The Council presidency and the European Parliament arrived at a provisional agreement on the Markets in Crypto-Assets (MiCA) proposal in June 2022. This is a critical update which could produce a regulatory framework for crypto-assets across the EU protecting a) investors, b) market integrity and c) financial stability.
First presented by the European Commission in September 2020, MiCA is targeted at nurturing technological development, financial stability, and consumer protection.
While ensuring that the current legal framework does not pose barriers to the use of new digital financial instruments, it concurrently ensures that these fall within the scope of financial regulation and the operational risk management arrangements of EU firms.
The provisional agreement is subject to approval by the Council and the European Parliament prior to going through the formal adoption procedure. Once adopted, MiCA is envisioned to become applicable in two fragments: the first part addressing stablecoins (to be applicable 12 months following its entry into force), and the second part addressing crypto-assets service providers (to be applicable within 18 months).
However, one year later and every year following, ESMA, co-operating with EBA, will submit reports to the Council and the European Parliament regarding developments in the markets in crypto-assets, along with analysis of risks posed in terms of money laundering, terrorist financing and other criminal activities.
Three years after, the Commission will report to the European Parliament and include any measures that may be essential to mitigate any identified risks.
What happens to the MFSA regime once MiCA comes into force? Will Malta lose any ‘first-mover' competitive advantage it may have had?
Sections in MiCA applicable to crypto-asset service providers will come into force 18 months after it is enactment. MiCA is a Regulation, which means it will replace anything that was there before. Malta must therefore then repeal their VFA regime completely.
Essentially, the MFSA has stated that it has two options:
‘We could do nothing until MiCA came into force, but this meant we would lose our competitive advantage. The second option – which is what we are already doing – is to identify and analyse the differences between MiCA and our VFA regime and, during those 18 months, try as far as possible to bridge the gaps. In that way, the transition for our existing licence-holders will be painless and seamless, as they would already have achieved MiCA compliance. It also helps us as regulators and supervisors as this will give us more time to align our internal processes to MiCA expectations before it kicks in.
There are hundreds of operators within the EU who will need a MiCA-equivalent licence and it would be to their advantage to start aligning before the new regime kicks in. If I were an operator in the crypto asset space, I think I would find the MFSA a really good option to consider.'
Malta was one of the first countries to set up a regulatory framework: how will MiCA affect this?
Malta's VFA framework was based upon MiFID principles and MiCA has derived from this Directive. This therefore means that there are very few inconsistencies between VFA and MiCA. Infact, the current framework is much more stringent than MiCA and, in some instances, the MFSA will likely need to revisit the current requirements for better alignment. It is likely that the impact will be minimal, which is positive news for the MFSA, current licence holders and for Malta as a jurisdiction.
As it stands now, MiCA would not be limited to players licensed within a Member State: any crypto-asset service provider would be able to apply for authorisation in order to operate within the EU. Does the MFSA anticipate new opportunities?
Yes, currently operators in Europe do not have a crypto regime and principally all they will be required to do is to register with a Member State for anti-money laundering purposes (5th AMLD). Proceeding with MiCA will mean that every operator must obtain a licence meaning that a large number of operators will need to take action.
Third country operators wishing to offer services to citizens in a Member State must establish a branch which will also need to be licensed. This represents a lot of activity in the crypto space and there will be a limited amount of time in which it has to be carried out.
How does this affect Malta as a jurisdiction? Malta is at the forefront of this sector and have been doing this for a few years now. The local industry has gained experience with licensing and supervising operators, with processes already in place, as well as an established track record.
From the consumer's point of view, does MiCA offer more protection?
Consumer Protection has been echoed to certainly be a top priority with MiCA and it is very likely to include conduct rules, advertising rules and disclosure requirements.
Clients will also be subject to suitability assessments prior to being permitted to invest in crypto-assets and there will be more awareness going forward to ensure that those who invest in crypto understand what they are doing with their money, and are not mislead.
What is the timeline going forward?
There is a provisional agreement regarding the general text with the European Parliament and the Council. Now the technical details remain to be determined. It is anticipated that the final text could be published in the Official Journal (the European Commission's version of the Government Gazette) in the first quarter of 2023.
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