MiCa standards for ICOs, ART, EMT, VASPs

19th of May, 2023

MICa ICO Prerequisites

Compliance with MICa regulations is critical for an ICO project to operate lawfully and in accordance with cryptocurrency and financial legislation. If a project fails to meet the conditions, it may be denied access to funding or even prosecuted. Furthermore, compliance may boost the project's credibility and persuade potential investors that it is trustworthy.

Paper white. MICA expects member companies to produce a white paper in order to ensure transparency and openness in the cryptocurrency market.

The following information should be included in the white paper:

  • Information about who wishes to engage in the bidding as well as the company who issued the crypto-asset, if different from the bidder.
  • Information about the trading platform's operator, whether he or she is in charge of generating the technical document.
  • If the technical documentation was not created by any of the above individuals, details regarding who created it and why must be provided.
  • The design of the crypto-asset, including its specifications and characteristics.
  • Information about how the cryptocurrency will be sold in a public auction or trading platform.
  • Information about the legal status of crypto-assets, investors' and other market players' obligations, and general hazards.
  • Information on the crypto-assets' technology and architecture.
  • A description of the dangers of investing in crypto-assets.
  • Data on the negative climate and environmental implications of the consensus technique used to create crypto-assets.
  • A declaration stating that crypto-assets may lose value, become illiquid, and are not always transferable to a third party.
  • A overview of critical information concerning crypto-assets for potential investors to use in making an informed purchasing decision.

Requirements:

  • Any information in the summary must be correct and supported by facts.
  • All information should be stated in a clear and straightforward manner.
  • A table of contents and publication date should be included in each white paper.
  • The white paper should be written in the official language of the country of origin, the language of the international financial field, or the host country's language.
  • The white paper should be viewable by machines.

To maintain compliance with the law and safeguard investors' interests, regulators such as MICa require the supervisory authority to be notified of an anticipated crypto-asset offering and the white paper published. These standards are intended to provide transparency and protection, resulting in a safer and more stable market for crypto-assets.

Specific criteria for asset-linked tokens (ART, EMT) under MICa

The directive focuses on Stablecoins, crypto-assets that have sparked considerable debate and controversy due to their security and use in preserving financial stability. 

Stable coins, also known as ART and EMT, are described as cryptocurrencies whose value is impacted by variations in the value of fiat currencies, gold, other crypto-assets, and so on.

The MiCA includes particular standards for stable currencies, such as:

  • Obtaining a special issue licence; extra issuance procedure approval;
  • Creating a white paper that satisfies specified standards and obtaining regulatory approval;
  • Capital requirements, transparency, and so on.

These standards must be carefully implemented in order to ensure the security and preservation of investors' rights in connection to crypto-assets.

The proposed drafting Directive specifies two key parties in the crypto-asset market: the crypto-asset issuer and the crypto-asset service provider (CASP). To develop the regulations and standards, regulators drew on the experience of PSD2 (Payment Services Directive) implementation as well as the experience of crypto-asset regulation in Japan and South Africa.

The following conditions must be satisfied in order to become a crypto-asset issuer and get the permission to conduct business:

  • Register its legal structure on European Union territory;
  • Publish a white paper containing information on the crypto-asset, its operating principles, and user security mechanisms;
  • Act in accordance with professional standards, including fair and professional identification of conflicts of interest and other aspects.

A crypto-asset service provider must meet the following criteria:

  • Creating a legal entity in the European Union;
  • Depending on the type of business, a minimum registered capital of €50,000 to €150,000 is required;
  • Obtaining permits for certain operations.

Companies that issue tokens connected to real assets must have adequate equity capital. This amount must be the larger of EUR 350,000 or 2% of the company's average reserve assets. This condition is required to ensure the trustworthiness and stability of such tokens.

The draught Directive also establishes obligations to avoid market manipulation for organisations who trade cryptocurrency on platforms. These obligations include the disclosure of insider knowledge, the prohibition of insider trading, and the prohibition of market manipulation.

Furthermore, members of the governing bodies of organisations issuing asset-linked tokens should be in good standing and have the necessary expertise, experience, and abilities to carry out their tasks efficiently. Furthermore, they must exhibit a desire to commit enough time to their obligations to ensure the company's smooth operation.

Promotional communications

Certain regulations apply to marketing materials related to the public issuance of asset-linked tokens. They must be straightforward and not deceptive, and the information included inside them must be compatible with the official crypto-asset document. Furthermore, token issuers must publish on their website at least once a month the amount of tokens in circulation, their value, and the composition of reserve assets.

Issuers should also design and maintain protocols for dealing with complaints from token holders and other stakeholders, as well as detect, avoid, and manage conflicts of interest among multiple parties, including as shareholders, workers, and token holders. Conflicts of interest resulting from the management and investment of reserve assets should be given special consideration.

These standards were put in place to promote the openness and legitimacy of asset-linked token public offerings, as well as to safeguard the interests of token holders and other participants.

Investment guidelines for reserve assets

Asset-linked token issuers must establish and manage an asset reserve that is independent from the issuer's assets and other tokens. The risk connected with the assets to which the tokens are attached must be covered by the asset reserve, which must be controlled by policies, processes, and contractual arrangements.

Investors in the asset reserve should only employ highly liquid financial products with low market and credit risk. It is also critical to guarantee that investments are liquidated swiftly and with little price impact. All of these safeguards will serve to protect token holders' interests and guarantee the system's stability.

Significant token classification

The EBA considers asset-linked tokens to be relevant if they fulfil at least three of the following criteria:

  • more than 10 million holders;
  • the market capitalisation or asset reserve value surpasses €5 billion;
  • more than 2,500,000 daily token purchases and sells transactions;
  • actively connected to actual assets. These deals amount more than €500 million in value.

Transactions involving tokens are subject to regular reporting

Token transactions must be reported on a regular basis as part of the European Union's token and digital asset market rules.

Regulators can use reporting to monitor token market activities, detect possible hazards and fraud, and study market trends. Furthermore, regular reporting assists regulators in making educated judgements on token market regulation and adapting their strategy to developments in the industry.

Reporting may include:

  • The number of transactions completed during a certain time period.
  • The amount of money exchanged in each transaction.
  • Each transaction's dates and timings.
  • The identification of the transaction participants.
  • Data about the assets related with each token.
  • Other transactional features, such as transaction type, fees, and so on.
  • Statistical data such as the total amount of tokens in circulation, their market capitalization, and so on.

VASP MICa requirements

A VASP (Virtual Asset Service Provider) is a company that offers services relating to cryptocurrencies or virtual assets exchange, storage, transfer, or management.

The following are the general prerequisites for VASPs:

  • Regulatory compliance: VASPs must follow all applicable rules and regulations, particularly those pertaining to anti-money laundering and counter-terrorism funding.
  • KYC (Know Your Customer): In compliance with applicable regulatory requirements, VASPs must undertake customer identification procedures and gather client information.
  • AML (Anti-Money Laundering): VASPs must create and maintain systems and procedures to identify and prevent money laundering and terrorist funding transactions.
  • VASPs should have monitoring mechanisms in place to detect and track suspicious transactions and activity.
  • Security: VASPs should use cutting-edge technology and security procedures to provide maximum security when storing and transmitting virtual assets.
  • Regular audits: VASPs should audit their systems and procedures on a regular basis to assess their effectiveness and compliance with applicable standards.
  • Cooperation with regulators: VASPs should work with authorities to provide them with the required information and documentation.

Furthermore, in order to provide crypto-asset services, suppliers must fulfil the following requirements:

  • establishing an office in a Union Member State where at least a portion of the crypto-active services will be supplied;
  • determining the location of real management in the European Union
  • at least one of the founders must be a resident of the EU.

Who is not permitted to provide crypto-emission services?

  • Companies or individuals who do not represent a legal body.
  • Companies that are not credit institutions, central securities depositories, investment firms, market operators, electronic money institutions, UCITS management firms, or alternative investment funds.

However, there is an exception: Non-legal companies may provide crypto-asset services only if their legal status provides third-party protection on a par with that of a legal company and they are subject to prudential supervision relevant to their legal form of organisation.

Please keep this in mind. Anyone who is not a crypto-asset service provider may not use the business name or name, nor may they distribute ads or use any other methods that might give the false impression that the person is a crypto-asset service provider or add to uncertainty about the topic.

Specific needs for huge VASPs from MICa: Identifying important CASPs

Crypto-asset service providers with more than 15 million active users in the European Union in a calendar year are deemed significant and must follow certain laws and regulations.

If a significant crypto-active service provider achieves the threshold, it must notify its competent authority within two months and provide the information necessary by the Commission's regulatory and technical standards approved under Article 75(4). When the responsible authority determines that the conditions have been met, it must notify ESMA.

CASPs are not subject to any special travel rules requirements. This implies that CASPs can now freely migrate between countries and regions with no limitations.

The agreement extends traditional finance's current "travel rule" to bitcoin transactions. Before making assets available to beneficiaries, providers must ensure that they are not related to restrictive measures or sanctions and do not constitute a money laundering or terrorism financing risk.

Insider trading is prohibited

Insider trading in cryptocurrency refers to the use of non-public information to acquire or sell cryptocurrency. Such transactions are illegal and subject to fines or criminal penalties.

Insider trading, according to the legislation, refers to transactions in which a person with insider knowledge utilises it to acquire or sell cryptoassets for their own or someone else's account. Insider trading also includes cancelling or changing a bitcoin order placed before the individual with the insider information.

The use of insider knowledge in bitcoin trading is illegal. Insider trading or attempting to benefit from having insider information about crypto-assets is prohibited. Furthermore, no one may counsel or convince another to participate in insider trading.

Insider trading rule violators may face administrative penalties or criminal prosecution, depending on the jurisdiction in which they are found.

Market manipulation is prohibited in the cryptocurrency sector

A prohibition on market manipulation has been implemented in order to preserve fair and legitimate trading in the crypto-asset market. This implies that no one should engage in or attempt to engage in market manipulation, which includes any activity aimed at creating false or misleading signals regarding the supply, demand, or price of a cryptocurrency asset.

It is illegal to use a fictional device or any other type of deceit or subterfuge to enter into trades, place trade orders, or participate in any other behaviour that may impact the price of one or more crypto-assets.

False or misleading information disseminated through the media or any other means is likewise forbidden, since it may provide false or misleading indications about the supply, demand, or price of a crypto-asset. The ban also applies to the spread of rumours if the person who spread the information knew or should have known that it was incorrect or misleading.

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