Markets in Crypto Act (MICA) and crypto-asset transfer legislation approved by the European Parliament
Information accompanying transfers of funds and certain crypto-assets, the first uniform European legislation framework for regulating the crypto-assets market in the EU that was finalized by Parliament and Council negotiators in June 2022, was almost unanimously approved, with 529 votes in favor to 29 against and 14 abstentions, by the Members of the European Parliament on the 20th of April 2023. In addition, the Markets in Crypto Act (MICA) legislation, also agreed by the Council in June 2022, setting new common rules on the supervision, consumer protection, as well as environmental safeguards of crypto-asset management, including cryptocurrencies, was also approved by the plenary of the Members of the European Parliament, with 517 votes in favor to 38 against and 18 abstentions.
The main objective of the new European crypto-asset legislation is to offer a uniform regulatory framework for the regulation of the crypto-assets market in the EU to guarantee and enhance the protection of consumers and investors, as well as promote innovation and extended usage of crypto-assets. In general this is achieved by establishing harmonized rules for crypto-assets to provide legal certainty for cases not covered by other EU legislation, with provisions to prevent money laundering and terrorist financing via the crypto industry.
One of the key points of the legislation is to ensure that crypto transfers, as any other financial operation, can always be traced and blocked when suspicious. To this end, the “travel rule”, which is already established in traditional finance and requires that information on the source of the asset and its beneficiary travel with the transaction and be stored on both sides of the transfer, has thus been extended to cover transfers in crypto-assets. Thus, operations with crypto-assets will henceforth be traced in the same manner as traditional money transfers. In addition, transactions above 1000€ from crypto-asset wallets of private users (self-hosted wallets) interacting with hosted wallets managed by Crypto-Assets Service Providers will be covered by these rules. Person-to-person transfers conducted without a provider, or among providers acting on their own behalf are to be exempt from the law.
Crypto-assets not regulated by existing financial services legislation will be covered by MiCA, which also contains key provisions for those issuing and trading crypto-assets (including both asset-reference tokens and e-money tokens), covering transparency, disclosure, authorization and supervision of transactions. These provisions are aimed towards consumer protection, with the disclosure of more thorough information about the risks, costs and charges linked to crypto-asset operations. This alleviates the effects of the lack of consumers’ confidence in those assets, which could significantly hinder the crypto-asset market development. Market integrity and financial stability is thus supported through the introduction of this new legal framework through the regulation of public offers of crypto-assets.
The enhanced traceability of the crypto-asset transfers is also expected to act as a money laundering prevention provision that would further enhance customer protection and promote the safety of the crypto-asset sector in the EU. The agreed text includes specific measures against behaviours that are likely to undermine users’ confidence in crypto-asset markets and the integrity of crypto-asset markets, such as insider dealings, unlawful disclosure of inside information and market manipulation related to crypto-assets. Additionally, there are rules prohibiting money laundering, terrorist financing, and other criminal activities, by which crypto-asset service providers authorized in the EU will be required to apply increased checks on financial operations involving customers and financial institutions from high-risk third countries. The European Securities and Markets Authority (ESMA) will also be required to set up a public register for non-compliant crypto-asset service providers that operate in the EU without authorization to further counter money-laundering risks.
The main environmental safeguards included in the new legislation are focused on the consensus mechanisms used for the validation of transactions in crypto-assets, as these can be energy intensive and thus have principal adverse impacts on the climate. Thus, it is mandated that the deployed consensus mechanisms be energy-efficient and environmentally friendly, and that any other environment-related adverse impact be adequately identified and disclosed by issuers and crypto-asset service providers. The most significant service providers will, additionally, have to develop draft regulatory technical standards to further specify the sustainability and energy indicators, such as power consumption. The European Securities and Markets Authority (ESMA) should take into account the deployed consensus mechanisms, existing disclosure requirements and ensure complementarity and consistency to avoid placing a double burden on companies and guarantee the smoothness of the implementation of the legislation requirements for the reduction of the carbon footprint of cryptocurrencies.
Overall, a unified regulatory framework at the EU level such as this, provides specific rules for the management of crypto-assets and related activities and services. Its enforcement is expected to support innovation and fair competition, while ensuring a high level of protection of retail holders and market integrity in crypto-asset markets.
Crypto-asset service providers should be able to scale up their business smoothly on a cross-border basis with access to banking services. Thus, financial stability is promoted through the expected smoothness of the operation of payment systems and the addressing of monetary policy risks that could arise from unregulated crypto-assets. The increasing protection of retail holders, market integrity and financial stability through the regulation of offers to the public of crypto-assets is not accompanied by regulation attempts at the underlying technology, with the EU legislation avoiding to impose unnecessary and disproportionate regulatory burdens on technical issues and the usage of the technology. Thus, the agreed regulatory framework avoids the danger of regulatory fragmentation that would distort competition, maintains the competitive edge of the EU market on international financial and technological markets by fostering innovation and providing clients with benefits such as access to safe, responsible and efficient financial services and comprehensive asset management.