token offerings (STOs) and listed crypto-related products such as Bitcoin and Ethereum ETFs. In addition, Hong Kong is also exploring stablecoins and a potential digital Hong Kong dollar (e-HKD), making it a growing center for digital assets in Asia.
Cryptocurrency Regulation in Canada
Canada provides a positive regulatory environment with clear guidelines. Cryptocurrencies are considered commodities, and Canada was the first country to approve a Bitcoin ETF. All crypto companies are classified as money services businesses (MSBs) and must register with provincial regulators, regulated by the Financial Transactions and Reports Analysis Center (FINTRAC). Cryptocurrency gains are subject to capital gains tax. While Canada provides market opportunities for compliant businesses, companies must adhere to strict registration and reporting obligations.
Cryptocurrency Regulation in the UK
The UK has established a comprehensive regulatory framework to integrate crypto-assets into existing financial regulations. In 2022, the House of Commons will recognize crypto-assets as regulated financial instruments. The Financial Services and Markets Act 2023 further expands financial regulation to cover all crypto-assets. Trading crypto derivatives is prohibited, and investors are required to pay capital gains tax on crypto profits. Companies must comply with extensive regulatory requirements, including Know Your Customer (KYC) and Anti-Money Laundering (AML) standards, measures designed to enhance market stability and investor confidence.
Cryptocurrency Regulation in Japan
Japan is known for its progressive attitude towards incorporating cryptocurrencies into its financial system. Cryptocurrencies are considered legal property and all crypto exchanges must register with the Financial Services Agency (FSA). The Japan Virtual Currency Exchange Association (JVCEA) acts as a self-regulatory body. Trading gains are considered miscellaneous income, a provision that has important implications for investors’ tax treatment. Japan offers a transparent and business-friendly regulatory environment, although companies must invest in compliance infrastructure to meet strict regulatory requirements.
Cryptocurrency Regulation in Australia
Australia provides a clear regulatory framework that balances innovation and consumer protection. Cryptocurrencies are classified as legal property and are subject to capital gains tax. Crypto exchanges must register with the Australian Transaction Reports and Analysis Center (AUSTRAC) and comply with anti-money laundering (AML) and counter-terrorism financing (CTF) obligations. In 2023, Australia announced plans to establish a new regulatory structure, which is expected to be finalized in 2024. Australia is open to innovation and has potential plans to launch a central bank digital currency (CBDC), but companies must prepare for upcoming regulatory changes to ensure compliance and maintain market competitiveness.
Cryptocurrency Regulation in Singapore
Singapore is a cryptocurrency-friendly jurisdiction with a robust regulatory framework.
The Monetary Authority of Singapore (MAS) regulates exchanges under the Payment Services Act (PSA) and launched a stablecoin issuer structure in 2023. Singapore has no capital gains tax, which is attractive to long-term investors. Singapore’s clear regulations and favorable tax policies make it an ideal market, although businesses must overcome advertising restrictions and obtain the necessary approvals for stablecoins.
Cryptocurrency Regulation in South Korea
South Korea has strict regulations to protect users and ensure financial integrity. Cryptocurrency exchanges must register with the Korean Financial Intelligence Unit (KFIU), and privacy coins were banned in 2021. The Virtual Asset User Protection Act of 2023 designates the Financial Services Commission (FSC) as the primary regulator. The company faces strict regulatory requirements and must establish partnerships with local banks for real-name verification to ensure compliance and user safety.
Cryptocurrency Regulation in India
India’s regulatory approach to cryptocurrencies is cautious, with ongoing debate and interim measures ongoing. Cryptocurrencies are neither fully legalized nor banned. Crypto investments are taxed at 30% and 1% tax deducted at source (TDS) is applicable on transactions. The Finance Bill 2022 defines virtual digital assets as property and sets tax requirements for the income generated therefrom. Regulatory uncertainty creates operational risks for companies, such as increased compliance costs, while high taxes may impact corporate profitability, forcing them to reassess their market strategies.
Cryptocurrency Regulation in Brazil
Brazil is moving towards integrating cryptocurrencies into its financial system. In 2023, Brazil enacted a law legalizing the use of cryptocurrencies as a means of payment, with the Brazilian Central Bank designated as the regulatory authority. The legalization of cryptocurrencies as a payment method opens up new opportunities for companies, but companies must adhere to relevant regulations of the Brazilian Central Bank to ensure compliance and effectively exploit this emerging market.
in conclusion
Opportunities and challenges under MiCA
MiCA brings opportunities and challenges for Swiss and European Web3 companies:
Opportunities and challenges:
Market access: A unified structure facilitates access to the entire EU market, making it easier for companies to do business.
Investor confidence: Enhanced regulatory oversight may increase investor trust and attract more capital into the market.
Innovation environment: Clear rules can encourage innovation within specified boundaries and promote industry development.
challenge:
Compliance Burden: Meeting regulatory requirements requires significant resources and can put a strain on small businesses.
Regulatory uncertainty: Enforcement and preparedness vary widely among member states, which may lead to imbalances in national markets.
Competition: Increased compliance requirements may raise barriers to entry, resulting in greater challenges for new entrants, thereby intensifying competition among existing players.
The future of European Web3 companies
Web3 companies must take a strategic approach to respond to the changing regulatory environment:
Proactive compliance: Advance preparation and engagement with regulators can facilitate a smooth transition.
Collaboration: Work with industry groups and legal experts to influence policy and share best practices to advance industry.
Adaptability: Be flexible so that you can adjust your business model and strategy in the face of regulatory changes.
This report aims to provide a comprehensive understanding of the MiCA regulations and their impact. Companies are advised to seek professional legal advice based on their specific circumstances to ensure full compliance with all regulatory obligations.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "Deep Wave TechFlow"
Original author: insights4.vc