I. The Markets in Crypto-Assets Regulation (MiCA) amends Directive (EU) 2019/1937, and is the EU’s first proposal aimed at the regulation of crypto-assets, issuers of crypto-assets, and cryptocurrency service providers. It is due to take effect in 2024/2025. The MiCA Regulation lays down requirements and duties for crypto-asset service providers, issuers of cryptocurrencies, offerors, and, in a simplified way, any persons admitted to trade in cryptocurrencies. This regulation encompasses in particular e-money tokens, asset-referenced tokens, and other crypto-assets.
The MiCA Regulation differentiates between three types of cryptocurrencies, each subject to a separate legal framework:
- asset-referenced tokens (ART) are tokens that purport to maintain a stable value by reference to one or more resources. Usually, this is a combination of assets, for instance a token that references gold, several currencies, or other cryptocurrencies)
- E-money tokens (EMT) are electronic substitutes for coins and banknotes that will likely be used to make payments. The key feature of an EMT is that it is backed by official state currency
- other crypto-assets are a digital representation of values or rights that can be transferred and stored electronically, and thus any other crypto-assets not excluded under the Regulation).
There is also a new category of persons that advise on cryptocurrency. This is any type of advisor who persuades people to invest in digital assets.
The business activity of exchanging crypto-assets for fiat currency (being a legitimate means of payment) is described in Article 3 of the MiCA Regulation. This is defined as concluding purchase or sale contracts concerning crypto-assets with third parties against fiat currency that is legal tender by using proprietary capital. Under the new legislation, operating as a cryptocurrency provider will require a permit, which can be applied for by persons having their registered seat within the European Union. DeFi and NFT tokens are not covered by the MiCA Regulation, but also, the EU has not entirely ruled out the possibility that these digital assets will be separately regulated in the future. Meanwhile, NFT may already be regulated to some degree by the DAC8 Directive.
II. The Digital Operational Resilience Act for the financial sector (DORA) is an EU regulation aimed at achieving a high common level of digital operational resilience within the financial sector. The Regulation provides for obligations such as an additional governance and control framework that ensures an effective and prudent management of information and communication technology (ICT) risks (Articles 4 and 6). As a part of the ICT risk management framework, financial entities are required to put in place business continuity policies through dedicated arrangements, plans, procedures and mechanisms to restore operations and effect recovery (Article 11). Furthermore, ICT-related incident report procedures must be established and implemented (Article 17.3)
- establishing a procedure to identify, track, log, categorize and classify ICT-related incidents according to their priority and severity,
- assigning roles and responsibilities that need to be activated for different ICT-related incidents types and scenarios,
- setting out plans for communication to staff, external persons and media and for notification to clients, for internal escalation procedures as well as for the provision of information to financial entities,
- reporting major ICT-related incidents and explaining the impact, response and additional controls to the relevant senior management and management body, and
- establishing ICT-related incident response procedures to mitigate impacts,
III. Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (DLT) is designated to establish terms and conditions for trading in financial instruments using this technology. The DLT Regulation contains for instance provisions amending the Directive on Markets in Financial Instruments (MiFID II) to encompass financial instruments issued using DLT , especially
- instruments already listed in MiFID II,
- instruments to which rights have been derived and registered within DLT including blockchains.
Financial instruments may only be admitted to trading within DLT market infrastructure, or be recorded within DLT market infrastructure if they meet the following criteria. However, DLT restricts their scope to the following:
– bonds and other forms of securitized debt, including depository receipts (of a certain issue size),
– money-market instruments (of a certain issue size) excluding those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved.
However, the DLT Regulation does exclude the possibility of organizing trading on DL MTF for
- participation titles of alternative investment funds (investment certificates on the Polish market issued by closed-end investment funds)
Decentralized finance (DeFi) is a financial system based on blockchain that is not subject to regulation, allowing interaction between users and the conclusion of a transaction without brokering by banks and other financial institutions. The EU may also regulate these sectors through separate acts in the future, but this also opens up a new and more favorable perspective for cryptocurrency for financial institutions. A permit will be required to search for users in the EU, and will be available to persons having their registered seat within an EU member state. A permit can be obtained by issuers of cryptocurrencies who make public offers for tokens connected with assets in the EU or who seek admission of such assets to trading on a cryptocurrency trading platform.
IV. The DAC8 Directive enables EU member states, including their tax authorities, to track the trade of crypto-assets and hinder tax fraud and tax evasion by requiring crypto-asset service providers to report (national and cross -border) transactions made by their clients residing within the EU. The reporting obligation also applies to non-fungible tokens (NFT). When the MiCA Regulation establishes a set of permits, the DAC8 Directive will additionally limit, to a certain degree, the anonymity on which the cryptocurrency market and blockchain are built.
The best solution would be to ensure that measures to prevent scams do not interfere too much in users’ privacy, and there is hope that any final regulation will not suppress the cryptocurrency market. Should this be the case, foreign exchange markets could be expected to be more cryptocurrency-friendly, allowing cryptocurrency trading regardless of European regulations.