By Romain Swertvaeger and Clément Robert
This summer, the first part of the EU MiCA regulation will officially come into force. Financial institutions (FIs) currently working with or exploring crypto assets will need to make operational adjustments. What specific actions need to be taken, and how will this affect EU crypto customers?
In June 2024, the EU will begin implementing parts of MiCA, focusing first on Asset Reference Tokens (ARTs) and Electronic Money Tokens (EMTs). In doing so, the EU is providing the financial industry with a framework for offering new digital products and services to customers. This development is significant because it integrates crypto assets into mainstream financial services and creates a legal framework for the operation, provision and distribution of these products. Understanding how these new assets work is essential for credit institutions to anticipate upcoming products on the market and even start building their own products around these tokens.
1. Evolution of financial value storage and transaction methods
Digital tokens combine the stability of traditional financial instruments with the flexibility of digital assets. ART and EMT represent the evolution of value storage and transaction methods. ART, often referred to as a "stablecoin", maintains its value through a basket of underlying liquid assets and is an ideal digital currency for savings or payments. This applies not only to financial assets such as currencies and crypto assets, but also to commodities such as precious metals such as gold, provided that the value of ART can be stable.
On the other hand, EMTs, often referred to as “electronic money tokens,” are the online equivalent of fiat currencies (traditional currencies issued by governments that are not backed by commodities, such as the dollar or the euro) and promise to simplify electronic payments while providing the security and reliability that traditional currencies should provide. Such tokens have similarities with traditional electronic money, such as those covered by the Electronic Money Directive 2 (EMD2) and the upcoming PSD3/PSR payments package. In fact, MiCA even stipulates that EMTs will be subject to the same issuance and redemption requirements as traditional electronic money.
What makes EMT different is the way it is implemented and issued, which enables different use cases than traditional electronic money. This also applies to ART, as it is the act of tokenization and the use of innovative technology that allows both tokens to open up new ways to enhance existing financial services.
2. Realize cross-border real-time payment
Faster cross-border transactions are a hot topic in the financial industry. At the EU level, the recently introduced Immediate Payments Regulation (IPR) will require EEA banks to offer cross-border instant payments in Euros or member state currencies. At the global level, there are also private initiatives underway between the European Banking Authority’s (EBA) RT1 instant clearing system and US/UK clearing houses to enable international interoperability of real-time payments. However, digital tokens do not need to rely on established clearing houses and existing rules, and cross-border real-time payments are enabled by default. The minimal number of intermediaries involved in the value chain also reduces the processing costs per transaction for banks and customers.
3. Adding value through convenience and reducing counterparty risk
Because tokens leverage blockchain technology, customers can benefit from value-added features such as smart contracts. Such features can include setting up a "cash on delivery" arrangement (where a smart contract will hold a portion of the customer's funds and automatically pay the customer when the item is received). These new use cases not only make it convenient for customers to pay when they receive the goods, but they can also limit counterparty risk in business relationships and reduce friction and delays in transaction processing.
4. Combat payment fraud and enhance financial security
The use of blockchain technology also offers a variety of other benefits to the financial industry due to the inherent structure and methods behind distributed ledger technology (DLT). In these highly encrypted systems, transactions are recorded on a secure, unchangeable ledger that is only accessible to a small number of authorized network members. In such systems, transactions are highly traceable, with data integrity ensured by many co-validators, and assurance that the transactions occurring in the blockchain are legitimate and authorized. Such measures reduce the risk of unauthorized access and fraudulent operations, which are key issues in the payment field.
5. Market Examples of Early Entrants
For example, some fintech companies offer EMTs in currencies such as the US dollar and the euro. These EMTs are pegged to the price of the fiat currencies they represent, but bring digital flexibility and advantages to the use of these fiat currencies. This includes the ability to use Euro EMTs in conjunction with features such as blockchain applications and smart contracts, which can further support many complex financial transactions and use cases. These include automatically and impartially processing and executing financial agreements based on code, enabling near real-time international payment settlements, etc.
Alternatively, financial institutions can also trade without issuing tokens. Some licensed entities already provide clients with access to large cryptocurrency trading platforms, allowing investors to easily access a more diverse range of products.
6. Preparations for June 2024
Financial institutions seeking to enrich their existing services should explore the possibility of offering such services, as well as the ability to provide more complex services to demanding customers. MiCA's provisions on ART and EMT will apply from June 2024, and the full legal rules from December 2024. Therefore, in-scope financial institutions should prepare to apply for a license to issue or trade tokens, draft a detailed crypto-asset white paper for their products, and engage with the National Competent Authority (NCA) to discuss their intention to start or continue operations. Keep in mind, too, that the remaining requirements will apply eight months later.
In particular, crypto asset white papers form an important part of the approval process for financial institutions to offer ART or EMT. Although the white paper requirements for different tokens vary, for both ART and EMT, financial institutions must disclose the operating mechanisms behind them, such as the issuance and redemption process, the rights and obligations of token holders, measures to protect assets, and report on their own governance structure and control measures regarding the intended crypto asset service products. In addition to these factors, they must also disclose details of the token type, such as the underlying assets behind ART and how the value of ART references these assets.
7. Looking ahead to December 2024 and beyond
While not as exciting as Christmas, financial institutions should also look forward to the full provisions of the MiCA Regulation coming into force this December. In particular, this will introduce licensing requirements for “Crypto-Asset Service Providers” (CASPs) into the legal application. While some established entities such as authorized credit institutions, investment firms, AIFMs do not require a separate license when providing crypto-asset services, this licensing provision will allow a wider range of companies in addition to pre-authorized financial institutions to provide crypto-asset services. This may lead to increased competition in the provision of such tokens and surrounding services, and financial institutions can enter these areas early from July.
In addition, a number of regulatory and compliance requirements will be introduced after this, and it is hoped that entities providing crypto asset services will effectively monitor and prevent insider trading, market manipulation and market abuse, ensure that adequate protection measures are provided to customers, and clearly follow the appropriate disclosure requirements that apply to them.
