Starting 30 December 2024, the Regulation EU 2023/1114 of the European Parliament and of the Council on markets in crypto-assets (MiCAR) will take full effect. It will open a new chapter regulating virtual currencies, also known as tokens, and related services and is expected to bring more clarity to the field. This step is crucial for Lithuania, which is considered one of Europe’s hubs for Fintech services, with over 500 crypto-asset service providers currently operating in the country. So how will they be affected by the new regulation, and when should they start preparing for MiCAR compliance?
What will MiCAR regulate?
First, it is worth addressing the specific types of crypto-assets that will fall under the scope of this important legislation. Although some estimates suggest that there are around 23,000 different cryptocurrencies in the world, not all of them fall within the scope of the Regulation’s definitions and authorisations.
MiCAR regulates three types of tokens. Firstly, e-money tokens linked to one of the official currencies and intended to maintain a stable value, such as Tether or USD Coin. It also regulates asset-referenced tokens (ARTs), which can be linked to official currencies, physical assets (e.g., gold) and other cryptocurrencies, or some combination of these asset classes, and aims to maintain a stable value, such as PAX Gold or Libra tokens. Finally, MiCAR includes utility tokens, which are only intended to provide access to certain services or products in the blockchain ecosystem. Institutions considering offering these tokens will not only have to comply with strict operational requirements and, have the necessary systems and proper communication in place, but they will also have to prepare a crypto-asset white paper. Additionally, the application for authorisation for the legal persons or other undertakings that intend to offer to the public or seek the administration to trade asset-referenced tokens will have to be prepared as well.
Regarding the specific services for which MiCAR is relevant for providers, in addition to the most well-known crypto-asset custody, administration, exchange, distribution and transfer services, we should also include portfolio management, providing advice on crypto-assets, reception and transmission of orders for crypto-assets on behalf of clients, operation of the trading platform. Where the legal entity would decide to provide these services on a professional basis, it would be required to obtain the authorisation from the competent authority of their home Member State. The Regulation refers to such businesses as crypto-asset service providers.
Who will be excluded from MiCAR?
All other tokens, including the much-hyped non-fungible tokens (NFT), will be exempted from the MiCAR regime. It is important to note that tokens with financial instrument characteristics may be subject to existing legislation, regulations or directives. Unfortunately, there is no detailed clarification yet on how crypto-asset giants such as Bitcoin, Ethereum, XRP, Solana, or the well-known “meme coin” Dogecoin, will be treated in the European Union and whether they will fall under the scope of MiCAR. In the case of Bitcoin, for example, there is no token issuer, so while in the eyes of consumers, a crypto-asset exchange would potentially be considered a seller, it is unclear whether the crypto white paper requirements would apply.
MiCAR also do not apply to services that are provided in a fully decentralised manner without any intermediary. In short, decentralized finance (DeFI) is also not a subject matter of MiCAR. However, it should also be assessed what the term “fully decentralised manner” means. Each and every project should be assessed on a case-by-case basis at all times. The European Securities and Markets Authority (ESMA) already published articles related to DeFI, particularly, on developments and risks in the EU market as well as methodology for the categorisation of smart contracts. Given the significant development of DeFI over the last few years, it is expected to get more guidance on the subject soon.
It is important to stress that MiCAR is neutral for blockchain technology itself and only defines the scope of certain digital assets and related services based on this technology. However, it is difficult to separate these services from the underlying technology, which means that what is known in the digital technology world as distributed ledger technology (DLT) inevitably figures in the Regulation.
New requirements for crypto-asset service providers
Amongst other conduct of business rules, particular emphasis is placed on consumer protection, market integrity and market abuse prevention. The Regulation introduces provisions requiring crypto-asset service providers to act honestly, fairly and professionally for the benefit of existing and potential customers. In addition, crypto-asset service providers are required to warn clients of the risks associated with cryptocurrency transactions. All information about services and marketing materials must be truthful, transparent and not misleading to consumers. In addition to the risks involved, pricing policies and the environmental impact of the services must also be openly communicated to existing and potential customers.
It will be necessary for crypto-asset businesses to have clear complaint management procedures and processes in place to protect clients’ crypto-assets as well as the prevention, management and disclosure of conflicts of interest to comply with the Regulation. Some crypto-asset service providers will also need to plan adequate winding-up procedures to avoid economic harm to clients and adverse effects on the financial market in the event of cessation of operations.
MiCAR also provides rules to prohibit market manipulation and abuse, including where assets are traded using information that is not publicly available on the market or where such information is illegally disclosed. Other actions that could lead to client harm and market disruption are also foreseen. In this respect, the MiCAR provisions are like the rules of the Market Abuse Regulation, which is relevant for traditional financial services, albeit to a lesser extent.
A new phase in the evolution of crypto-assets
When MiCAR enters full force, crypto-assets will become a new type of regulated financial instrument, and the companies that provide related services will become financial service providers. Not only will they have to define and formalise procedures and processes that comply with the Regulation, but they will also have to assess consumer protection issues and impose prudential requirements on company managers.
The Regulation will provide more clarity and, most importantly, oversight in an increasingly valuable market for crypto-asset services. It will be interesting to see the impact of crypto-asset regulation at the EU level on existing financial market players, such as credit institutions, which will not need a separate licence to operate under MiCAR. With other key EU legislation governing digital assets (6th AML Directive, DLT Pilot Regime, Dora, DAC8), MiCAR will open a new phase in the evolution of crypto-asset markets in the EU.
A look at Lithuania
Earlier this autumn, the Ministry of Finance of the Republic of Lithuania announced that the Bank of Lithuania will be the licensing and prudential supervision authority, whereas the Financial Crime Investigation Service will be responsible for the prevention of money laundering and terrorist financing together with the Bank of Lithuania. The Ministry of Finance also recommended that the date of application for MiCAR in Lithuania be earlier than 30 December 2024. The Bank of Lithuania has already organised a consultation session on MiCAR requirements and plans to develop guidelines to help prepare for the MiCAR compliance and licensing process this year.
Although it has yet to be confirmed whether MiCAR will come into force in Lithuania at an earlier date, preparations should be made now. The licensing process is lengthy and demanding, and MiCAR requirements set high business and compliance standards for service providers. Even those crypto-asset service providers with registration under the Law on Prevention of Money Laundering and Terrorist Financing of the Republic of Lithuania should assess what additional procedures, policies and processes will need to be implemented, whether they have proportionate staffing levels for their services and clients, and more.
If you want to discuss how MiCAR may affect your business,explore the possibilities, and get more information on the licensing process, please contact Sorainen associate Akvilė Jurkaitytė.