Deep dive into the Regulation of markets in crypto-assets (MiCAR)
MiCAR is generally causing quite a stir in the crypto ecosystem. It has succeeded in giving a notoriously regulation-averse market a set of rules that is so far unique in the world. MiCAR could, therefore, play a role model even for the responsible parties in the United States or the British Financial Conduct Authority. Nevertheless, MiCAR has to be continued. There are still remaining regulatory challenges after MiCAR. At this state, MiCAR does not apply NFTs (Non-fungible Token)1 as well as DeFi (decentralized finance), especially dApps (decentralized applications), which provided crypto-asset services in a fully decentralized manner.
But what does MiCAR contain at this point in time? Let’s get started!
General facts and goals of MiCAR
The overall objective of the MiCAR is to create a Union framework to strengthen user confidence and the development of a market in crypto-assets. The absence of such regulation leaves companies without legal certainty and can result in substantial risks to market
integrity, including market abuse and financial crime. Markets in crypto-assets are still modest size. However, crypto-assets could be widely adopted by retail holders in the future. MiCAR is, therefore, necessary to support innovation and fair competition while ensuring a high level of protection for retail holders and the integrity of markets in crypto-assets. In addition, the consensus mechanisms used for the validation of transactions in crypto-assets might have adverse impacts on the environment. These impacts have to be adequately identified and disclosed by issuers of crypto-assets and crypto-assets service providers with the aim of developing more environmentally friendly solutions.
Enter into force
MiCAR is an EU-Regulation, which is binding in its entirety, so there is no ratification by the Member States necessary. MiCAR entered into force on 30th June of 2023. An obligation to apply exists from 30th December of 2024. With the exception of the parts to asset-referenced and e-money tokens, which shall apply from 30th June 2024 (Article 149 MiCAR).
Content of MiCAR — Overview
Title I mainly contains definitions. In title II-V, MiCAR defines and regulates crypto-assets and centralized issuers of crypto-assets as well as centralized crypto-asset service providers (CASPs). Regulation includes, in particular, the obligations that must be met by crypto-asset issuers and service providers. Title VI deals with the prevention and prohibition of market abuse. I will provide an overview of the main points in these titles.
Title I: Crypto-assets
Definition: Crypto-asset means a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology (Article 3 section I no. 5 MiCAR). MiCAR divides crypto-assets into different types.
Title I: Types of crypto-assets (according to MiCAR):
Title I: Issuers, applicant issuers and offeror (in this article summarized as „Issuer“)
Definition: „Issuer“ means a legal person or other undertaking who issues crypto-assets (Article 3 section I no. 10 MiCAR).
Definition: „applicant issuer“ means an issuer of asset-referenced tokens or e-money tokens who applies for authorisation to offer to the public or seeks the admission to trading of those crypto-assets (Article 3 section I no. 11 MiCAR).
Definition: „offeror“ means a natural or legal person, or other undertaking, or the issuer, who offers crypto-assets to the public (Article 3 section I no. 13 MiCAR).
Title I: Crypto-asset service provider (CASP)
Definition: crypto-asset service provider means a legal person or other undertaking whose occupation or business is the provision of one or more crypto-asset services to clients on a professional basis, and that is allowed to provide crypto-asset services (Article 3 section I no. 15 MiCAR).
Title I: Crypto-asset services
Title II — IV: Obligations for issuer of crypto-assetsTitle II — IV: Obligations for issuer of crypto-assets
Title V: Obligations for crypto-asset service provider
Title II — V: Obligations for a crypto-asset white paper concerns issuers and service provider
Title VI: Market abuse involving crypto-assets
What else is to be expected? — Delegated Acts
In order to promote the consistent application of MiCAR across the Union technical standards and regulatory technical standards are to be developed by EBA (European Banking Authority) and ESMA (European Securities and Markets Authority) (according to point 109 of the whereas’s of MiCAR). These standards shall be adopted by the Commission as a delegated acts until 30th June of 2024 (Article 139 MiCAR).
Outlook to DeFi
MiCAR applies crypto-asset issuers and crypto-asset service provider, who provide or controll services or activities regardsless whether they are offered directly or indirectly by them. This includes cases, when part of such activities or services is performed in a decentralised manner. Where crypto-asset services are provided in a fully decentralised manner without any intermediary, they aren‘t applied by MiCAR. DeFi is characterized by peer-to-peer transaction without an intermediary where smart contracts execute all transactions automatically. The consensus mechanism allocate governance rights to all governance token holders. But, what is, if one party is holder of 51% or even more of the governance token. In this case I would guess the crypto-asset services are not provided in a fully decentralised manner. Thus a service is partially of full decentralised isn’t easy to determine. In the end the interpretation oft he supervisory authorities will be decisive, whether a the allocation of governance token is sufficient to determine, if the crypto-asset service is fully or partly decentralised and have to fulfill obligations according to MiCAR or not.
The International Token Standardization Association (ITSA) e.V.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
- The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
- The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
- ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.
Remarks
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