New Era of Crypto Regulation - Understanding MiCA's Comprehensive Framework and Its Impact on the Digital Asset Landscape

Josef Bergt

2023

Introduction

In the dynamic and rapidly evolving world of digital assets, regulatory frameworks are essential in providing stability, transparency, and security. The Regulation (EU) 2023/1114 on Markets in Crypto-Assets Regulation (MiCA), a groundbreaking legislative framework introduced by the European Union, marks a significant step in the regulation and thus broad implementation of crypto-assets. This regulation imposes new obligations on a wide range of participants in the crypto market. This article offers an in-depth analysis of MiCA, its implications, and the responsibilities it introduces for different market participants.

Scope of Application of MiCA

MiCA's reach extends to various entities involved in the crypto-asset ecosystem, such as custodial wallet providers, crypto exchanges, brokers, and advisors as well as placing agents for crypto assets, stablecoin issuers, and various other service providers in the EU (Art. 2(1) MiCAR). The comprehensive nature of this regulation underscores the EU's commitment to creating a secure and transparent environment for digital assets.

Timeline for Compliance and Implementation

MiCA was officially enacted on June 29, 2023, and is currently in a phased implementation stage. The regulatory standards are being developed collaboratively, involving ESMA, EBA, industry experts, and public stakeholders. Specific provisions concerning asset-referenced tokens and e-money tokens will come into effect in June 2024, with the remainder becoming applicable in December 2024.

Licensing and Regulatory Approval for Certain Issuers

MiCA extends its regulatory reach to specific categories of issuers, particularly those dealing with asset-referenced tokens and e-money tokens. These issuers are not only required to obtain a license but also need to have their crypto-asset white paper endorsed by financial regulators. This additional layer of scrutiny ensures that these tokens, which have a more direct impact on financial stability and consumer protection, meet high regulatory standards.

Licensing Requirements for Crypto-Asset Service Providers

The regulation also mandates licensing for certain types of crypto-asset service providers operating within the European Union. This includes exchanges, custodial wallet providers, and brokers, among others. The licensing process is designed to ensure that these entities operate with integrity, security, and in the best interest of their clients.

MiCA's Introduction of Crypto-Asset White Paper Requirements

A central aspect of MiCA is the obligation for issuers to prepare a detailed white paper before offering crypto assets to the public or listing them on exchanges. This document must adhere to stringent standards concerning its form and content, providing comprehensive information about the crypto asset. The white paper serves as a critical tool for ensuring transparency and protecting investors, offering a clear understanding of the asset's characteristics, risks, and legal considerations.

Prohibition of Market Abuse in Crypto Markets

In a move to align crypto markets with traditional financial markets, MiCA explicitly prohibits market abuse, including market manipulation and insider trading. These provisions aim to foster a fair and trustworthy trading environment, protecting investors from fraudulent practices and ensuring market integrity.

Interim Conclusion

MiCA represents a significant advancement in the regulation of crypto assets within the European Union. By setting clear guidelines for issuers and service providers, and by prohibiting market abuses, MiCA aims to establish a secure and transparent digital asset marketplace. This new regulatory landscape poses both challenges and opportunities for market participants. 

Exploring the Comprehensive Scope of MiCA

MiCA's jurisdiction extends over a broad array of entities and activities in the European Union's crypto-asset domain. This includes natural and legal persons involved in the issuance, public offer, and trading admission of crypto assets, as well as those providing related services. Specifically:

• Issuance: This pertains to the initial sale of a crypto asset on behalf of third parties by an issuer or placing agent on the primary market, which might occur within the ambit of a public offering or outside of it.
• Public Offering: Defined as any communication in any form that presents sufficient details on the offer and the crypto assets, enabling potential buyers to make an informed decision. This can be as simple as publishing information on a website.
• Trading Admission: Involves listing crypto assets on a licensed exchange within the EU. It's noteworthy that MiCA may be applicable even if the issuer isn't based in the EU or if the public offer doesn't occur within the Union, as the legitimate spectrum of the reverse solicitation regime is very narrow.
• Crypto-asset Services: These encompass a wide range of services including custody, trading platform operations, exchanges, order execution, advisory services, and transfer services.

Exceptions to MiCA's applicability are clearly outlined, such as certain characteristics of crypto-assets (like NFTs and also financial instruments which remain subject to MiFID II) or specific actors (like reverse solicitation and group exceptions).

Defining Crypto-Asset in the MiCA Framework

At the heart of MiCA is the definition of a 'crypto asset', which is essentially a digital representation of value or rights transferable and storable electronically via distributed ledger technology or similar means. This definition embraces a vast majority of well-known cryptocurrencies and is more inclusive than the 'virtual currency' concept introduced earlier in EU law. Nevertheless, referring to both values or rights as defined in Article 3(1)(5) MiCAR is redundant, as in general any value is represented through a right (e.g., the right of ownership represents the value of the owned asset)

Identifying Exceptions within MiCA's Scope

MiCA acknowledges several noteworthy exceptions to its regulatory framework (compare Art. 142(2) and recital 10 MiCAR; Art. 2(2)(a), (3) and (4) as well as recital 3 MiCAR):

• NFTs: Non-fungible tokens are exempt unless they are not unique or fungible with other crypto assets.
• Financial Instruments: Tokens representing rights akin to financial instruments fall outside MiCA's scope, as they are already governed by other EU legal frameworks.
• Group Companies: Entities providing services internally within a group are not subject to MiCA, although safeguards against abuse of this provision are in place.

Introducing New Categories of Crypto-Assets

MiCA classifies crypto-assets into three distinct categories (Art 3(1)(6, 7, 9) MiCAR):

• Asset-Referenced Tokens: These are designed to maintain stable value by referencing other values or rights, including fiat currencies, commodities, or other crypto-assets.
• E-money Tokens: Similar to asset-referenced tokens but specifically pegged to the value of a single official currency.
• Utility Tokens: These provide access to a good or service offered by the issuer.

Each category is subject to unique regulatory requirements for public offerings.

Unregulated Crypto Business Models

Despite MiCA's extensive coverage, certain crypto business models remain outside its regulatory purview:

• Self-Hosted or Non-Custodial Wallets: Offering wallet software or paper wallets without transferring crypto-assets.
• Infrastructure Operators: Operating mining facilities or validators, although this might sometimes be classified as an alternative investment fund.
• Truly Decentralized Financial Applications (DeFi): Solutions where no contractual relationships are established.
• Genuine Non-Fungible Tokens: Individualized assets linked to tokens, like art usage rights.

These unregulated areas might be addressed in future regulations, possibly in a MiCA II framework.

In-Depth Analysis of Crypto-Asset Service Providers under MiCA

MiCA establishes two distinct categories of crypto-asset service providers: those acquiring a MiCA license and those already holding a license for traditional financial services. Regardless of the category, these entities must adhere to specific criteria within the EU. They are permitted to operate across the Union, either through freedom of establishment or freedom of service provisions.

For already licensed financial service providers, MiCA specifies permissible services based on their existing licenses, such as credit institutions being allowed to provide all services, and investment firms offering services akin to their licensed financial instrument activities.

General Principles for Offerors and Exceptions to Public Offer Requirements

MiCA imposes general principles of conduct, like good faith, fairness, and professional behavior, applicable to all issuers. However, certain crypto-asset offers are exempt from the general requirements, like free offers, rewards for ledger maintenance, utility tokens for existing services, and crypto-assets used within a limited merchant network (Art 4(3) MiCAR).

Even with these exemptions, the rules for crypto-asset service providers remain applicable. MiCA also outlines specific scenarios where a white paper is not required, such as offers to fewer than 150 persons, offers not exceeding 1 million euros within 12 months, or offers exclusively to qualified investors (Art 4(2) MiCAR).

Procedure for Service Providers Offering Crypto-Assets

Entities already under supervision can provide crypto-asset services after notifying the competent authority and fulfilling certain prerequisites, like submitting a business plan. Conversely, unsupervised companies must seek authorization from their member state's regulatory authority, which may involve a rigorous review process.

MiCA anticipates increased difficulty in obtaining approval post-implementation, potentially leading to the emergence of crypto-friendly jurisdictions within the EU and EEA.

General Obligations for All Crypto-Asset Service Providers

MiCA mandates that all service providers must act in the best interest of customers, provide clear and fair communications, and adhere to prudential requirements like minimum capital. They must also ensure secure storage of crypto-assets and funds, manage conflicts of interest effectively, and have a solid plan for managing business in case of outsourced provider failure.

Special Provisions for Specific Crypto-Asset Services

• Custody and Administration: Involves safekeeping of crypto-assets and access means, with specific liabilities in case of loss. The liability of the crypto-asset service provider shall be capped at the market value of the crypto-asset that was lost, at the time the loss occurred (Art 75(8) MiCAR).
• Trading Platform Operation: Requires clear operating rules, evaluation of listed crypto-assets, and real-time data publication.
• Crypto-Asset Exchange for Funds or Other Assets: Obliges providers to adopt a non-discriminatory policy and transparent pricing methods.
• Order Execution for Clients: Focuses on achieving the best result for the customer, barring specific customer instructions.
• Placing of Crypto-Assets: Entails marketing crypto-assets on behalf of issuers, with consent required for using white papers.
• Order Reception and Transmission: Involves routing client orders with no remuneration from trading platforms.
• Advice and Portfolio Management: Requires suitability assessment for clients and transparent advisory practices.
• Transfer Services: Pertains to transferring crypto-assets between ledger accounts, necessitating clear contractual agreements.
• General Requirements for Public Offering
  • MiCA mandates that only legal entities can publicly offer crypto-assets in the EU, irrespective of their establishment location.
  • A crucial prerequisite is the preparation and notification of a crypto-asset white paper to the supervisory authority before initiating a public offer. The white paper must remain publicly accessible as long as the crypto-asset is held.
  • Marketing communications must be identifiable, fair, clear, non-misleading, and consistent with the white paper. They must also include specific disclaimers and be documented on the offeror's website.
  • The offeror must adhere to principles of honest, fair, and professional conduct, with equitable treatment for all crypto-asset holders.
  • Exceptions to these requirements are applicable in cases like free offers, rewards for ledger maintenance, offers concerning utility tokens, and crypto-assets used within a limited merchant network.

Crypto-Asset White Paper

• The white paper is central to MiCA's regulatory framework (Art 8 MiCAR), detailing the offeror, issuer, project, technology, risks, and environmental impacts of the consensus mechanism.
• It must be fair, clear, non-misleading, concise, and devoid of future value assertions.
• The paper should be submitted to the supervisory authority 20 working days before publication. Amendments require submission seven days prior to publication and older versions must be accessible for ten years.
• Utility tokens for goods or services not yet existing or provided can only be offered publicly for a maximum of twelve months (Art 12(8) MiCAR).
• Article 5 (4) of MiCAR allows for the avoidance of drafting multiple white papers for the same crypto asset. This is possible if the crypto asset is already traded on another EU based trading platform and a compliant white paper exists with the original author's written consent for its use.

Right of Withdrawal & Liability

• Retail holders have a 14-day right of withdrawal for crypto-assets purchased in a public offering, with no fees or justification required (Art 13 MiCAR).
• MiCA establishes liability (Articles 15, 26 and 52 MiCAR) for information in the white paper, similar to the prospectus liability regime in EU securities laws.

Public Offering of Asset-Referenced Tokens and E-Money Tokens

• Asset-referenced tokens generally require authorization, with specific governance and operational measures, including a reserve of assets.
• E-money tokens can only be offered by credit institutions or e-money institutions and must be redeemable at par value with no fees.
• Exceptions exist for asset-referenced tokens if the average outstanding value over 12 months does not exceed 5 million euros or if the offering is solely to qualified investors.
• For high-volume asset-referenced tokens used in a single currency area, issuance restrictions are imposed to prevent them from substituting official currencies.

General Provisions on Insider Dealing and Market Manipulation

• MiCA implements a regime similar to that for financial instruments, encompassing public disclosure of insider information, prohibitions on insider dealing and unlawful disclosure, and prevention of market manipulation.
• These rules have an extraterritorial reach, applying to all persons and acts related to crypto-assets, regardless of location. Notably, this includes MEV (maximum extractable value) business models including frontrunning practices.

Mandatory Public Disclosure of Inside Information

• Inside information pertains to non-public, precise information about issuers, offerors, or crypto-assets that could significantly impact prices.
• Entities must disclose inside information pursuant to Art 87 MiCAR to the public that directly concerns them and ensure public accessibility for at least five years pursuant to Art 88(1) MiCAR, with certain allowances for delayed publication under specific conditions

Prohibition of Insider Dealing (Art 89 MiCAR)

• Insider dealing involves using inside information to trade crypto-assets for personal or third-party benefit.
• The prohibition targets individuals who have inside information due to their role, obtain it through criminal acts, or should reasonably know it constitutes inside information.
• It extends to recommendations or inducements to engage in insider dealing.

Prohibition on Unlawful Disclosure of Insider Information (Art 90 MiCAR)

• Individuals with insider information are barred from unlawful disclosure, except in normal employment or professional duties.
• Legal entities are required to disclose such information.

Prohibition of Market Manipulation (Art 91 MiCAR)

• Market manipulation includes transactions or behaviors that give misleading signals or secure prices at abnormal levels, using fictitious devices or deception, and disseminating false or misleading information.
• MiCA defines additional forms of market manipulation that do not rely on false or misleading information (disrupting or delaying functioning of trading platforms and obscuring genuine orders on them).

Obligations to Prevent and Detect Market Abuse (Art 92 MiCAR) 

• Persons arranging or executing crypto-asset transactions must have systems to prevent and detect market abuse.
• Reporting obligations are imposed for suspected market abuse incidents.

Transitional Measures for Token Issuers and Crypto-Asset Service Providers (CASPs)

• MiCA's full applicability starts from 30 December 2024, providing a transition period for compliance.
• Public offers ending before this deadline are exempt from certain requirements, including the obligation to prepare and notify a crypto-asset white paper (compare Art 8 MiCAR, Art 16(1), 19, 21(1) MiCAR and Art 48(1)(b) and 51 MiCAR).
• For crypto-assets listed before 30 December 2024, reduced requirements apply, particularly for marketing communications published after this date.
• Crypto-exchange operators have until 31 December 2027 to ensure compliance of crypto-assets with MiCA's white paper requirements (Art 143(2)(b) in connection with Art 6, 8, 9 and 12 MiCAR).

Asset-Referenced Tokens Issuers

• Issuers must obtain a license and adhere to white paper regulations.
• Issuers already operating before 30 June 2024 can continue until they receive or are denied a MiCA license, provided they apply before 30 July 2024.
• Credit institutions must notify their authority before 30 July 2024 if they were issuing asset-referenced tokens before 30 June 2024 (Art 143(4) and (5) MiCAR).
• E-money tokens (stablecoins) issuers must comply from 30 June 2024 as there are no specific transitional measures.

Transitional Regime for CASPs (Art 143(3) MiCAR)

• CASPs must obtain a MiCA license to offer services in the EU.
• Authorized CASPs as per current EU Member State law can continue until 1 July 2026 or until their MiCA license application is resolved.
• Member States may opt out of this transitional regime or shorten its duration.

Simplified License Procedure (Art 143(6) MiCAR)

• Between 30 December 2024 and 1 July 2026, Member States may offer a simplified license procedure for already authorized CASPs.

Content Requirements for Crypto-Asset White Papers (Art 6 MiCAR)

• Comprehensive Information Requirement
  • The white paper must include extensive information about the offeror, issuer, project, offering, crypto-asset, associated rights and obligations, underlying technology, risks, and environmental impacts.
• Transparency and Fairness
  • Information must be fair, clear, non-misleading, and exclude speculative statements about future asset value.
• Risk Clarification
  • The white paper must highlight potential risks, including value loss and illiquidity, and clarify that crypto-assets are not covered by compensation or guarantee schemes.
• Summary Inclusion
  • A summary in non-technical language must be provided, emphasizing the need for investment decisions based on the entire white paper.
• Specific Requirements for Asset-Referenced Tokens
  • White papers for asset-referenced tokens must detail the stabilization mechanism, investment policy, custody arrangements, and redemption rights.
• Specific Requirements for E-Money Tokens
  • E-money token white papers must disclose issuer identity, connections with distributed ledger technology entities, and the issuer's financial condition.
• Language and Format
  • The white paper should be in an official language of the issuer’s or host Member State or an internationally recognized financial language, in a machine-readable format.
• Standardization Efforts
  • ESMA and EBA are developing technical standards for crypto-asset white papers, expected by 30 June 2024, to ensure consistency.

Right of Withdrawal Under MiCA (Art 13 MiCAR)

• Right of Withdrawal for Retail Holders
  • Retail holders, defined as natural persons acting outside trade, business, craft, or profession, have a right of withdrawal for crypto-asset purchases, excluding asset-referenced tokens and e-money tokens.
  • This right allows withdrawal within 14 days from the purchase agreement without incurring fees or providing reasons.
• Reimbursement Obligations
  • Upon exercising the right of withdrawal, all payments, including charges, must be reimbursed within 14 days using the same payment method as the initial transaction, unless agreed otherwise.
• Exceptions to the Right of Withdrawal
  • The right of withdrawal does not apply if the crypto-asset was admitted to trading before purchase or if the offeror's public offer subscription period has ended.
• White Paper Information Requirement
  • Offerors must include information about the right of withdrawal in the crypto-asset white paper.

Liability for Information in Crypto-Asset White Papers

• General Liability for White Paper Content
  • Articles 15, 26, and 52 of MiCA govern the liability for information provided in crypto-asset white papers.
• Authors of white papers (offerors, persons seeking admission to trading, trading platform operators) and their administrative, management, or supervisory bodies are held responsible for the accuracy and completeness of information.
• Liability in Specific Crypto-Asset Categories
  • Liability provisions for asset-referenced tokens and e-money tokens are detailed in Articles 26 and 52, respectively.
• Liability Exceptions
  • Authors are not liable for information in the summary of the white paper unless it is misleading, inaccurate, or inconsistent when read with other parts of the white paper.
• Any contractual exclusion or limitation of liability is void.
• Holder's Burden of Proof
  • Holders must prove the infringement of information requirements and the impact of the infringing information on their decision to purchase, sell, or exchange the crypto-asset.
• Mitigating Liability Risks
  • Issuers should ensure clear, accurate, and non-misleading information.
• Regular updates to the white paper are crucial for reflecting significant changes in the crypto-asset project.
• Engaging external experts can help in ensuring compliance and identifying potential risks.

Under MiCA, offering crypto-assets to the public or seeking their admission to trading in the EU requires a compliant crypto-asset white paper.

• Possibility of Using Existing White Papers
  • Article 5(4) MiCA allows the use of an existing white paper for crypto-assets already admitted to trading on another EU platform, provided there's consent from the original author.
  • This provision avoids the need for multiple white papers for the same asset, streamlining the listing process and reducing liability for exchanges.
• Agreements for White Paper Use
• Written agreements are necessary for utilizing an existing white paper, offering efficiency and cooperation within the crypto industry.

ESMA's Second Consultation Package on MiCA

• Sustainability Indicators for Distributed Ledgers
  • Focuses on assessing the sustainability impact of nodes in a distributed network, considering factors like energy consumption, location, and equipment.
  • ESMA proposes a template for presenting information on climate and environment-related adverse impacts.
• Disclosures of Inside Information
  • MiCA includes prohibitions on insider dealing and obligations for public disclosure of insider information.
  • ESMA's guidance mirrors MAR, distinguishing between 'active dissemination' and website publication of insider information.
• Technical Requirements for White Papers
  • MiCA mandates machine-readable and human-readable formats for white papers.
  • ESMA suggests using iXBRL format, aligning with the practice for annual financial reports in the EU.
• Trade Transparency Measures
  • Trading platforms must have clear and transparent operating rules, with pre- and post-trade transparency information.
  • ESMA proposes adopting MiFIR rules for crypto-exchange transparency requirements.
• Record-Keeping and Business Continuity for CASPs
  • CASPs must keep detailed records of all services, activities, orders, and transactions.
  • The proposed guidance aligns with MiFID II, adapted for the specifics of MiCA.

Delegation of White Paper Obligations to Exchange Operators

• MiCA's Requirements for Crypto-Asset White Papers
  • Entities seeking to trade crypto-assets in the EU must prepare, notify, and publish a crypto-asset white paper, along with specific marketing communications.
• Delegation Provision in Article 5(3) of MiCA
  • Article 5(3) permits the delegation of white paper responsibilities to trading platform operators through a written agreement.
  • The agreement must outline the obligations taken over by the operator and mandate the provision of necessary information by the applicant to the operator.
• Liability in Delegation
  • Operators are liable for incomplete, unclear, or misleading information in white papers.
  • Applicants may also be liable for providing such inadequate information to the operator.
• Benefits and Risks of Delegation
  • Delegation benefits small startups lacking resources or expertise for MiCA compliance.
  • Operators must be cautious of liability risks associated with taking on these responsibilities.

Drafting Legal Opinions for Asset-Referenced Tokens

• MiCA Regulations for Asset-Referenced Tokens
  • Asset-referenced tokens are defined as crypto-assets that maintain stable value by referencing other values or rights, excluding e-money tokens.
  • Credit institutions must notify the competent authority 90 days before issuing these tokens, accompanied by a legal opinion confirming their classification.
• Content of the Legal Opinion
  • The opinion should analyze the token's design, operational mechanics, and reference values or rights.
    • It should clarify why the token does not qualify as an e-money token or a financial instrument, among other excluded categories under Article 2(4) of MiCA.
  • Anticipated Guidelines from ESA
    • By 30 December 2024, ESA is expected to release guidelines on the content and structure of legal opinions for crypto-assets, providing a template and standard classification test.

Definition and Scope of Marketing Communications

• Definition Under ESMA Guidelines
  • Marketing communications encompass a broad range of mediums and methods, including advertisements, social media messages, and individual communications.
  • Excluded from this definition are legal/regulatory documents, corporate communications, and short online messages that link to marketing content without specific information.

General Requirements for Marketing Communications

• Article 7 MiCA Requirements
  • Marketing communications must be clearly identifiable, fair, clear, and not misleading.
  • They must include a statement highlighting that the communication is not reviewed or approved by any EU authority and that the offeror is solely responsible.
  • Information must align with that in the crypto-asset white paper, with clear indications of its publication and contact details of the offeror or trading platform operator.
• Requirements for Asset-Referenced Tokens and E-Money Tokens
  • Marketing communications for these tokens must include a clear statement about the holder's right of redemption.

Notification, Publication, and Modification

• Notification to Competent Authorities
  • Competent authorities can request notification of marketing communications but do not require pre-approval.
• Publication on Offeror’s Website
  • Communications must be promptly published on the offeror's website before the start of the public offering or admission and remain available as long as the crypto-assets are held by the public.
• Updating Marketing Communications
  • Similar to the white paper, marketing communications must be updated to reflect significant new factors, mistakes, or inaccuracies that affect the crypto-asset's assessment.

Right of Redemption for Asset-Referenced Tokens and E-Money Tokens

• Permanent Right of Redemption
  • MiCA grants holders of asset-referenced and e-money tokens a permanent right of redemption against the issuer (Article 39 MiCA).
• Redemption Requirements for Asset-Referenced Tokens
  • Issuers must maintain a reserve of assets backing the tokens.
  • Redemption can be either in funds equivalent to the market value or by delivering the referenced assets.
  • Issuers are required to establish policies outlining redemption conditions, mechanisms, valuation, settlement conditions, and reserve asset management.
• Preparation of a Redemption Plan (Article 47 MiCA)
  • Issuers must create an operational plan for orderly redemption in situations like insolvency.
  • The plan should include mechanisms for equitable treatment of holders and ensure timely payment with reserve asset proceeds.
• Redemption Provisions for E-Money Tokens
  • Holders must have a right of redemption for funds denominated in the referenced official currency at par value.
  • Issuers of e-money tokens must also establish and notify a redemption plan within six months of public offer or admission to trading (Article 55 MiCA).

Obligation to Develop a Recovery Plan

• Recovery Plan for Asset-Referenced Tokens
  • Issuers must plan for scenarios where reserve asset requirements might not be met.
  • The recovery plan should include measures for restoring the reserve of assets.
• Recovery Plan Requirements
  • The plan should ensure the preservation of services, timely recovery of operations, and fulfillment of obligations in risk scenarios.
  • It may include options like suspension or limitation of redemptions and liquidity fees.
• Submission Deadline to Competent Authority
  • Issuers must submit the recovery plan within six months of authorization or white paper approval for asset-referenced tokens, and from the offer or trading date for e-money tokens.
  • Regular review and updates of the recovery plan are required.

Market Abuse Provisions in MiCA

• Insider Information and Market Abuse
  • Article 87 MiCA defines inside information as non-public, precise information that could significantly influence crypto-asset prices.
  • Insider dealings, including the use of inside information for trading, are prohibited under Article 89 MiCA.
  • Market manipulation, defined in Article 91 MiCA, includes actions that give false or misleading signals or secure crypto-asset prices at abnormal levels.
  • Article 92 MiCA mandates systems for preventing and detecting market abuse.

Understanding the practice of Frontrunning or MEV (Maximal Extractable Value)

• MEV in Blockchain Transactions
  • MEV refers to the maximum value validators can extract by manipulating the order of transactions in a blockchain block.
  • This can include front-running (placing transactions before a large recognized transaction with a higher gas price to ensure the transaction is executed with priority) or back-running (placing transactions immediately after a profitable transaction).

Intersection of MEV and Market Abuse under MiCA

• MEV as Potential Market Manipulation
  • MEV practices, especially those resembling front-running, may fall under MiCA's market manipulation provisions.
  • Each MEV activity must be assessed case-by-case to determine if it constitutes market abuse, involving misleading signals or price manipulation.
• Classification of MEV Under MiCA
  • While MiCA doesn't explicitly address MEV, its broad scope suggests that MEV activities could be classified as market abuse.
  • A nuanced approach is necessary to distinguish between inherent decentralized blockchain operations and actual abusive practices.

Critical Assessment: MEV vs. Front-Running

• Similarities to Traditional Front-Running
  • MEV resembles front-running in traditional markets, where brokers exploit advance knowledge of large transactions for profit.
• Differentiation in Blockchain Context
  • In the decentralized blockchain environment, MEV is more complex, involving various strategies beyond traditional front-running.

MiCA's impact on MEV practices remains uncertain, requiring careful analysis to differentiate between permissible blockchain operations and market abuse. ESMA's future guidelines will be crucial in providing clarity on how MEV fits within MiCA's market abuse framework.

Source: MiCAR

Executive Summary:

• MiCA requires crypto-asset issuers to draft a detailed white paper before public offerings or exchange listings.
• Issuers of asset-referenced and e-money tokens must obtain a license and have their white papers approved by financial regulators.
• MiCA prohibits market manipulation and insider trading in crypto markets.
• MiCA's implementation is phased, with application of all provisions by December 2024.
• Broad Scope: MiCA applies to various entities and activities related to crypto-assets in the EU.
• Crypto-Asset Definition: A broad term encompassing most cryptocurrencies and blockchain-based digital representations of value or rights.
• Notable Exceptions: Certain entities and crypto-assets, like NFTs and financial instruments, are exempt from MiCA.
• New Crypto-Asset Categories: MiCA introduces specific categories like asset-referenced tokens, e-money tokens, and utility tokens with distinct regulatory requirements.
• Unregulated Areas: Several crypto business models remain outside MiCA's scope, potentially to be addressed in future legislation.
• Crypto-Asset Service Provider Categories: MiCA distinguishes between newly licensed entities and those with existing financial service licenses.
• General Principles and Exceptions: Applies broad conduct standards to offerors, with specific exemptions for certain crypto-asset offers.
• Service Provider Procedures: Differentiated procedures for supervised and unsupervised companies, with an anticipated increase in approval difficulty post-MiCA.
• General Obligations: All providers must prioritize customer interests, maintain transparency, and ensure secure operations.
• Specific Service Provisions: MiCA sets out detailed requirements for various crypto-asset services, emphasizing customer protection and market integrity.
• Public Offering Framework: MiCA outlines stringent criteria for public offering of crypto-assets, including white paper requirements and marketing communication rules.
• White Paper Centralization: The white paper is a key document under MiCA, requiring detailed information and regular updates.
• Retail Holder Protections: Includes a right of withdrawal and establishes liability for white paper content.
• Special Rules for Asset-Referenced and E-Money Tokens: These tokens are subject to additional regulatory measures, including authorization and redemption requirements.
• Exceptions and Restrictions: There are notable exceptions in the offering of asset-referenced tokens, and specific restrictions for high-volume tokens to prevent them from replacing official currencies.
• Comprehensive Regulatory Framework: MiCA aligns with financial instruments' regulations, addressing insider dealing and market manipulation in the crypto-asset sphere.
• Disclosure Requirements: Entities are mandated to disclose insider information publicly and maintain its accessibility.
• Insider Dealing Restrictions: Insider dealing is strictly prohibited, encompassing a broad range of activities and individuals.
• Unlawful Disclosure Prohibition: Tight controls are placed on the dissemination of insider information.
• Market Manipulation Prohibitions: MiCA takes a firm stance against any form of market manipulation, including deceptive practices and false information dissemination.
• Market Abuse Prevention: Entities involved in crypto-asset transactions are required to have mechanisms to identify and report market abuse.
• Transitional Regime: MiCA provides transitional provisions for token issuers and CASPs to adapt to the new regulatory framework by specific deadlines.
• Asset-Referenced Tokens: Issuers have until 30 July 2024 to apply for a MiCA license, with different provisions for credit institutions and no transitional measures for e-money tokens.
• CASPs Transitional Measures: CASPs authorized under current EU Member State law can continue operations under transitional provisions until 1 July 2026.
• White Paper Requirements: MiCA mandates detailed and transparent white papers for crypto-assets, with specific content requirements, risk disclosures, and a summary section.
• Asset-Specific Provisions: Additional requirements are specified for asset-referenced and e-money tokens white papers.
• Language and Format Standards: White papers must be accessible in relevant languages and formats, with standardization efforts underway for consistency.
• Retail Holder Protection: MiCA provides a right of withdrawal for retail holders, allowing them to retract crypto-asset purchases under certain conditions.
• Information Disclosure: Offerors must disclose the right of withdrawal in the white paper, with strict liability for incomplete or misleading information.
• Comprehensive Liability: The liability for information in white papers extends to various parties involved in the creation and management of crypto-assets.
• Specific Provisions for Asset Types: Different liability rules apply for asset-referenced tokens and e-money tokens.
• Holder Responsibility: Holders bear the burden of proving the impact of misleading or incomplete information on their investment decisions.
• Risk Mitigation: Issuers are advised to provide accurate information, regularly update white papers, and consult external experts to minimize liability risks.
• White Paper Reuse: MiCA allows the use of existing white papers for crypto-assets, streamlining processes and reducing liability risks for exchanges.
• Sustainability Focus: ESMA emphasizes sustainability in distributed ledgers, requiring detailed disclosures on climate and environmental impacts.
• Insider Information Disclosure: Mirroring MAR, ESMA provides guidance on the public disclosure of insider information in the crypto market.
• White Paper Format Standards: MiCA mandates that white papers be both machine-readable and human-readable, with iXBRL proposed as the preferred format.
• Trade Transparency Alignment: ESMA suggests leveraging existing MiFIR rules for trade transparency in crypto exchanges.
• Record-Keeping Consistency: The record-keeping requirements for CASPs are proposed to align with MiFID II, ensuring regulatory consistency.
• White Paper Delegation: MiCA allows for the delegation of white paper obligations to trading platform operators, offering efficiency and resource optimization for applicants.
• Liability Considerations: Both operators and applicants face potential liability for any inadequacies in the information provided in white papers.
• Legal Opinions for Asset-Referenced Tokens: Essential for credit institutions issuing asset-referenced tokens, these opinions must detail why the token does not fall under excluded categories.
• Importance of Clarity and Compliance: Legal opinions must be unambiguous and comprehensive, ensuring alignment with MiCA regulations and forthcoming ESA guidelines.
• Broad Definition of Marketing Communications: Encompasses a wide range of media and methods, excluding certain types of corporate and legal communications.
• Identifiability and Accuracy Requirements: Communications must be identifiable as marketing, with information that is fair, clear, and not misleading.
• Consistency with White Paper Information: Marketing content must align with the crypto-asset white paper and indicate its availability.
• Special Provisions for Certain Tokens: Communications for asset-referenced tokens and e-money tokens must include specific redemption rights information.
• Regulatory Oversight and Accessibility: While not requiring pre-approval, communications must be notified to authorities upon request and published on the offeror’s website for public access.
• Obligation to Update: Marketing materials must be revised to reflect any significant changes or inaccuracies, similar to the requirements for the white paper.
• Right of Redemption for Holders: MiCA provides a permanent right of redemption for asset-referenced and e-money token holders.
• Asset-Referenced Token Redemption: Issuers must maintain a reserve of assets and establish clear redemption policies.
• Operational Redemption Plan: A detailed plan is required for orderly redemption in cases like issuer insolvency.
• E-Money Token Redemption: Similar redemption rights and plan requirements apply to e-money tokens.
• Recovery Plan Obligations: Issuers must prepare for potential unbalances in reserve assets and include recovery measures in their plans.
• Comprehensive Recovery Options: The plan should include various measures to protect token holders and financial stability.
• Regulatory Compliance: Issuers must submit their plans to the competent authority within specified deadlines and regularly update them.
• MiCA grants holders of asset-referenced and e-money tokens a permanent right of redemption against the issuer (Article 39 MiCA).
• Redemption can be either in funds equivalent to the market value or by delivering the referenced assets.
• Issuers are required to establish policies outlining redemption conditions, mechanisms, valuation, settlement conditions, and reserve asset management.
• Preparation of a Redemption Plan (Article 47 MiCA)
• Issuers must create an operational plan for orderly redemption in situations like insolvency.
• The plan should include mechanisms for equitable treatment of holders and ensure timely payment with reserve asset proceeds.
• Redemption Provisions for E-Money Tokens: Holders must have a right of redemption for funds denominated in the referenced official currency at par value.
• Issuers of e-money tokens must also establish and notify a redemption plan within six months of public offer or admission to trading (Article 55 MiCA).
• Recovery Plan for Asset-Referenced Tokens: Issuers must plan for scenarios where reserve asset requirements might not be met.
• The recovery plan should include measures for restoring the reserve of assets.
• The plan should ensure the preservation of services, timely recovery of operations, and fulfillment of obligations in risk scenarios.
• It may include options like suspension or limitation of redemptions and liquidity fees.
• Submission Deadline to Competent Authority
• Issuers must submit the recovery plan within six months of authorization or white paper approval for asset-referenced tokens, and from the offer or trading date for e-money tokens.
• Regular review and updates of the recovery plan are required.