The MiCA represents the first regulatory step shared by all European crypto users.
Today we will be looking into the MiCa bill, a set of stipulations that will affect how the crypto market is shaped in our birth region for years to come.
With the entry into force of the MiCA, unregulated ‘offshore’ companies will no longer be able to proactively target EU consumers, thus leading to MiCA-regulated crypto-assets firms gaining significant market share in the EU over their otherwise unregulated offshore competitors.
The creation of regulatory clarity amid global uncertainties could attract capital, talent, and companies, especially those that want to trigger the so-called ‘tokenization’ process, in this sense this kind of so-called emerging industry could become a huge opportunity for the EU’s economic and technological revival.
The MiCA is destined to play a huge role as a reference ‘standard’, especially concerning those jurisdictions, and those that do not have much experience in financial regulation and supervision will think about their framework for ‘crypto-assets’.
In addition to rules for issuers of crypto-assets and service providers, the MiCA also introduces rules against market manipulation, called marked abuse rules, and insider trading.
The use of insider information to profit from trading activities will be illegal, as will activities that provide false or misleading signals to the supply, demand, or price of a crypto asset.
The EU market is the largest domestic market in the world, with more than 450 million consumers; due to the size of its market, the MiCA will play a crucial role for all those companies around the world that are ready to adapt MiCA’s operating standards, possibly even on an international scale, to maintain streamlined operations and products globally, while also protecting the majority of European based retail investors.
If the MiCA, which is arguably the most comprehensive regulatory framework for crypto-assets on a global scale to date, proves to be ‘executable’ for the entire industry, consumers, and regulators, it will certainly have a global impact.
Furthermore, the EU is working on the ‘Data Act’ which includes an article on the regulation of smart contracts used for data sharing; ‘The AI Act’ is a proposed European law on artificial intelligence aimed towards the improvement of ethical uses in the AI market.
Finally, the EU has proposed a digital ID, or DID that would provide citizens with a personal wallet with which to access public services.
The European Regulation called MiCA
After years of intense negotiations and a political agreement reached about 10 months ago, MiCAR, a European Regulation containing important provisions on how the European Community should regulate crypto-assets, was finally voted on and formally adopted in the plenary of the European Parliament.
At this point, the vote by the European Council and the subsequent publication in the European Official Journal remains to be done, but we should note that the provisions on asset-referenced tokens (ART) and electronic money tokens (EMT) will become applicable 12 months after the entry into force of the MiCA, and all other provisions 18 months after the entry into force of MiCAR.
The European MiCA regulation intends to replace the existing national regulatory frameworks for crypto-assets, going so far as to introduce specific rules for stablecoins, defined as digital currencies pegged to stable reserve assets intending to reduce volatility.
As far as it was proposed, the main objectives of the MiCA are focused on
- Protecting consumers buying cryptocurrencies or using cryptographic asset services
- Creating regulatory harmonization
- Creating legal certainty for companies and institutions that want to enter the space, with clear regulation for different services, enabling fair competition and innovation
- Taking the lead on how cryptocurrencies should be regulated globally.
The MiCA Regulation does not apply to the European Central Bank, national central banks, the European Investment Bank, the European Financial Stability Facility, the European Stability Mechanism, and public international organizations.
Furthermore, it does not provide detailed anti-money laundering rules for so-called ‘cryptocurrency’ firms, as they are currently covered by the ‘Anti-Money Laundering Package’ in addition to the TFR ‘Transfer of Funds’.
Furthermore, the MiCA does not cover crypto-assets that are considered ‘securities’ to avoid duplication of regulatory frameworks.
These tokenized securities services are covered by the MiFID, and for those who want to experiment with trading and settlement of securities on blockchain, the EU has introduced the ‘DLT Pilot Regime’, officially in force since last March 2023.
Essentially from its approval in April 2023, and starting to affect the entire European Union in mid-2024 to 2025 the MiCA will be applied in full swing.
As of now, the securities will be able to be digitally represented by tokens on the blockchain. The provisions under discussion introduce the necessary rules on the issuance of ‘tokenized’ shares and bonds.
Returning to the meat of the legislation MiCA, it is good to point out a few concepts and definitions:
1. A ‘crypto-asset’ is a ‘digital representation of a value or right, which can be transferred and stored electronically, using a distributed ledger or similar technology’. This definition would include most crypto-assets including so-called native tokens such as bitcoin and ether.
2. A “utility token” represents a type of crypto-asset whose purpose is to provide access to a good or service provided by its issuer.
3. An “asset-referenced token” (“ART”) is a token that aims to stabilize its value by referring to a basket of currencies, commodities, crypto-assets, or other individual non-currency assets.
4. An e-money token (“EMT”) aims to stabilize its value by reference to the value of a single currency, e.g. USDC, USDT, BUSD, or EUROC. This concept and most of its requirements are derived from the existing EU regulatory concept of e-money.
This gives everyone some clear guidelines to follow, and a clear definition of what everything is from a legislative standpoint, something that has been difficult to navigate for all companies involved in crypto since their foundation.
DeFi and NFTs
The MiCA legislation applies to enterprises, natural and legal persons, and “certain other enterprises”.
Other ‘undertakings’ means non-legally constituted entities, however, the EU has clarified that these do not include DAOs and all the decentralized protocols.
Recital 22 of the MiCA clarifies a very important concept, namely that “when crypto-asset services (…) are provided in a fully decentralized manner without any intermediary, they should not fall within the scope of this Regulation”.
The same paragraph adds that the MiCA also applies “when part of these activities or services is performed in a decentralized manner”.
About NFTs within the MiCA, their place within the MiCA is not entirely clear, as Article 2 and Paragraph 10 suggest that NFTs should remain outside the scope of the MiCA, while Paragraph 11 indicates that NFTs, whether issued in a series or a collection, should be considered as part of the legislation because they would lose the character of “uniqueness” and therefore “non-fungibility” characteristic of NFTs.
The Impact of the European Harmonisation Plan on the Crypto-assets Sector
Coming just a few months before the release of MiCA, the EU Regulation of the European Parliament and of the Council, officially published in the Official Journal of the EU on 2 June 2022, deals with a pilot regime for market infrastructures based on distributed ledger technology ‘DLT pilot regime’.
Effective from March 2023 for a maximum duration of six years, the DLT pilot regime is in line with the European Commission’s strategy on digital finance for the EU financial sector, which aims to ensure that the EU embraces the digital revolution and leads it with innovative European companies at the forefront, making the benefits of digital finance available to all European consumers and businesses.
The TLD pilot regime is an innovative piece of European financial services legislation that introduces a European regulatory ‘sandbox’ for all players in the market to follow.
It also aims to facilitate the development of a secondary market for crypto-assets qualified as financial instruments, usually referred to as securities.
Furthermore, the DLT pilot regime will allow for the creation of real use cases and help build the necessary experience to inspire a permanent EU regulatory regime.
This new regulation concerns the admission to trading and registration on a DLT market infrastructure of DLT financial instruments, financial instruments issued, registered, transferred, and stored using distributed ledger technology, such as blockchain.
The European Commission expects that during this period, EU companies will fully exploit the potential of this new regulatory framework and, on the other hand, supervisors and regulators will identify obstacles in regulation, while regulators and companies will gain valuable insights into the application of DLT.
By 2026, ESMA will prepare a detailed report on the functioning of the DLT pilot regime, based on which the European Commission will determine its future, such as its extension, enlargement to other asset classes, the end of the regime or the adoption of European legislation to generalize the use of DLT.
The Digital Operational Resilience Act ( DORA) solves a major problem in EU financial regulation.
Before DORA, financial institutions managed the main categories of operational risk primarily with capital allocation but did not manage all components of operational resilience.
After DORA, they must also follow the rules for the capabilities to protect, detect, contain, recover, and repair against ITC ‘Information Technology & Communication’ incidents.
DORA explicitly refers to ICT risk and establishes rules on ICT risk management, incident reporting, operational resilience testing, and third-party ICT risk monitoring.
The regulation recognizes that Information Technology and communication incidents and lack of operational resilience can jeopardize the soundness of the entire financial system, even with ‘adequate’ capital for traditional risk categories.
Now that the DORA proposal has been formally adopted, those aspects requiring national transposition will be transposed by each EU Member State.
At the same time, the relevant European Supervisory Authorities such as the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA), will develop the resulting technical standards that all financial services institutions, from banking to insurance and asset management, will have to comply with.
In this regard, the respective national competent authorities are expected to play the role of compliance monitor and will enforce the regulation as necessary.
If MiCA’s main task is to harmonize the regulatory framework at the European level, it is believed that this should also be done at the tax/tributary level, following what has already been referred to in recently published instruments/documents by various supranational bodies.
Concerning the taxation of crypto-assets at the European level, it is useful to recall that on 10 October 2022, the OECD published the Crypto-Assets Reporting Framework.
This document builds on existing regulatory and tax frameworks, such as the OECD’s own Common Reporting Standard and the Financial Action Tax Force rules, which set the global standard for Know Your Customer (“KYC”) procedures back in 2019 and 2021.
Just as the Common Reporting Standard was originally conceived to promote tax transparency for financial accounts held abroad, similarly the Crypto-Assets Reporting Framework is an attempt to create a framework that will enable tax authorities to monitor the ownership and use of crypto-assets.
If one adds to this a first proposal for the taxation of crypto-assets at the European level through the EU Directive DAC8, which has the task of possibly standardizing tax treatment in Europe, starting from an already stated position and definition, i.e. that already reported by MiCA, the clear objective is to create a single legal and fiscal framework that provides certainty and stability and that creates the ideal conditions for the development of an ‘EU Digital Market’ that is potentially the largest ever, even because of the US and Chinese
market.
The DAC8 is crucial for crypto businesses.
The Eighth Directive on Administrative Cooperation, or DAC8, sets out the requirements for cryptocurrency service providers regarding tax reporting.
Companies offering cryptocurrency services will have to report their customers’ transactions to national authorities, for both domestic and cross-border transactions, starting in 2026. This may include Non-Fungible Tokens and Central Bank Digital Currencies.
The main objective of the directive is to ensure consistency between OECD and EU standards to increase the effectiveness of information exchange while reducing administrative burdens.
The DAC8 adheres to the OECD Crypto-Asset Reporting Framework and OECD reporting standards: it will require Crypto Asset Service Providers to collect information on transfers of any amount to ensure traceability while complying with the new reporting rules and the now more stringent requirements for the reporting of Tax Identification Numbers.
In summary, the draft Directive indicates the significant tax significance of ‘staking and lending’ activities and that these types of transactions should be recorded and reported accordingly.
Crypto-asset service providers and crypto-asset operators are both included in the Directive and this is not in line with other European regulations such as the “MiCAR” and the “Anti-Money Laundering” Directive, which leads to an inconsistent expansion of the scope of regulation and therefore potentially disadvantageous for the European single market.
Furthermore, the Directive lacks ‘clear guidance’ on which crypto-assets should be reported, indicating that R-CASPs should ‘appropriately determine’ such assets on a case-by-case basis, which could lead to excessive reporting burdens and thus increased administrative costs, especially for smaller entities.
In this specific case, a reasonable solution would be to report the same assets under MiCA to avoid duplicate verification requirements.
The Tax Identification Number could be essential for the Member States to match the information received with the data in their national databases, thus facilitating the identification of the taxable persons concerned by the Member States and the correct assessment of the corresponding taxes.
Moreover, the proposal does not contain any concrete rules on the exact implementation of the reporting rules which will inevitably lead to confusion and most probably to over-reporting in order not to incur a penalty.
Last but not least, the proposal provides for a set of minimum penalties in case of non-compliance, which are considered to be rather high, especially for smaller RCASPs. With this in mind, the introduction of a temporary penalty abatement scheme, especially for small and medium-sized companies, would be more than desirable.
About Synapse Network
Synapse Network is developing a cross-chain investment and start-up acceleration ecosystem based on blockchain technology to give everybody an equal chance to contribute to great upcoming projects and to do so early on. We are bridging the gap between the traditional & crypto markets. The idea of the Synapse Network technology goes beyond the standard offer of launchpads available on the market, becoming a true technological brand providing tech solutions.
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