MiCA Part 1 Officially in Effect A New Beginning for EU Cryptocurrency Assets

Author: Romain Swertvaeger, Clément Robert; Translation: TaxDAO
This summer, the first part of the MiCA regulation in the European Union will officially come into effect. Financial institutions (FIs) currently engaged in or exploring cryptocurrency assets will need to make business adjustments. What specific actions need to be taken and how will this impact EU crypto customers?
In June 2024, the EU will begin implementing certain provisions of MiCA, initially focusing on Asset Reference Tokens (ART) and Electronic Money Tokens (EMT). In this process, the EU is providing the financial industry with a framework to offer new digital products and services to customers. This development is significant because it integrates crypto assets into mainstream financial services and establishes a legal framework for the operation, provision, and distribution of these products. Understanding how these new assets operate is crucial for credit institutions to anticipate upcoming products in the market, or even start building their own products around these tokens.
1. Evolution of Financial Value Storage and Trading Methods
Digital tokens combine the stability of traditional financial instruments with the flexibility of digital assets, and ART and EMT represent the evolution of value storage and trading methods. ART, often referred to as “stablecoins,” maintain their value through a basket of underlying liquid assets, making them ideal for savings or digital payments. This applies not only to currencies, crypto assets, and other financial assets, but also to commodities like gold, provided the value of ART remains stable.
On the other hand, EMT, often referred to as “electronic money tokens,” are equivalent to fiat currencies (government-issued traditional currencies without commodity backing, such as the US dollar or euro) in online form, promising to simplify electronic payments while providing the security and reliability expected of traditional currencies. These tokens share similarities with traditional electronic money, such as the content covered by the Electronic Money Directive 2 (EMD2) and the upcoming PSD3/PSR Payment Package. In fact, MiCA even stipulates that EMT must comply with the same issuance and redemption requirements as traditional electronic money. The difference with EMT lies in its implementation and issuance methods, enabling different use cases than traditional electronic money. This also applies to ART, as tokenization and the use of innovative technology have paved the way for new approaches to enhancing existing financial services with both types of tokens.
2. Achieving Cross-Border Real-Time Payments
Faster cross-border transactions are a hot topic in the financial industry. At the EU level, the recently introduced Instant Payment Regulation (IPR) will require banks in the European Economic Area to provide cross-border instant payments in euros or member state currencies. Globally, the European Banking Authority’s RT1 instant clearing system and private initiatives between the US/UK clearinghouses are striving for international interoperability of real-time payments. However, digital tokens do not rely on established clearinghouses and existing rules, allowing for cross-border real-time payments by default. With fewer intermediaries in the value chain, this also reduces transaction costs for banks and customers per transaction.
3. Adding Value through Convenience and Reduced Counterparty Risk
Because tokens leverage blockchain technology, customers can benefit from value-added features like smart contracts. These features may include setting up “payment on delivery” arrangements (where smart contracts hold a portion of the customer’s funds and automatically release payment upon receipt of goods). These new use cases not only make it convenient for customers to pay upon receiving goods but also limit counterparty risk in business relationships, reducing friction and delays in transaction processing.
4. Combating Payment Fraud, Enhancing Financial Security
The use of blockchain technology also brings various other benefits to the financial industry due to the inherent structure and methods of distributed ledger technology (DLT). In these highly encrypted systems, transaction records are securely stored on an immutable ledger accessible only to a few authorized network members. Transactions in such systems have high traceability, are collectively verified by many validators to ensure data integrity, and can guarantee that transactions within the blockchain are legitimate and authorized. These measures reduce the risks of unauthorized access and fraudulent activities, which are critical issues in the payment sector.
5. Market Examples for Early Entrants
For instance, some fintech companies offer EMT in currencies like the US dollar and euro. These EMT are pegged to the prices of their respective fiat currencies but bring digital flexibility and advantages to the use of these fiat currencies. This includes the ability to combine euro EMT with blockchain applications and features like smart contracts, further supporting many complex financial transactions and use cases. This includes automating, fairly executing financial agreements based on code and achieving near real-time international payment settlements.
Additionally, financial institutions can engage in trading without issuing tokens. Some licensed entities have already provided access for customers to large cryptocurrency trading platforms, enabling investors to easily access a more diverse range of products.
6. Preparation for June 2024
Financial institutions seeking to enrich their existing services should explore the possibilities of offering such services and enhance their ability to provide more complex services to demanding clients. MiCA regulations regarding ART and EMT will come into effect from June 2024, and the full regulatory rules will apply from December 2024. Therefore, financial institutions within scope should prepare to apply for licenses to issue or trade tokens, draft detailed crypto asset whitepapers for their products, and engage with National Competent Authorities (NCA) to discuss their intentions to start or continue operations. It’s important to remember that the remaining requirements will apply eight months later.
In particular, crypto asset whitepapers form an essential part of the approval process for financial institutions offering ART or EMT. While whitepaper requirements may vary for different tokens, for ART and EMT, financial institutions must disclose the operational mechanisms behind them, such as issuance and redemption processes, rights and obligations of token holders, measures to protect assets, and report their governance structure and controls for expected crypto asset service products. In addition to these factors, they must also disclose detailed information about the types of tokens, such as the underlying assets behind ART and how ART value references these assets.
7. Outlook for December 2024 and Beyond
While not as exciting as Christmas, financial institutions should also anticipate the full terms of the MiCA regulations coming into effect in December this year. In particular, this will introduce licensing requirements for “Crypto Asset Service Providers” (CASP) under legal scope. While authorized entities like credit institutions, investment firms, and AIFMs do not need separate licenses when providing crypto asset services, this licensing requirement will allow more types of companies beyond pre-authorized financial institutions to offer crypto asset services. This may lead to increased competition in providing such tokens and ancillary services, and financial institutions can enter these areas early starting from July.
Furthermore, this will introduce multiple regulatory and compliance requirements afterward, ensuring that entities wishing to provide crypto asset services effectively monitor and prevent insider trading, market manipulation, and market abuse, provide adequate protection measures for customers, and clearly follow disclosure requirements applicable to them.