Crypto Assets Licence under MICA

The Markets in Crypto-Assets Regulation (MiCA) establishes a harmonised regulatory framework across the European Union (EU) to govern crypto-assets and related services. MiCA aims to provide legal certainty, foster innovation, ensure consumer protection, maintain financial stability, and support market integrity. Businesses dealing with crypto-assets in Malta and across the EU must understand and comply with MiCA to operate effectively.

Understanding Crypto Assets under MiCA

Definition of Crypto Assets

Under MiCA, crypto-assets are digital representations of value or rights transferred and stored electronically using distributed ledger technology (DLT).

Categories of Tokens under MiCA

1. Asset-Referenced Tokens (ARTs)
2. Electronic Money Tokens (EMTs)
3. Other Crypto Assets (OCAs)

Asset-Referenced Tokens (ARTs)

Asset-Referenced Tokens (ARTs) are defined under the Markets in Crypto-assets Regulation (MiCA) as crypto-assets whose value is maintained stable by referencing multiple underlying assets, including fiat currencies, commodities, and other crypto-assets. ARTs are designed to minimize volatility commonly associated with traditional cryptocurrencies, providing more predictable value and serving as reliable instruments within the digital financial ecosystem

Key characteristics of ARTs include:

• Stability: Value pegged or referenced to a diverse pool of underlying assets, reducing volatility.
• Transparency: Clear disclosure of reference assets and mechanisms used for value stabilization.
• Redeemability: Typically redeemable or exchangeable against the underlying reserve assets

Examples of ARTs include:

• Tokens referencing a basket of major currencies such as USD, EUR, and GBP to maintain stable international purchasing power.
• Tokens linked to commodities like gold, silver, or oil to offer exposure to real-world asset values.
• Tokens referencing mixed crypto-assets portfolios aimed at balanced exposure and reduced risk.

Common use cases of ARTs include:

• Facilitating international transactions and remittances with minimized exchange risk.
• Providing stable stores of value for investors looking to hedge against cryptocurrency volatility.
• Enabling decentralized finance (DeFi) platforms to offer predictable returns and stable financial products.

Regulatory Requirements for ART Issuers

Under MiCA, issuers of ARTs must adhere to stringent regulatory frameworks to operate within the EU:

Authorisation Obligations:

• Issuers of ARTs are subject to mandatory authorization by competent authorities within the EU before commencing issuance.
• Applications must provide comprehensive documentation including detailed business models, risk assessments, and operational frameworks.

Governance and Risk Management:

• Issuers must establish robust governance structures and internal control mechanisms to manage operational, credit, market, and liquidity risks effectively.
• Transparency obligations require clear and regular disclosure of asset management practices, token stability mechanisms, and financial reports.
• Operational continuity and crisis management plans must be in place to handle potential market disruptions or systemic risks.

Reserve Asset Requirements:

• ART issuers are obligated to maintain reserve assets equal to or exceeding the total value of outstanding token liabilities, ensuring token redeemability at all times.
• Reserves must consist of high-quality, liquid assets, clearly delineated and managed separately from the issuer’s operational funds.
• Regular independent audits and reporting on reserve adequacy and asset composition are mandatory, ensuring compliance and fostering market confidence.

Electronic Money Tokens (EMTs)

Electronic Money Tokens (EMTs) under MiCA refer to crypto-assets whose value is pegged directly to a single official fiat currency, designed to maintain stable and predictable value. EMTs serve as digital representations of traditional fiat currency, facilitating swift, efficient, and secure digital transactions.

Key characteristics of EMTs include:

• Stable Value: Directly linked to a single official currency, maintaining stability equivalent to traditional e-money.
• Redeemability: EMT issuers must guarantee redemption at par value at any time upon request.
• Transaction Efficiency: Designed for rapid, secure, and cost-effective digital transfers and payments.

Unlike traditional e-money, which is typically managed within centralized systems and subject to conventional banking regulations, EMTs leverage blockchain and decentralized ledger technology. However, EMTs share critical features with traditional e-money, including strict redemption obligations, safeguarding of funds, and consumer protection measures.

Issuance and Redemption Rules

Issuers must ensure EMTs are redeemable at par value at all times. This entails:

• Maintaining sufficient reserves matching issued EMTs.
• Ensuring immediate redemption capabilities without delay or excessive restrictions.

Key Regulatory Obligations for EMT Issuers

Capital and Liquidity Requirements:

• EMT issuers must maintain adequate capital reserves to cover liabilities and meet liquidity requirements.
• Regulatory oversight ensures continuous monitoring of capital adequacy and liquidity positions to prevent market disruptions.

Safeguarding of Funds and Consumer Protection:

• Issuers must strictly segregate client funds from operational funds, safeguarding these funds through appropriate legal arrangements.
• Robust mechanisms for consumer protection are mandated, including clear disclosures, dispute resolution procedures, and transparent reporting to uphold trust and stability within the market.

Other Crypto Assets (OCAs)

Other Crypto Assets (OCAs) under MiCA encompass tokens that do not qualify as Asset-Referenced Tokens (ARTs) or Electronic Money Tokens (EMTs). These typically include utility tokens and investment tokens, characterized by higher volatility due to the absence of stabilization mechanisms.

Key characteristics of OCAs include:

• Volatility: Generally more susceptible to market fluctuations.
• Utility and Investment Functions: Often designed to provide access to specific platforms, services, or represent investment instruments.
• No Stabilization Mechanisms: Lack inherent value stabilization methods, unlike ARTs and EMTs.

Distinguishing OCAs from ARTs and EMTs

OCAs differ primarily due to:

• Absence of direct asset referencing or pegging to fiat currency.
• Increased volatility reflecting market dynamics and speculative interests.
• Varied applications not strictly confined to payment functionalities.

Regulatory Implications for OCA Issuers

Notification Requirements:

• Issuers must notify competent authorities prior to offering OCAs within the EU market.
• Notifications must clearly outline token features, risks, intended market operations, and issuer details.

Operational Transparency and Reporting Standards:

• Issuers must adhere to transparent communication of token-related risks, functionalities, and market behaviors.
• Comprehensive disclosure requirements are mandated to enable investors and consumers to make informed decisions.

Crypto Asset Service Providers (CASPs)

Crypto Asset Service Providers (CASPs) under MiCA are entities providing regulated crypto-asset services aimed at enhancing market transparency, security, and stability.

Types of Services Regulated

• Custody and Administration of Crypto-assets: Secure storage, safeguarding, and management of crypto-assets.
• Operation of Trading Platforms and Exchanges: Facilitating orderly crypto-asset trading through regulated platforms.
• Execution and Transmission of Orders: Conducting precise execution and efficient transmission of crypto-asset transactions and orders.

Regulatory and Prudential Requirements

• Organisational Governance: Robust internal governance structures, risk management, and internal control systems.
• Compliance, AML/CFT Obligations: Strict adherence to anti-money laundering (AML) and counter-financing terrorism (CFT) frameworks.
• Consumer Protection Standards: Enhanced protection measures, including transparent disclosures, safeguarding client assets, and dispute resolution mechanisms.

Crypto Asset White Papers under MiCA

Crypto asset white papers provide essential information about token offerings, promoting transparency.

• Comprehensive details on risks, characteristics, issuer identity, and financial information.
• Mandatory submission and approval by regulatory authorities.
• Certain small-scale offerings and specific token types may be exempt.

The MiCA Licence Application Process

Correct and complete documentation is crucial to securing your MiCA licence. Key documents required include:

• Business Plan: A comprehensive, detailed outline of your business operations, clearly demonstrating viability, sustainability, and strategic objectives in compliance with MiCA standards.
• Governance Structure and Internal Controls: Clear documentation outlining your organizational framework, management oversight procedures, risk management, compliance measures, and internal audit processes.
• Proof of Capital and Liquidity: Demonstrable evidence of sufficient capital reserves and liquidity to meet MiCA’s stringent financial requirements, ensuring consumer protection and operational stability.

Benefits of Obtaining a MiCA Licence

Acquiring a MiCA licence significantly boosts your credibility and competitive edge in the EU crypto-assets market. Key benefits include:

• Market Access: Smooth and secure entry into EU markets, removing barriers to cross-border crypto asset operations.
• Enhanced Trust: Demonstrates regulatory compliance, significantly improving trust among investors, partners, and customers.
• Operational Certainty: Clear regulatory guidance helps businesses operate with confidence, minimizing legal risks and uncertainties.
• Growth Opportunities: Opens doors for partnership, funding, and expansion within the EU and beyond, leveraging your licensed status as a mark of excellence.

Application Timeline and Key Stages

Understanding the MiCA licence timeline and process stages helps set clear expectations:

1. Pre-application Preparation: Initial eligibility assessment and documentation preparation.
2. Formal Submission: Official submission of your application to the regulatory authorities.
3. Regulatory Review: Detailed evaluation by regulatory authorities, including clarifications and follow-ups.
4. Licence Approval and Issuance: Final confirmation and issuance of the licence upon meeting all regulatory standards.

How Can CSB Group help

CSB Group’s dedicated regulatory specialists will ensure that your MiCA licence application adheres strictly to regulatory obligations. Our comprehensive support facilitates precise compliance, robust governance frameworks, and effective mitigation of legal risks, positioning your business securely and strategically within the evolving EU crypto-assets regulatory landscape.