The Future of Digital Assets in the EU
Many people have long seen the market for digital assets as the Wild West of investing, filled with lucrative volatility and a significant risk of fraud. However, the European Commission’s Markets in Crypto-Assets (MiCA) is a regulatory framework that seeks to change this. MiCA is due to come into effect in 2024 with the dual objectives of harmonisation of existing EU regulations and the protection of investors.
One of the key impacts of this new framework will be to broaden the scope of existing regulation to include additional Virtual asset service providers (VASPs). Owing to the market’s rapid development, many service providers are unregulated, putting investors at risk of exploitation. Crypto-asset service providers (CASPs) is a term that exists in many other jurisdictions and has now been adopted by MiCA’s drafters to replace the Financial Action Task Force’s well-known definition for VASPs. The CASP definition is very similar to the original definition however it is much broader in scope so as to provide for as many crypto-related entities as possible. The most important thing to understand is that all VASPs will be considered CASPs but not all CASPs will be VASPs as they will fall outside the previous, narrower definition.
- Exchange between virtual assets and fiat currencies;
- Exchange between one or more forms of virtual assets;
- Transfer of virtual assets;
- Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
- Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
- The custody and administration of crypto-assets on behalf of third parties;
- The operation of a trading platform for crypto-assets;
- The exchange of crypto-assets for fiat currency that is legal tender;
- The exchange of crypto-assets for other crypto-assets;
- The execution of orders for crypto-assets on behalf of third parties;
- Placing of crypto-assets;
- The reception and transmission of orders for crypto-assets on behalf of third parties;
- Providing advice on crypto-assets;
MiCA will also regulate the digital assets which currently fall outside the scope of EU and Member State regulations, such as e-money tokens, asset-referenced tokens and utility tokens. Surprisingly, MiCA does not address non-fungible tokens (NFTs), although the European Commission has indicated that it will address them in the future.
When MiCA comes into effect it will be applicable across the EU, without requiring Member States to introduce implementation laws. This uniform approach will bring about greater clarity and certainty for CASPs who are currently faced with differing domestic regulations across Member States. For example, MiCA will streamline the licensing process for crypto-asset issuers and make it valid across all Member States.
Notwithstanding the greater ease of doing business, the regime itself will impose stricter obligations on CASPs so as to protect investors from market abuse and ensure transparency. These obligations relate to the authorisation of issuers and the marketing of crypto-assets themselves, as well as the requirement to publish reports and whitepapers. However, issuers that operate on a smaller scale will be exempt, such as those that deal with less than 120 investors per Member State.
While some CASPs may be sceptical of MiCA’s impact on their business models, the Commission anticipates that the increased protection will attract investors. For example, CASPs involved in the custody of digital assets (custodians) will be required to store their customers’ assets separately to their own data, using Distributed Ledger Technology (DLT). This will ensure the assets are more secure in the event of a malware attack. Furthermore, these custodians will also be liable for losses that result from hacking or break down in technology. These requirements will undoubtedly increase consumer confidence and thus stimulate investment.
Finally, it is interesting to note that because the safeguards relate to EU consumers, these changes will also apply to any firms outside the EU who wish to do business in the EU. Therefore, MiCA will have far-reaching implications for both CASPs and investors in the digital assets market not just in the EU but around the world. As Dublin is one of the world’s investment fund and asset management hubs it will be interesting to see what opportunities and challenges arise as a result of MiCA.