European Commission legislative proposals for crypto assets
The European Commission has recently published a questions and answers (the Q&A) addressing certain issues relating to:
- the EU's Digital Finance Strategy
- a proposed regulatory framework on crypto-assets
- legislative proposals on digital operational resilience
- the EU's Retail Payments Strategy
These measures form part of the EU's "Digital Finance Package" (the DFP), a range of proposed reforms which aim to boost Europe's competitiveness and innovation in the financial sector, while also ensuring consumer protection and financial stability.
Among the most notable of the measures proposed by the DFP is a comprehensive regulatory framework for crypto-assets. According to the Q&A, the rationale for the proposed regulatory framework is to establish the right market conditions to allow crypto-assets to develop and to ensure that appropriate rules are in place to protect consumers and support financial stability.
- The proposed regulatory framework on crypto-assets will be divided in to two parts:
- The Regulation on Markets in Crypto-Assets (MICA) which aims to protect consumers and the integrity of the previously unregulated markets in crypto-assets.
A pilot regime for market infrastructures which use distributed ledger technology (DLT) to trade and settle transactions in financial instruments in crypto-asset form.
The Regulation on Markets in Crypto-Assets
MICA will apply to all crypto-assets not already captured by existing financial services legislation. These include crypto-assets, utility tokens, asset referenced tokens and e-money tokens. MICA will also cover a wide range of crypto-asset providers such as custodian wallet providers, crypto-asset exchanges, crypto-asset trading platforms and issuers of crypto-assets.
Key elements of MICA include:
- Crypto-asset service providers, trading platforms, exchanges and custodial wallet providers will be required to have a physical presence in the EU and will be required to seek authorisation from a national competent authority before starting their activities. Crypto-asset service providers authorised in one EU Member State will be able to provide services in other Member States on a passporting basis.
- Crypto-asset service providers will be subject to capital requirements, governance standards and an obligation to segregate their clients' assets from their own assets.
- Bespoke measures to prevent market abuse, including an obligation on crypto-asset service providers to put in place surveillance and enforcement mechanisms.
- Issuers of crypto-assets will be required to publish a white paper specifying certain details on each specific crypto-asset and there will be a prohibition on misleading market communications by crypto-asset issuers.
- Members of an issuers' management body will be required to meet probity standards.
Regulatory responsibility
Entities within scope for MICA will be supervised by the authorities of the Member State in which they are based. For entities with cross-border activities, Member States will be required to designate a single point of contact to permit the division of such entities between authorities in several Member States.
Issuers of significant asset-referenced tokens or 'stablecoins' will be subject to the supervision of the European Banking Authority (the EBA). In addition, issuers of significant e-money tokens will be supervised by both national competent authorities and the EBA.
Pilot Regime for Distributed Ledger Technology
The proposed pilot regime for DLT will cover market participants which have been previously approved either as a multilateral trading facility or central securities depository, insofar as they wish to operate a distributed ledger market infrastructure. The pilot regime aims to allow regulators to gain experience on the use of DLT in market infrastructures and remove regulatory hurdles to the issuance, trading and post-trading of financial instruments in crypto-asset form.
Key features of the pilot regime for DLT market infrastructures include:
- certain conditions for acquiring permission to operate a DLT market infrastructure
- limitations on the transferable securities that can be admitted to trading
The European Securities and Markets Authority (ESMA) will carry out a review on the application of the pilot regime three years after its entry into force.
Next Steps
The framework, along with the other measures proposed by the DFP, will be subject to the agreement of the European Parliament and Council. Our Financial Regulation team will be monitoring regulatory developments in this area, for further information contact Kevin Allen, Partner or please contact any member of A&L Goodbody's Financial Regulation team.
Date published: 7 October 2020