Navigating the Markets in Crypto-Assets Regulation (MiCA)

On 16 May 2023, the EU Council adopted the Regulation on Markets in Crypto-Assets (MiCA), hence marking the final step in the legislative process. The MiCA Regulation introduces harmonized rules on crypto-assets within the EU. MiCA harmonizes the regulations of all EU member states on crypto assets. This was necessary because there were divergent regulations between the EU member states that impaired economic freedom within the EU. It intends to provide legal clarity, safeguard consumers, and maintain market stability in the crypto-assets sector. By harmonizing standards, MiCA allows for fair competition within the EU single market for digital assets.

MiCA: A General Overview

The regulation affects crypto-asset issuers, offerors and crypto asset service providers (CASPs) operating within the EU. The global reach of MiCA means that any third country crypto-asset issuer or crypto asset service provider aiming to issue and offer tokens or services within the EU and to EU citizens must comply with these regulations.

MiCA contains a very broad definition of crypto-assets. However only a specific set of crypto-assets are subject to the regulation. It mostly affects what is commonly referred to as stablecoins.

Asset-Referenced Tokens (ART): These are crypto-assets, that are not electronic money tokens, that aim to maintain a stable value by referencing any other value or right or a combination thereof, such as other crypto-assets or more official currencies.

Electronic Money Tokens (EMT): These are types of crypto-assets that strive to uphold a stable value by referencing the value of a single official currency like EUR or USD.

Crypto-Assets, Other than Asset-Referenced Tokens or E-Money Tokens: This category acts as a catch-all for crypto-assets that do not fall under the above definitions, including Bitcoin (BTC), Ethereum (ETH), and utility tokens.

With regard to ART and EMT, MiCA further distinguishes between significant tokens and tokens that are not significant. Criteria for significancy include a large customerbase, a high market capitalization, or a large number of transactions.

Certain crypto-assets that are recognized as regulated instruments under existing financial regulations in the EU, such as transferable securities, structured deposits, e-money, or securitizations, fall outside of the MiCA regime. Also exempted are Non-Fungible Tokens (NFT), except when the NFT is issued as fractional representation of an NFT or in a large series or collection.

The Role of Crypto-Asset Service Providers

CASPs are entities that offer services related to one or more crypto-assets, either to the issuers or to the consumers. Services can include custody and administration of crypto-assets, operation of a trading platform, exchange services between crypto and fiat currencies, and others. It is worth noting that fully decentralized finance (DeFi) will remain out of scope.

The Authorization Requirements under MiCA

In general, issuers of ART and EMT as well as CASPs will need authorization to operate in the EU.

EMT: The issuance of EMT triggers the strictest of rules under MiCA. It is only possible for authorized credit institutions (under CRD/CRR framework) and e-money institutions (under the Second E-Money Directive EMD2 framework).

ART: The issuance of ART, if not exempted, requires a legal entity incorporated in an EU Member State. Furthermore, respective issuers must comply with several key prudential and organizational requirements. Amongst others, this includes notification of a whitepaper with the national competent authority (“NCA”), minimum capital requirements, reserved assets, etc. The whitepaper is basically an investor information document like a securities prospectus under the EU Prospectus Regime and hence MiCa provides for similar exemptions from the whitepaper obligation. In addition, issuers will need to provide the NCA with a legal opinion confirming that the asset-referenced token does not qualify as a crypto-asset outside the scope of MiCA.

Once being authorized, issuers can benefit from the EU-Passporting regime, meaning that issuers located in one EU member state will generally be able to offer crypto-assets to investors across the EU with no further notification obligation in another EU member state.

Other Crypto-Assets: For issuers of general tokens such as utility tokens, the less strict rules under MiCA apply. They can even be incorporated outside the EU. Whitepaper notification obligations and corresponding liability are, amongst others, to be observed aswell.

CASPs: When it comes to CASPs, they need to establish a legal entity with effective management in the EU. There are similar requirements stipulated by MiCA for all crypto-asset service providers but also specific rules mirroring the Markets in Financial Instruments Directive (MiFID) II for those offering corresponding services such as investment advice, portfolio management, etc.

Transitional Period

MiCA considers the necessity of a seamless transition into its regulatory framework. It will start to apply with a two step implementation process, beginning in Q2/2024 with the rules regarding the issuance and offering of asset-referenced token (ART) and e-money tokens (EMT), followed by the rules regarding the authorization framework for CASPs operating in the EU that will start to apply in Q4/2024.

Conclusion: Implications for Swiss crypto-asset issuers and CASPs

While Switzerland is not part of the EU, Swiss crypto-asset issuers and service providers aiming to operate in the EU must adhere to MiCA's regulatory framework. They should understand the classification of tokens under MiCA and comply with the accompanying requirements. Swiss CASPs intending to offer services in the EU and to EU residents need to ensure authorization from an EU member state authority.

It's essential for Swiss entities to keep abreast of the regulatory developments, regularly update their operational practices, and – where required – adjust their business models to ensure full compliance with MiCA. Although MiCA presents certain challenges, it also offers an opportunity to operate in a harmonized European market, making early and comprehensive compliance efforts a strategic advantage.

MiCA and Its Impact on Crypto-Asset Service Providers from a Swiss Perspective

MiCA is an EU regulation designed to govern crypto-assets. It has significant implications for crypto-asset service providers, particularly in terms of licensing requirements. MiCA affects all crypto-asset service providers operating within the EU or targeting EU residents. It establishes legal certainty and stringent consumer protection mechanisms, promoting financial stability in the crypto-asset market.

CASPs under MiCA are entities that offer professional services related to crypto-assets, such as:

custody and management of crypto assets for third parties;
operation of a trading platform for crypto values;
exchange of crypto values for fiat money;
exchange of crypto values for other crypto values;
execution of orders for crypto values on behalf of third parties;
placement of crypto values;
accepting and transmitting orders for crypto values for third parties;
advising on crypto values.

Licensing Requirements under MiCA

MiCA necessitates that CASPs obtain a license from a competent authority in an EU member state. Providers must demonstrate the following:

CASPs need to establish a legal entity in at least one EU member state.
CASPs need to comply with capital requirements: € 150,000 for operators of trading platforms; € 125,000 for crypto-custodians and CASPs providing exchange services; € 50,000 for all other CASPs.
CASPs also need to comply with governance requirements, such as a well-defined organization structure with clear lines of responsibility, effective procedures to identify, manage, monitor, and report risks they are or might be exposed to, adequate technical resources to run a secure, efficient, and reliable operation, procedures to handle complaints from users as well as robust IT systems and controls, with a focus on cybersecurity, business continuity, and disaster recovery.
CASPs finally need to comply with sustainability requirements, which means that they need to publish on their website information related to the climate and other environment-related adverse impacts of the consensus mechanism used to issue each crypto-asset in relation to which they provide services. CASPs will be able to source this information directly from the offering documentation received from the issuers.
CASPs licensed under MiCA will be able to provide services across the EU (“Passporting”).

Compliance Monitoring

MiCA assigns responsibilities to both national and EU level authorities, such as the European Securities and Markets Authority (ESMA), for effective monitoring of CASPs' compliance with MiCA rules.

Conclusion: A Swiss Perspective

From a Swiss perspective, MiCA provides both challenges and opportunities. For Swiss-based CASPs intending to operate within the EU, compliance with MiCA is not optional but mandatory. Such providers need to prepare accordingly, ensuring they meet all the regulatory and licensing requirements laid down by MiCA.

In terms of opportunities, MiCA offers a clear regulatory framework, which can enhance credibility and trust among consumers and investors. While compliance may entail significant effort and investment initially, it will lead to better long-term prospects for Swiss CASPs operating in the EU.

It's also critical that Swiss providers stay updated with the evolving regulatory landscape within the EU to ensure continued compliance and smooth operations. As the Swiss market is known for its innovative spirit and robust financial market infrastructure, it is well-positioned to adapt and thrive under the new MiCA framework.

Reverse Solicitation under MiCA from a Swiss Perspective

Reverse solicitation, also known as "on-customer's-own-initiative" basis, is a concept where a client, on their own initiative, seeks financial or investment services from a provider. MiCA outlines the approach towards reverse solicitation, which Swiss providers should be aware of, given the close interaction between the Swiss financial market and the European Union.

Under MiCA, an explicit provision states that CASPs from third countries, such as Switzerland, are only allowed to provide services to clients within the EU if they have established a branch within the territory of the Union. However, a CASP is exempted from the obligation to establish a branch where a client in the Union, on its own initiative, seeks to receive a service from that CASP. This is referred to as "reverse solicitation."

Reverse solicitation under MiCA requires that the client, not the provider, must initiate the provision of a service. Unsolicited communications sent by a provider (including advertising or promotional materials) cannot be construed as such an initiative. Further, the provider must be able to demonstrate that the client approached it without any solicitation on the provider's part.

Swiss-based CASPs may find this provision important, given the close links between Switzerland and the EU. However, relying on reverse solicitation to service EU clients could pose substantial risks, given the need to clearly demonstrate the client initiated the relationship. A failure to establish a branch in the EU where necessary could result in administrative penalties under MiCA.

Swiss CASPs must undertake due diligence to ensure they meet the conditions for reverse solicitation. They must maintain thorough documentation of all client communications, establishing that the client, not the provider, initiated the business relationship.

Future Developments & Conclusion

ESMA will issue more detailed guidelines for the classification of reverse solicitation within the next 18 months. But please note that ESMA typically interprets MiFID II reverse solicitation narrowly. So, it would not be surprising if ESMA took a similar position with the MiCA reverse solicitation provisions. Swiss CASPs should monitor these developments closely to ensure continued compliance.

Reverse solicitation offers a potential route for Swiss CASPs to service EU clients without establishing a branch in the EU. However, it is not without risks. Swiss CASPs must understand the detailed requirements under MiCA and maintain comprehensive records to demonstrate compliance. As MiCA continues to evolve, Swiss CASPs should ensure they stay informed of all updates and changes to ther everse solicitation rules.

Understanding the Transition Period Under MiCA from a Swiss Perspective

MiCA was adopted by the EU Council in May 2023 and will enter into force at the expiration of a transitional period, the details of which are explored in this factsheet.

The transition period is designed to allow CASPs and crypto-asset issuers already conducting business before MiCA's entry into force to adjust their operations to meet the new regulatory requirements.

Duration and Application of the Transition Period

The transition period lasts for 18 months since May 2023, the date of application of the MiCA regulation. MiCA rules regarding the issuance and offering of ARTs and EMTs will start to apply in Q2/2024 whereas rules regarding the authorization framework for CASPs operating in the EU will start to apply in Q4/2024.

During the transition period, CASPs and crypto-asset issuers who were already conducting business before the application date of the MiCA regulation are allowed to continue their operations. However, they must take active steps towards compliance with the new regulatory requirements.

Regulatory Expectations During the Transition Period

During this period, CASPs and crypto-asset issuers are expected to prepare and submit an application for authorization under MiCA to the competent authority in their chosen home member state. The application must meet the regulatory standards set out in MiCA and demonstrate that the service provider can comply with those standards.

CASPs and crypto-asset issuers are also expected to align their policies, systems, and processes with the new requirements under MiCA, which cover areas such as organizational requirements, operating conditions, and investor protection rules.

Conclusion: A Swiss Perspective on the MiCA Transitional Period

From a Swiss point of view, the MiCA transitional period offers both opportunities and challenges. It provides Swiss-based CASPs and crypto-asset issuers with a timeframe to ensure their operations are compliant with EU regulations before offering services in the EU.

For Swiss CASPs and crypto-asset issuers intending to operate in the EU, the transitional period is not an optional phase, but a necessary period of adaptation and alignment. Applying for the necessary authorizations, adapting operational practices to comply with MiCA, and aligning their systems and policies with the new regulations should be among the top priorities.

The MiCA transitional period could mark a turning point for Swiss CASPs and crypto-asset issuers to enhance their credibility and trust among EU consumers and investors. While the transition may pose short-term challenges, it could lead to significant long-term benefits, making Swiss providers more competitive in the broader EU market.