New Comprehensive Regulation on Crypto-Assets in Europe

The rise of cryptocurrencies and their increasing impact and relevance in the global economy have led the European Union (EU) to establish an exhaustive and comprehensive regulation to address this asset class. The Markets in Crypto-Assets (MiCA) Regulation, approved by the European Parliament and the Council of the European Union, is a comprehensive regulation that seeks to guarantee consumer protection, ensure financial stability, and promote integrity, innovation and competition in the European crypto-assets market.

The exponential growth experienced by the crypto-asset industry in recent years has led regulators and authorities to raise the need for a clear and unified legal framework for crypto-assets in the EU. The European Commission proposed the MiCA Regulation in September 2020 with the aim of establishing uniform requirements for primary market activities, such as the issuance or public offering of crypto-assets, and their admission to the secondary market through the crypto-asset's access to trading platforms. It also establishes requirements for crypto-asset service providers.

The MiCA Regulation defines crypto-assets as "a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology."

The regulation classifies crypto-assets into three different categories, depending on whether a given crypto-asset seeks to stabilize its value by referencing other assets. The first category, referred to as e-money tokens (EMTs) consists of crypto-assets whose objective is to stabilize their value by referencing a single official currency, with their function being very similar to that of e-money. The second category is comprised of crypto-assets called asset-referenced tokens (ARTs), which aim to maintain a stable value by referencing another security or right, or a combination of these (i.e., it could be referenced to the value of several legal tender fiat currencies, one or several commodities, one or several crypto-assets or a combination of these assets). This second category encompasses all other crypto-assets that cannot be classified as e-money tokens and whose value is asset-backed. Finally, the third category of crypto-assets is comprised of all crypto-assets that are neither e-money tokens nor asset-backed tokens. Popular crypto-assets such as bitcoin and ether fall into this category.

Nevertheless, there are certain crypto-assets that fall outside the scope of MiCA, such as crypto-assets that are considered financial instruments or fall within the scope of EU financial services regulation, crypto-assets that are unique and non-fungible such as non-fungible tokens (NFTs) — except for fractional parts of a unique and non-fungible crypto-asset, as these fractions are not considered unique and non-fungible — and digital assets issued by central banks (central bank digital currencies or CBDCs) or other public authorities.

It is essential to note that MiCA explicitly excludes crypto-asset services that are provided in a fully decentralized manner, without recourse to an intermediary, and crypto-assets that do not have an identifiable issuer, from its scope of application. This implies that decentralized finance (DeFi) and decentralized autonomous organizations (DAOs) are not regulated by this rule.

Specifically, MiCA comprehensively regulates the following matters in relation to crypto-assets:

• issuance and public offering of crypto-assets
• issuance and public offering of EMTs
• issuance and public offering of ARTs
• crypto-asset service providers
• additional rules

The MiCA Regulation was formally adopted by the Council of the European Union on May 16, 2023, thus concluding the legislative process. The regulation will now be published in the official gazette and will take effect 20 days after its publication. The provisions contained in the regulation will start to apply after a transition period ranging between 12 to 18 months, depending on the specific provision.

To learn about the most relevant aspects of each of the previously listed points, please refer to the document Relevant Aspects of the MiCA Regulation, which details some of the most relevant aspects incorporated through this comprehensive regulatory framework adopted by the EU in the crypto-asset field.

In conclusion, the implementation of MiCA marks an important milestone on the road to a solid, secure and necessary regulatory framework for the crypto-asset ecosystem. As this legal framework is consolidated, we will begin to see a less uncertain and more reliable outlook for both crypto-asset service providers and the investing public.

It is likely that the approval of this standard will encourage other countries to develop their own regulations, which would allow for greater coordination and harmonization at a global level.

Holland & Knight actively advises financial institutions and companies in the crypto-asset industry, as well as other entities, in the adoption of internal policies that allow them to comply with new regulations that may be issued on the matter. We actively monitor the implementation of regulations that may have a direct impact on the functioning of the crypto-asset system and the different actors that compose it.

For further information on this matter, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.