Date
01 Oct 2023Category
Financial ServicesIntroduction
In a single step, the EU has established a comprehensive framework for crypto assets and trading that largely mirrors the existing MiFID framework for investment services by application of the principle "same activities, same risks, same rules".
Background
The application of distributed ledger technology enables ICT systems of an issuer to process large numbers instantaneously to virtually an unlimited degree.
The use of blockchain in the crypto sector enables an issuer in a relevant reporting period (e.g. one calendar year) to aggregate the value of transactions in large numbers, with values up to an amount exceeding €1 trillion, numbers of daily transaction in millions and numbers of customers in tens of millions.
The explosive growth of crypto sector in recent years in a largely unregulated framework has created significant risks for customers in terms of consumer protection, market integrity, risks to money laundering activities, and risks to the payments system, in particular with regard to crypto tokens that are referenced to one or more other assets or currencies.
The absence of an EU Framework for markets in crypto tends to undermine confidence in these assets leading to missed opportunities in Fintech resulting in lack of legal certainty on how crypto assets are to be treated in different EU member states; also resulting in regulatory fragmentation making it more difficult to scale up activities on an EU Cross Border basis.
MiCAR also notes that crypto assets that aim to stabilise their price by reference to a basket of assets could in future be widely adopted by retail customers, leading to potential threat to financial stability.
The blockchain mechanisms used in crypto assets can also have major adverse impacts on climate, and consumers need to be aware of the principal adverse threats by virtue of the technology combinations being employed which also need to be addressed through the MiCAR framework.
MiCAR adopts the approach that the regulation of crypto should be guided by the principle of “same activities, same risks, same rules” such that e.g. crypto assets that qualify as financial instruments under MiFID should continue to be regulated by MiFID and not MiCAR etc.
Crypto Assets
Crypto assets are digital representations of value.
The Regulation classifies crypto assets into three distinct types and subject to different forms of regulation depending on the risks that they represent, as follows:
The Regulation adopts different requirements for the issuance and ongoing supervision of ARTs, EMTs, and OTs by reference to the different levels of risk attributed to them, guided by the principle of "same activities, same risks, same rules".
The Regulation also regulates issuers, intermediaries and operators of trading platforms, third party service providers, such as administrators, custodians, crypto advisers and portfolio managers, referred to as crypto asset service providers (each a “CASP”), as defined in Article 57.
An offeror of an OT is not required to be authorised in its home member state, however, offerors and applicants for admission of OTs to trading on a platform must satisfy certain minimum criteria, including:
Offers of OTs to the public
Offers and admission to trading of OTs on a crypto platform may only be made on the basis of a White Paper with a summary of key information and related marketing communication.
The White Paper is not required to be approved by a competent authority, but only notified to it and the offeror is responsible for its contents, including certain minimum risk warnings and is also potentially liable to holders for any mis-information.
An ART is defined as a type of crypto asset that is not an e money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.
An offeror of ARTs to the public is required to be authorised by the competent authority in its home member state and subject to ongoing supervision as to adequacy of systems and controls in relation to Risk, Compliance and Governance, including effective control and safeguarding arrangements for ICT systems etc.
Capital Requirements
Issuers of ARTs other than significant ARTs are subject to minimum own funds requirements to the higher of:
Significant ARTs Programs
ARTs are considered to be significant where:
Where the EBA concludes that an ARTs program is significant, supervision of that ARTs program will be transferred from the home state regulator to the EBA.
A significant ARTs program is subject to the following additional requirements:
Redemption Rights
ARTs are subject to a permanent right of redemption:
The ARTs White Paper
A public offer of ARTs or admission to trading on a crypto platform may only be made on the basis of a White Paper and related marketing communication that has been approved by the home state regulator.
The White Paper must include the following:
Reserve Assets
An issuer of ARTs must retain a reserve of assets composed and managed in such a way that:
Reserve assets may only be invested in highly liquid financial instruments with minimal market risk, credit risk, and concentration risk and capable of being liquidated rapidly with minimal adverse price effect, such as units in UCITS funds.
Reserve assets are required to be held by a third-party custodian, including an authorised CASP custodian or an eligible credit institution or investment firm.
Recovery Plan
An issuer must maintain a Recovery Plan providing for measures to be taken to restore compliance in respect of requirements for reserve assets, where these have been breached.
The Recovery Plan must include the following:
Redemption Plan
An issuer of an ARTs program is required to maintain an operational plan to support orderly redemption, which is to be implemented in the event of a resolution decision by the competent authority in respect of the issuer.
The redemption plan must include contractual arrangements, procedures, and systems including the appointment of an interim administrator to ensure equitable treatment of all holders, and that holders are paid in a timely manner with the proceeds from the sale of the remaining reserve assets.
An EMT is defined as a crypto asset that purports to maintain a stable value by referencing the value of one official currency.
An issuer of EMTs is required to be authorised by the competent authority in its home state.
The issue of EMTs is restricted to issuers that are also authorised as a credit institution or an e money institution and has notified the EMT White Paper to the competent authority.
EMTs are deemed to constitute e money.
Issues of EMTs are subject to certain basic conditions:
The EMT White Paper
The White Paper must include the following:
Investment of EMT Reserve Assets
Investment of reserve assets must be made as follows:
Capital Requirements for EMTs
Being restricted to issuers that are authorised as credit institutions or e money institutions, such entities are subject to the outstanding capital requirements for such entities.
Significant EMT Programs
In a similar way to significant ART programs, the EBA will classify an EMT program as significant where:
Where an EMT program is classified as significant supervision will be transferred from the home state regulator to the EBA, subject to a potential derogation for non EEA jurisdictions.
Recovery Plan
An issuer must maintain a Recovery Plan providing for measures to be taken to restore compliance in respect of requirements for reserve assets, where these have been breached.
The Recovery Plan must include the following:
Redemption Plan
An issuer of an EMT program will maintain an operational plan to support orderly redemption, which is to be implemented in the event of a resolution decision by the competent authority in respect of the issuer.
The redemption plan must include contractual arrangements, procedures, and systems including the appointment of an interim administrator to ensure equitable treatment of all holders and that holders are paid in a timely manner with the proceeds from the sale of the remaining reserve assets.
CASPs include service providers such as:
Each of these services are considered to be equivalent to the applicable services in respect the EU Market in Financial Instruments under MiFID 2 (2014/65/EU) and, accordingly, CASPs are regulated under MiCAR in a similar manner guided by the principle of “same activities, same risks, same rules”.
Market Abuse
MiCAR prohibits market abuse regarding any form of crypto asset transaction or service, including unlawful disclosure of inside information, insider trading and actions likely to lead to disruption or manipulation of crypto assets.
Authorisation and Supervision of CASPs
In order to provide services in respect of crypto assets the service provider must be authorised by the national competent authority in the home member state.
A firm that is already authorised as a credit institution, central securities depositary, investment firm, market operator, e money institution, UCITS Manco, or AIFM may operate as a CASP without a requirement for separate authorisation under MiCAR.
Under the Freedom of Service provisions of EU Law and MiCAR, a CASP may provide services throughout the EU on a cross-border services basis or by way of establishment.
The application for authorisation must include the following:
On-going supervisory requirements include:
Significant CASPs
Similar to Significant ARTs and EMT programs, a CASP will be deemed to be significant if it has more than 15 million customers on average in any one calendar year period and will become subject to regulation by the EBA.
Recast Transfer of Funds Regulations
When MiCAR was published in June 2023, it was accompanied by Regulation (EU) 2023/1113, (the Recast Transfer of Funds Regulation) which introduces new rules on information accompanying transfers of funds and certain crypto assets.
This regulation requires CASPs to collect and make accessible certain information about the sender and beneficiary of the transfer of the crypto assets, regardless of the size of the transaction in order to ensure traceability and more easily identify suspicious transaction and so block them.
Level 2 and Level 3 measures
The EBA is responsible for better implementation of MiCAR by the creation of Regulatory Technical Standards and Implementing Technical Standards.
In addition, the EBA and the national competent authorities will be responsible Level 3 measures in terms of Opinions and Guidelines.
Implementation
MiCAR, being in the form of an EU Regulation is directly applicable in Ireland.
Subject to a government decision on certain options and discretions, MiCAR is likely to come into force December 2023, with requirements for ARTs and EMTs being applicable from June 2024.
Transitional Provisions
CASPs that are currently operating in Ireland may avail of a transitional arrangement that they may continue providing services on grandfathered basis until June 2026 by which time they must become authorised under MiCAR.
We have an experienced team of FS professionals in terms of Audit, Advisory Services and Regulation led by Darren Shipp, Yvonne O’Connor and a team of auditors and advisors, supported by Joe Gavin who is an expert in EU and Irish Financial Regulation.
We consider that we are well equipped to advise and audit CASPs that qualify as Class 1 and Class 2 CASPs as these groups comprise mostly small and medium enterprises, which is a particular focus of Azets Ireland.
We have particular experience in auditing and advising Class 1 and Class 2 MiFID firms and we consider that we are well positioned to advise the equivalent CASPs on the basis of “same activities, same risks, same rules”.
