MiCA stands for "Markets in Crypto-Assets," representing a completely new legal framework for cryptocurrencies in Europe. This regulation brings order to a market that was once likened to the "Wild West" – aimed at protecting investors, preventing fraud, and ensuring smoother operations.

The journey of MiCA began in 2018. With the rapid development of the cryptocurrency market at the end of the 2010s, the European Commission recognized the need for a unified approach to address emerging challenges.

This led to the official proposal of MiCA on September 24, 2020, as part of an effort to promote digital finance and protect consumers.

Why is MiCA necessary?

There are three main factors driving the need for MiCA:

  • Regulatory consistency: Before MiCA's emergence, the lack of a clear legal framework caused confusion and inconsistency among EU member states. Businesses struggled to comply with regulations, while consumers faced varying levels of protection. MiCA aims to create a level playing field, making cross-border business operations easier while enhancing consumer protection measures.

  • Investor protection: The popularity of cryptocurrencies has led to an increase in fraudulent and deceptive practices. MiCA introduces stringent transparency regulations, requiring cryptocurrency issuers to clearly disclose risks, ensuring consumers are well-informed before investing.

  • Financial stability: The unregulated cryptocurrency market has posed risks to the stability of the financial system. MiCA addresses this issue by establishing rules to prevent market manipulation and promote responsible innovation in the sector.

Timeline of MiCA regulation

MiCA, the legal framework of the European Union for crypto assets, was proposed in September 2020, adopted in May 2023, and will officially come into full effect in December 2024. This regulation establishes comprehensive standards for crypto asset service providers across the EU.

The main parts of MiCA

MiCA consists of 7 main parts, covering regulations for crypto assets and requirements for service providers, as well as liability responsibilities by jurisdiction.

The MiCA parts Focus Key Elements Part I Platform regulation Rules for crypto platforms, definitions of key terms, and scope of application. Part II Issuing crypto assets Requirements for issuing crypto assets, white papers, and legal personality. Part III Asset-Referenced Tokens (ART) Regulations for stablecoins, asset-backed tokens, and transparency. Part IV E-Money Tokens (EMT) Issuance rules, white papers, issuer responsibilities, and trading regulations. Part V Authorized service providers Authorized entities, cross-border service provision, and regulatory compliance. Part VI Market abuse Preventing insider trading, information leaks, and market manipulation. Title VII Regulatory cooperation Coordination between EU and national regulators, enforcement of regulations, and information sharing.

Part I of MiCA

Part I provides rules for platforms that offer and trade crypto assets publicly. This section outlines the requirements these platforms need to meet to operate legally in the EU and includes three main points:

  • Establish requirements for platforms and related organizations.

  • Specifically explains the subjects to which the regulation applies.

  • Defining key terms such as distributed ledger technology (DLT), utility token, consensus mechanisms, crypto asset services, and many other concepts.

For example, when referring to "utility tokens," the regulation defines them as digital assets that provide users access to a specific application or service, such as tokens used to make purchases in games or access certain features on a platform.

Part II of MiCA

Part II of MiCA sets out the requirements for organizations wishing to create and publicly offer a crypto asset. If an organization wants to issue a crypto asset that does not fall under the category of asset-referenced token (ART) or e-money token (EMT), that organization must meet the following key criteria:

  • Legal personality: The issuing organization must have legal personality, meaning it is established under the laws of an EU member state and has the capacity to undertake legal activities.

  • White paper: A detailed white paper must be prepared and published, explaining the purpose, technology, and risks associated with the crypto asset.

  • Marketing communications: Marketing materials must be published accurately, reflecting the true nature of the crypto asset and its intended use.

  • Notification to the competent authority: The organization must notify the competent authority in its member state of its issuance plans, while also submitting a mandatory white paper and marketing materials (if required).

  • Additional compliance: The organization must comply with specific additional requirements related to offering crypto assets.

Notably, these regulations do not apply to tokens awarded for work on the blockchain if they are provided for free. Additionally, utility tokens or tokens exclusively used for payment are not considered crypto assets under MiCA.

Part III of MiCA

Part III of MiCA focuses on asset-referenced tokens (ART), a type of crypto asset designed to maintain stable value by being linked to an asset, a right, or a combination of both. This token type is distinct from e-money tokens and uses collateral assets to stabilize value, including fiat currencies, commodities, or even other crypto assets. In practice, ART is often understood as stablecoin.

For instance, imagine a hypothetical ART named EcoCoin, designed to maintain stable value due to being backed by a portfolio of assets consisting of: 50% euro, 30% gold, and 20% Bitcoin. By diversifying based on multiple asset types, EcoCoin has a better chance of coping with market fluctuations that may affect each individual asset.

To issue an ART like EcoCoin, the issuing organization must be a valid legal entity, typically operating as a credit institution, and must meet stringent regulatory standards. This includes:

  • Maintain sufficient reserves to back the issued tokens.

  • Ensure ART is managed transparently and stably.

Regulations also require issuing organizations to provide clear information about the collateral assets for tokens and the methods used to maintain its stability.

Part IV of MiCA

Part IV of MiCA sets out the principles for issuing e-money tokens (EMT), a type of crypto asset linked to fiat currencies such as the euro or dollar. These tokens aim to maintain stable value, similar to a digital version of traditional money.

To issue EMT, the organization must be licensed as a credit institution or crypto organization. For example, if a company named PayToken plans to issue a cryptocurrency token linked to the euro, before offering this EMT to the public, the company must be approved by the regulatory authority. This process includes submitting a detailed white paper explaining the characteristics, issuance process, and how the tokens can be redeemed.

In addition to the white paper, Part IV requires the issuing organization to notify the relevant authority at least 40 working days before carrying out any public issuance. The white paper must clarify how the EMT functions, including the issuance and redemption processes, ensuring transparency for investors.

Another important point of Part IV is the liability of the issuing organization. If PayToken provides misleading information to investors or fails to comply with regulations, the company may be held liable for any losses incurred.

Part IV also regulates trading platforms. The regulation prohibits trading cryptocurrency tokens with built-in anonymity features unless all traders and transactions can be identified. This does not mean that security tokens are banned, but rather ensures that anonymous transactions cannot occur on regulated exchanges, thus supporting anti-money laundering efforts.

Below is a summary to differentiate the differences between ART and EMT:

Asset-Referenced Token (ART) E-Money Token (EMT) Definition Crypto assets linked to a basket of assets Crypto assets representing fiat money (fixed exchange rate) Main intended use Means of exchange (not for payment) Focus on payment purposes Redemption Market value or asset delivery At par value with fiat currency Requirements for issuers Only entities regulated by MiCA; strict disclosure and reporting requirements Licensed crypto organization or credit institution Restrictions on issuance Limits to prevent abuse such as currency Not applicable to EMT denominated in EU currency Regulatory scope Only under MiCA MiCA + Electronic Money Directive 2 (EMD2) / Payment Services Directive (PSD2)

Part V of MiCA

Part V of MiCA defines the organizations allowed to provide services related to crypto assets in the EU and clarifies their scope of activities. The types of organizations that can provide these services include:

  • Credit institution

  • Central securities depository

  • Investment firm

  • Market operator

  • Crypto organization

  • UCITS management company

  • Alternative investment fund manager (AIFM).

To operate legally in the EU, businesses must comply with various regulations and be licensed in the member states where they operate. In this context, "legal entity" refers to any entity recognized by law with rights and responsibilities, such as the ability to enter into contracts or own assets.

Part V also simplifies cross-border service provision within the EU. For example, if CryptoTrade is licensed in France, they can offer services in other EU countries, such as Germany or Italy, provided they notify the authorities in those countries.

Additionally, this part includes important regulations for service providers, requiring them to meet specific obligations toward customers, including:

  • Ensure robust security measures.

  • Build a strong governance structure.

  • Comply with operational standards.

These requirements aim to protect consumers and promote transparency in the crypto asset market.

Part VI of MiCA

Part VI of MiCA focuses on preventing market abuse in the crypto asset sector. The objective is to promote fair trading by preventing activities such as insider trading and market manipulation, based on rules from the traditional financial sector. Specifically, this part includes:

  • Insider trading: Trading crypto assets based on undisclosed confidential information is prohibited. For example, if an employee of a cryptocurrency exchange knows of an announcement that could drive up the price of a token, that person is not allowed to trade based on this insider information.

  • Illegal disclosure: Leaking internal information before it is officially published is illegal, especially if this information could affect the price of a crypto asset. Those sharing this sensitive information may face legal liability.

  • Market manipulation: Any actions that create misleading signals about the price or supply of a crypto asset are prohibited. This includes practices like wash trading, where an individual buys and sells the same asset to create the appearance of more trading activity than actually exists.

Importantly, these regulations apply to both centralized exchanges (CEX) and decentralized finance (DeFi) platforms, ensuring that market abuse practices are controlled across the entire crypto asset ecosystem.

Part VII of MiCA

Part VII of MiCA focuses on how regulators in the EU cooperate to manage the crypto asset market. This regulation establishes a system in which national authorities in each EU member state coordinate with EU-level authorities to ensure effective oversight and enforcement.

Key content includes:

  • National competent authority (NCA): Each EU member state must designate an authority responsible for enforcing MiCA regulations. These authorities ensure that crypto asset businesses comply with regulations in their respective countries.

  • Cross-border cooperation: If a country detects an issue, such as market manipulation, it must share this information with EU regulatory authorities, such as the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). This helps ensure a coordinated and unified response at the cross-border level.

  • Enforcement powers: Regulators are clearly empowered to investigate and impose penalties. For example, if a cryptocurrency exchange operates without the appropriate license, the authority may suspend services or fine the company.

  • Regular information sharing: National authorities must exchange information regularly, which is crucial for addressing global risks in the crypto sector. This helps regulators coordinate better and quickly detect issues such as fraud or manipulation.

  • Standardization process: To make cooperation more effective, Part VII provides standardized processes for information sharing. This ensures that communication between regulators occurs transparently and efficiently.

Exclusions of MiCA: What is not regulated

An important feature of the MiCA regulation is the clear identification of the types of assets that are not in its scope. This helps to delineate what MiCA applies to and what it does not, ensuring that only certain types of crypto assets fall within the legal framework of MiCA. Below are the main exclusion cases:

  • Financial instruments: If a crypto asset is considered a financial instrument under other EU laws, it will not fall under MiCA's scope.

  • Deposits and structured deposits: Assets that meet the definition of deposits or structured deposits are excluded from MiCA's scope.

  • Investment funds: MiCA does not apply to assets classified as investment funds.

  • Securitized positions: Tokens that fall under securitized positions are exempt from MiCA.

  • Insurance contracts: Life and non-life insurance contracts, even when tokenized, are also not considered crypto assets under MiCA.

  • Retirement products and social security programs: These types of financial products are also outside the scope of MiCA.

  • Non-fragmentable NFTs: Unique and non-fragmentable NFTs (such as digital art tokens without utility or trading capabilities) are excluded.

  • Public transactions: Certain transactions in the public sector are exempt from MiCA's regulations.

  • Central bank digital currencies (CBDC): Digital currencies issued by central banks are not subject to MiCA regulation.

  • Non-transferable digital assets: Non-transferable assets, such as specific customer loyalty points, are also excluded.

For example, if a company creates an NFT representing a unique digital artwork, this token will not fall under MiCA's scope as long as it is not fragmentable or provides utility as a payment method.

The road ahead

By 2025, MiCA regulations will be fully enforced, but this is not the end point – it is merely the beginning. As MiCA lays a solid foundation, countries like the US, UK, Singapore, Canada, Japan, and the United Arab Emirates may use it as a model to build clearer regulations for crypto assets, market integrity, and consumer protection.

The impact of MiCA is likely to lead to harmonization across sectors, improving transparency and ensuring investor safety globally.