NEWS AND INSIGHT

Obligations of Crypto Asset Companies in MiCA


04 May 2023

Obligations of Crypto Asset Companies in MiCA

  1. Introduction

The use of crypto-assets has gained significant popularity in recent years, and many businesses have started to operate in this market. However, the lack of legal clarity and investor protection has been a growing concern for many investors, businesses, and regulators. The Markets in Crypto Assets (“MiCA”/ “the Regulation”) regulation is a new set of regulations being introduced by the European Union to govern the use of cryptocurrencies and other digital assets within its member states. It aims to establish a comprehensive legal framework for the regulation of crypto-assets and related activities.

  1. MiCA’s Objective

The regulation aims to provide a safe and secure framework for the use of digital assets, while also protecting consumers and promoting innovation. The growth of crypto-assets market is seen especially with new types of assets, such as stablecoins, becoming increasingly popular. However, as the market has grown, so too have concerns about the risks, such as the potential for market abuse, insider trading, and money laundering.

Stablecoins which are crypto-assets that are designed to maintain a stable value relative to a fiat currency or a commodity, have become increasingly popular in recent years, and their regulation has been a source of debate among regulators. MiCA proposes to regulate stablecoins based on their characteristics and the level of risk they pose to investors and the financial system.

This article will briefly examine the potential legal obligations that companies operating in the crypto-assets market may have under MiCA.

  1. Requirements For CASPs
  1. Authorization Requirements

One of the most significant legal obligations under MiCA is the requirement for companies to obtain authorization from the relevant national regulator before offering crypto-asset services in the EU. The authorization process will be subject to strict requirements such as

  1. capital requirements,
  2. governance arrangements,
  3. risk management, and
  4. custody of assets.

This is to ensure that companies have appropriate risk management frameworks in place to protect investors and maintain market integrity.

  1. Investor Protection

Companies must provide investors with clear and accurate information about the risks associated with crypto-assets. This includes the obligation to provide investors with a whitepaper containing all relevant information about the crypto-asset, including its issuer, its purpose, and its characteristics.

Companies are also required to provide ongoing disclosure of any material changes to the information contained in the whitepaper, as well as ongoing financial reporting.

  1. Market Abuse, Insider Trading, and Market Manipulation

Companies are required to have appropriate systems and controls in place to prevent market abuse, insider trading, and market manipulation and report any suspicious activity to the relevant authorities. This is to protect the integrity of the market and prevent harm to investors.

Further, companies must have appropriate governance arrangements in place to ensure that they operate in a transparent and accountable manner. They must also have adequate organizational requirements in place to ensure that they have the necessary expertise, resources, and procedures to comply with their MiCA obligations. In this context, it is important for companies to conduct compliance studies with experienced lawyers in order to comply with the obligations imposed by the Regulation.

  1. Custody and Transfer of Crypto-Assets

Companies that provide custody services for crypto-assets must comply with strict requirements regarding the safekeeping of assets, including the use of secure storage facilities, regular audits, and robust cybersecurity measures. This is to protect investors from the risk of loss or theft of their assets.

  1. Compliance with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CTF) Regulations Is an Important Factor for CASPs:

Compliance with anti-money laundering (AML) and combating the financing of terrorism (CTF) regulations is important for crypto service providers. Under MiCA, crypto service providers will be required to comply with AML and CTF regulations. Failure to comply with these regulations could result in significant fines and reputational damage, as well as the loss of the ability to operate in the European market.

In addition, crypto-assets are particularly vulnerable to AML and CTF risks due to their anonymity, borderless nature, and the ease with which they can be transferred across borders. As such, it is important for crypto asset service providers to implement robust AML and CTF compliance programs to prevent their services from being used for illicit activities such as money laundering, terrorist financing, and other financial crimes.

MiCA also includes provisions relating to third-country providers, which are companies that are based outside the EU but provide crypto-asset services to EU residents. These companies will need to comply with certain requirements under MiCA, such as the requirement to appoint an EU-based representative and comply with EU AML and CTF regulations.

 

  1. Conclusion

MiCA, represents a significant development in the regulation of the crypto-assets market. By complying with AML and CTF regulations, crypto asset service providers can help to reduce the risks associated with crypto-assets, promote the integrity of the financial system, and ensure that they are able to continue to operate in the European market under the new regulatory framework proposed by MiCA. Companies operating in this market will need to carefully consider their obligations under MiCA and take steps to ensure compliance. Failure to do so could result in fines or other sanctions, as well as reputational damage. However, MiCA also provides an opportunity for companies to operate in a more transparent and regulated market, which could help to attract more investors and promote the growth of the crypto-assets market.

 

 

Sources

1.https://eur-lex.europa.eu/resource.html?uri=cellar:f69f89bb-fe54-11ea-b44f-01aa75ed71a1.0001.02/DOC_1&format=PDF

2.Countdown to MiCA: The EU’s cryptoassets regulation, https://www.jdsupra.com/legalnews/countdown-to-mica-the-eu-s-cryptoassets-7919247/

3.Digital finance: agreement reached on European crypto-assets regulation (MiCA), https://www.consilium.europa.eu/en/press/press-releases/2022/06/30/digital-finance-agreement-reached-on-european-crypto-assets-regulation-mica/