Europe regulates crypto-assets

On 20 April 2023 the European Parliament approved the MiCA regulation, the European Union’s first comprehensive framework for crypto-assets, with rules for issuers and service providers. Until then, the sector had grown largely outside any specific regulation.

The approval came after years of rapid growth and sharp volatility, an environment in which many users missed clear rules. Setting clear rules does not remove the risks of these assets, but it changes the environment in which companies operate and in which those who use them decide, whether individuals or businesses. The regulation does not seek to judge the value of these assets or their usefulness, but to establish who may offer them to the public, with what requirements and under what supervision, a usual step when a market reaches a certain size.

What MiCA is

That it is a regulation is what makes it relevant. A European regulation applies directly in all member states, without each country having to transpose it into its own law, which gives a common basis to anyone operating in several countries and prevents the rules from varying from one territory to another.

That uniformity has a practical advantage. A company authorised under the common rules can explain to its customers and partners under which rules it works, and whoever hires its services knows what requirements it should meet. Before, each country applied its own criteria, and in many cases there was simply a legal vacuum. Although the regulation applies directly, its rollout is usually done in phases and with implementing rules, so it is worth following the specific application timetable for each type of activity.

Who it is aimed at

It sets rules for issuers of crypto-assets and for service providers, such as platforms that hold them, exchange them or help customers buy them. These are two different figures: whoever creates and puts an asset into circulation, and whoever provides services on assets that already exist.

The rules for this kind of entity tend to revolve around basic questions: who is responsible, what information is given to the customer, how the assets held in custody are protected and what obligations the company has towards supervisors. They are the same questions asked in any other regulated financial sector. A company offering these services will have to show, for example, that it has a suitable organisation and resources, and that it informs its customers in an understandable way about the risks they take.

What it means for those who operate

At last there were common rules in Europe. For those operating in this field, regulatory compliance became a requirement for staying in the market, not an option. Companies in the sector must review their model, structure and internal procedures to check what will be required of them and on what timetable.

Customers, for their part, can check whether their provider complies with the rules that apply to it. Before entrusting funds to a platform it is worth knowing where it is established, what authorisation it has, how assets are held and what happens if the company runs into trouble. And, if you deal in these assets, it is worth knowing their tax treatment and reporting obligations, with the help of an adviser. For companies that accept crypto-assets as a means of payment or hold them in treasury, the regulation is also relevant, because it defines the reliability of the intermediaries they work with and the guarantees they can demand.

Clear regulation does not remove the risk of these assets, but it does reduce uncertainty about the rules of the game.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.