On December 30, 2024, the EU (Regulation on Markets in Crypto-assets) (hereinafter referred to as the 'MiCA Regulation') officially comes into effect, marking a new era in the European compliance framework for crypto assets. In our previous series of articles, we have introduced key definitions of the MiCA Regulation, and interested readers can click (Interpreting the EU MiCA Regulation: How do virtual currency custody services comply? | Mankun Web3 Legal) for more information. For many Web3 practitioners, especially those interested in the European market, how should they respond after the MiCA Regulation comes into effect? Today, Mankun lawyers will take you to explore this.
Who Must Comply with MiCA?
Article 2 of the MiCA Regulation defines its scope of application, namely for individuals, legal persons, and other enterprises engaged in the following activities within the EU:
1. Issuance of Crypto Assets: Creating new crypto assets.
2. Offering Crypto Assets to the Public: Providing crypto assets for public subscription.
3. Admission to Trading: Allowing crypto assets to be listed for trading on trading platforms (such as crypto asset exchanges).
4. Providing Services Related to Crypto-Assets: Involves various services provided for crypto assets, including custody, trading facilitation, transaction execution, wallet management, etc.
The MiCA Regulation fundamentally covers all activities related to crypto assets. In simple terms, any entity wishing to engage in crypto asset-related activities within the EU may fall under the regulation of the MiCA Regulation. We have outlined the scope of 10 different crypto asset-related services in our previous articles; readers can click (Web3 Interpretation | A Comprehensive Explanation of Why Web3 Enterprises Need EU MiCA and Dubai VARA Licenses) for details.
It is important to note that regardless of where a crypto asset service provider (CASP) is registered or established, as long as their service involves serving European interests, they may fall under the regulation of MiCA.
Who Enforces the MiCA Regulation?
According to EU regulations, the enforcement subjects of MiCA are divided into the EU level and member state level:
1. EU Level
There are two main regulatory bodies responsible for the enforcement of MiCA: the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA).
ESMA is the regulatory authority for financial markets in the EU, similar to our country's Securities Regulatory Commission. According to the Financial Times, 'ESMA aims to expand its powers over the regulation of major securities exchanges and other critical aspects of EU financial infrastructure, striving to become the European version of the US Securities and Exchange Commission (SEC).' In the foreseeable future, ESMA will play a more significant role in the European financial market.
EBA is the EU's banking regulatory authority, similar to our former Banking Regulatory Commission. It sets unified regulatory standards for the European banking industry.
Differences between ESMA and EBA:
·Different Regulatory Domains: The EBA is mainly responsible for banking regulation, while the ESMA is responsible for securities market regulation.
·Different Functional Focus: The EBA is more focused on banking operations and depositor protection, while the ESMA emphasizes investor protection and orderly market operations.
2. Member State Level
Previously, each EU member state independently designated its national agencies to formulate regulatory policies for crypto assets within their jurisdiction and impose penalties. The names and scopes of authority of regulatory agencies varied among EU member states; for example, Poland's financial regulatory agency is the Polish Financial Supervision Authority (PFSA), while Malta has the Malta Financial Services Authority (MFSA).
The MiCA Regulation encourages regulatory agencies between EU member states to cooperate closely with EU institutions to improve the efficiency of the regulation's enforcement and closely monitor potential violations in the market. In the foreseeable future, the regulatory framework for crypto assets will be more unified and refined in the EU. So what are the key points of the MiCA Regulation for Web3 practitioners planning or already conducting business in the EU?
Key Points of the MiCA Regulation
1. Unified Framework, Comprehensive Compliance
If a license is likened to a passport, the direct benefit brought by the MiCA Regulation is that Web3 practitioners can travel throughout Europe with a 'Schengen visa.'
Previously, the Web3 compliance systems in EU countries operated independently, unable to form a unified regulatory framework; now, MiCA has established a unified framework and standards for EU member states. In the foreseeable future, whether for issuers of virtual currencies, operators, or crypto asset service providers, there will be a reduction in repeated applications, improving compliance efficiency.
Compared to the previous disparate regulatory frameworks of various countries, overall, the MiCA Regulation provides more detailed provisions, imposing higher compliance requirements on Web3 businesses in Europe. For crypto asset service providers, MiCA sets comprehensive rules covering various aspects from governance and capital requirements to custody and management. For instance, to obtain authorization, a CASP must have at least one director residing in the EU and maintain a registered office within the EU. In terms of marketing, it particularly emphasizes regulating false statements, complying with rules for marketing communications and information activities, and conducting activities fairly; otherwise, regulatory authorities will issue corresponding warnings and penalties.
2. Sufficient Capital, Stable Value
To prevent systemic financial risks in the crypto market, MiCA has established special requirements for stablecoin issuers, mandating that issuers hold sufficient reserve assets to support their value stability, ensuring the stability of stablecoin values.
Therefore, stablecoin issuers need to maintain sufficient capital and liquidity reserves to respond to potential market fluctuations and redemption demands; in particular, stablecoin issuers must ensure adequate reserves support the tokens they issue.
3. Combating Crime, Regulating the Market
The MiCA Regulation emphasizes and prevents potential illegal activities in the crypto market, such as insider trading and market manipulation. It also requires all crypto asset service providers to implement anti-money laundering (AML) and counter-terrorism financing (CTF) measures, including strict KYC procedures and transaction monitoring to prevent illegal activities by criminals through the crypto market. Crypto asset service providers must implement rigorous customer due diligence (CDD) procedures, monitor suspicious transactions, and report to relevant authorities to prevent money laundering and terrorist financing activities.
Penalties that may be faced for violating the MiCA Regulation
For Web3 practitioners, the most concerning issue is whether the project can operate normally; the reason for pursuing compliance is that the cost of non-compliance is high. After sorting out, Mankun lawyers summarize the penalty measures of the MiCA Regulation into the following four categories:
1. Warning
Warnings serve as a reminder of the importance of compliance. The EBA will officially issue warnings indicating that the issuer has failed to fulfill one or more obligations stipulated by the MiCA Regulation.
·Nature: A warning is a formal administrative notice, serving as an official administrative record indicating that the regulatory authority has noted issues with the issuer.
·Applicable Situations: Usually used when violations are relatively minor or occur for the first time, and the issuer shows a cooperative attitude towards correction. For example, it may involve untimely information disclosures, minor non-compliance in marketing communications, or minor defects in internal management processes.
·Impact: A warning itself may not directly lead to business interruptions or financial losses, but it can negatively affect the issuer's reputation and potentially lead to stricter regulatory scrutiny. If the issuer fails to take timely corrective measures after receiving a warning, they may face harsher penalties.
·Example: ESMA warns a certain issuer that its white paper lacks necessary information disclosures and requires it to make supplements within a specified time.
2. Fines and Periodic Penalty Payments
Fines and periodic penalty payments both fall under economic sanctions, and their differences are as follows:
In short, fines are retrospective, punishing past violations, while periodic penalty payments are prospective, deterring ongoing or future non-compliance by imposing daily fines until obligations are met.
3. Suspending or Prohibiting Activities
Suspending or prohibiting activities is a stricter penalty than a warning and will directly impact the issuer's business operations.
·Suspending Activities: Refers to temporarily prohibiting issuers from engaging in certain activities for a specified period. For example, suspending public issuance, suspending trading platform transactions, suspending marketing activities, etc.
Deadline: Usually has a clear time frame, such as the 'single longest period not exceeding 30 consecutive working days' mentioned in Article 130.
Applicable Situations: Usually used when violations are relatively serious, or issuers fail to effectively correct issues pointed out in previous warnings. For example, involving misleading publicity, failure to manage reserve assets as required, severe internal control deficiencies, etc.
Impact: Suspending activities can lead to business interruptions, revenue losses, customer attrition, and severely damage the issuer's reputation.
·Prohibiting Activities: Refers to permanently prohibiting issuers from engaging in certain specified activities. For example, permanently banning the public issuance of a certain token or permanently banning trading on a specific platform.
Nature: This is a very severe penalty, meaning the issuer will be unable to continue operations in the field.
Applicable Situations: Usually used when violations are extremely serious, or the issuer repeatedly violates regulations and refuses to correct. For example, involving fraud, money laundering, or serious violations that harm investor interests.
Impact: Prohibiting activities can have a devastating impact on the issuer's business, significantly increasing the company's operational risks.
4. Revocation or Cancellation of License
Revocation or cancellation of a license is the most severe penalty under the MiCA Regulation.
·Nature: Refers to the regulatory authority formally revoking the operational license obtained by the issuer under the MiCA Regulation, rendering it unqualified to provide related services in the EU.
·Applicable Situations: Usually used in the most severe violation cases, such as:
Severely violating the core provisions of the MiCA Regulation, causing significant harm to financial market stability or investor interests.
Providing false information to obtain licensing.
Repeated and persistent violations of regulations, even after multiple warnings and penalties, remain uncorrected.
The company is insolvent or facing bankruptcy liquidation.
·Impact: Revocation of authorization means that the issuer must immediately cease all related business in the EU and may face further legal actions and penalties. This is a fatal blow for the issuer, potentially leading to complete business termination and irreparable harm to its reputation and future development.
In summary, the four types of penalties constitute a multi-layered punishment system for violations under the MiCA Regulation. Regulatory authorities can choose appropriate penalties based on the specifics of the violations or combine multiple measures to achieve the best regulatory effect. Of course, the four mentioned are not exhaustive; the MiCA Regulation regarding information disclosure is essential for Web3 practitioners to understand these penal measures better, helping them comprehend compliance requirements and take necessary actions to avoid violations.
Ongoing Compliance: Future Outlook for the MiCA Regulation
For virtual asset service providers (VASP), the MiCA Regulation has reserved a grace period for practitioners registered before its implementation to transition to the timelines stipulated by the MiCA Regulation. Different countries have different arrangements; for example, if a company is a registered VASP (old license) in Poland, it will be allowed to provide services under the VASP license until the grace period ends on June 30, 2025 (anticipated date).
However, for crypto asset service providers that have never applied for a VASP license, they must apply for a CASP license before starting operations.
Regardless of how long the grace period set by each EU country is, currently, the MiCA Regulation stipulates that all crypto asset service providers (CASPs) must complete their license applications by July 2026.
Of course, the MiCA Regulation is not static; regulatory authorities will submit a publicly released report to the European Parliament and Council each year, reporting on amendments and the direction of regulatory changes based on market fluctuations and actual application of the regulation. At that time, Mankun lawyers will continue to follow up, providing Web3 practitioners with the latest and most comprehensive compliance guidelines from major crypto regions around the world.
▲Image Source: ESMA
Summary by Mankun Lawyers
While introducing strict regulatory standards, the MiCA Regulation also creates opportunities for businesses to expand into the European market and gain competitive advantages. By proactively meeting compliance requirements, in the short term, Web3 practitioners can obtain official endorsements and seize opportunities; in the long run, a more transparent and regulated business environment is also beneficial for the sustainable development of projects.
Mankun Law Firm has extensive practical experience and profound expertise in the Web3 field, particularly in crypto asset compliance, international business expansion, and cross-border legal support. We will not only continue to monitor the implementation progress of the MiCA Regulation but also regularly publish in-depth compliance interpretations and operational guidelines based on industry dynamics and client needs, helping clients grasp the latest policy changes.
By closely integrating industry trends with legal expertise, Mankun Lawyers are committed to designing tailored compliance solutions for clients, assisting them in efficiently addressing regulatory challenges, seizing market opportunities, and ultimately gaining a competitive edge in the rapidly evolving crypto asset market. Whether you are a crypto asset service provider, a token issuer, or another Web3 practitioner planning to expand globally, we can provide you with comprehensive support covering everything from business layout to risk prevention, helping your business achieve significant growth both in the EU and globally.