On 10 October, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) voted to support the MiCA (Markets in Crypto Assets) Regulation provisional agreement reached on 30 June. The lawmakers from the Parliament’s ECON and LIBE committees also voted on the same day to support the Transfer of Funds Regulation (or TFR, also known as the Travel Rule).
TL;DR – What are MiCA and TFR?
We dove into detail on MiCA and TFR in our blog recently (Part1, Part 2), but in short, MiCA provides a new regulatory framework for exchanges, trading platforms, brokers, custodians, as well as token and stablecoin issuers that intend to operate in the EU. It covers, among other things, licensing, disclosure requirements, prevention of market abuse, and environmental sustainability requirements. TFR is the implementation of the FATF’s “Travel Rule”, which is the requirement, in most circumstances, to identify information on the sender and receiver in crypto transactions.
In this entry, we outline the key remaining steps of this legislative journey before full implementation. In our next entry, we will unpack the enumerated obligations for crypto asset service providers and stablecoin issuers, as well as how to prepare for MiCA/TFR implementation, including transitioning to MiCA if you are already registered or licensed in an EU country.
Where is the finishing line – or when can we expect full implementation?
The EU still has a few hills to climb before the legislative process reaches the finishing line. These include a final vote at the EU Parliament Plenary, translation of the final text into EU official languages, and publication in the Official Journal.
Should there be no further bumps on the road, both MiCA and TFR are expected to enter into force in Q1 2023. However, the entry-into-force date is not the same as the date when all the rules start applying. For that, two key timelines are particularly relevant to crypto asset service providers, crypto asset and stablecoin issuers:
- Q1 2024, i.e. 12 months after the regulations come into force: Stablecoin rules will apply. This means stablecoin issuers will need to seek approval from national competent authorities before issuance, draw up and publish white papers of approved stablecoins, and comply with requirements regarding conduct, market communications, capital, liquidity, etc. Stablecoins in MiCA & TFR include (i) asset-referenced tokens (ARTs) – tokens referencing a basket of multiple fiat/crypto assets and (ii) e-money tokens (EMTs) – tokens referencing one single fiat currency.
- Q3 2024, i.e. 18 months after the regulations come into force: All other rules, including licensing of crypto asset service providers, and the TFR will start to apply.
What are the steps before reaching the finishing line?
Meanwhile, various European regulators, most notably the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), will still need to maintain their stamina (and speed), backed by sufficient resources, to accomplish a few more tasks. For example, the development of:
- Regulatory Technical Standards (RTS) – commonly known as “level two text” – such as specifying the information to be included in an application for CASP or stablecoin authorisation, methodology for calculating the capital requirements for stablecoin issuers, white paper disclosures, pre/post-trade transparency requirements, complaints handling, standard reporting templates, conflict of interests, etc.
- Supervisory policies and procedures – particularly on the supervision of issuers of ARTs by the EBA, and of issuers of significant EMTs, who will be under a dual-supervision model by both the EBA and national competent authorities.
- Information exchange requirements – concerning those between issuers and supervisors, and among supervisors at national and European levels.
- Guidelines – on stablecoin recovery and redemption plans, criteria for the classification of crypto assets as financial instruments or crypto assets under MiCA, management board suitability requirements, etc.
And these are not the only tasks using up their fuel, as the industry will still require more specificity on the following issues, where compromise was reached in the very last days of the negotiation.
- Cap on stablecoins: The proposal to impose restrictions to issue stablecoins based on an estimated quarterly average number and value of transactions per day within a single currency area, as a means of exchange, was re-introduced. The final text stipulates that using ARTs or non-Euro denominated EMTs as a means of exchange will be capped at 1 million transactions and EUR 200 million per day. By way of reference, according to Chainalysis’ data, USDC had close to 50,000 transactions with a total flow of around USD 5.35 billion on 10 October. While this cap does not appear to apply to stablecoins used in spot trading transactions, more clarity will be required by the EBA on how to distinguish transactions used for retail payments or settlement purposes, to name but a few.
- NFTs: The final text of MiCA states that NFTs that are “unique and not fungible with other crypto assets” including digital art and collectables, are outside the scope of MiCA. However, the “fractional parts of a unique and non-fungible” token, as well as those tokens issued “in a large series or collection”, should be considered as an indicator of their fungibility. Clarity on the meaning of the indicator of fungibility is essential. Those NFTs and NFT platforms falling within this definition would then need to comply with MiCA and TFR.
- DeFi: The final texts have currently excluded DeFi, that is, crypto asset services provided in a “fully decentralised manner without any intermediary.” This raises the question of which of the existing DeFi protocols would meet this definition. If they don’t, they may likely be subject to MiCA’s requirements. And even for those “fully decentralised” services, the European Commission is already working on an assessment of the development of DeFi and whether the regulatory treatment of DeFi is adequate. That will take the form of an interim report in Q1 2025 and a full report in Q1 2027, and the result could mean new rules for DeFi.
MiCA, together with TFR, will provide a harmonised crypto regulatory framework across the EU, obviating the need for businesses to navigate a myriad of rules. These rules signal a more comprehensive regulatory regime, transitioning from merely countering illicit finance to prudential, conduct of businesses, prevention of market abuse and consumer protection. As the draft regulatory technical standards and guidelines develop, the rules will provide additional legal clarity and certainty to crypto asset service providers, crypto assets offerors, and stablecoin issuers intending to operate in the EU, and offer a benchmark for other policymakers across the globe.
About the author: Janet Ho is the Chainalysis Head of Policy for Europe, supporting public and private sectors in understanding the latest developments of crypto assets and their interactions with regulatory trends and requirements. Before joining Chainalysis, she was a financial and security policy maker in the Hong Kong Government and then the Financial Action Task Force Secretariat. Her recent work includes negotiating the FATF Standards on Virtual Assets, Virtual Assets Red Flag Indicators, and Proliferation Financing Risk Assessment Guidance.
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