The recent introduction of Markets in Crypto-Assets Regulation[1] (MiCA) in the European Union represents a significant milestone in the effort to bring order to the complex landscape of cryptocurrencies and digital assets. This Regulation, enacted in June 2023, aims to create a comprehensive regulatory environment to ensure financial stability, investor protection and promote transformations in the crypto sector.
1. But… what are crypto-assets?
The MiCA classification characterizes crypto-assets as digital representations of values or rights likely to bring significant benefits to market players, namely non-professional holders of crypto-assets. […] When used as a means of payment (such as cryptocurrencies[2]), crypto-assets can provide opportunities for cheaper, faster, and more efficient payments, in the cross-border context, by limiting the number of intermediaries[3]. On the other hand, digital assets that cannot be transferred to other holders are not covered by the definition of crypto-assets[4].
Most cryptocurrencies are private[5], there is no need for a third party to intervene in the transaction (read financial authorities) and are not subject to monetary policies, removing the State from the possibility of using monetary policy to intervene in the economy. This decentralization appears as the main reason for attracting investors and non-professional users of cryptocurrencies. Effectively, the absence of an intermediary reduces transaction costs, not registering the high commissions[6] that are applied to consumers for making payments and maintaining an account.
On the other hand, the registration of cryptocurrencies on a blockchain, although it allows consulting the history of transactions, it does not identify the origin and destination of the transaction, making such an operation subject to a previously unknown privacy.
However, the same motives that appear as attractions have a perverse effect associated with them, which increase the distrust that still exists associated with the use of these assets.
The existence of low transaction costs is related not only to the absence of a third party intermediary, but also to the lack of regulation (and consequently an unprotection of users), and operators do not have to bear compliance costs.
In the same vein[7], and contrary to what happens in electronic money, crypto assets referring to an official currency (e-money tokens or digital currency cryptocurrencies), do not have a right of credit on the entities issuing crypto assets, and there is no means of complaint. Some entities do not yet allow, or allow it within a limited redemption period, a way to claim par value equivalent to the available tokens.
The Regulation aims to bring e-money tokens closer to electronic money, ensuring the right to repayment of cryptocurrencies at any time and at face value in the respective reference currency.[8]
On the other hand, if the privacy of crypto users is ensured from the point of view of the transaction, such encryption allows an easier means of criminal action, making it difficult to prevent operations and favoring the use of these mechanisms at the level of economic crimes.
Finally, it should also be noted that each transaction that takes place within the scope of a cryptocurrency requires a mining process[9] done by a hardware with high performance capacity, which performs this function for long periods, requiring a high environmental effort. In the words of Lawyer João Ascenso[10] “It cannot be accepted that new industries, especially digital (which do not have the environmental impact inherent to the production of physical goods), base their operating model on old-fashioned and unsustainable environmental standards“, it is not to prevent innovation, but to try to create structures and institutions that symbolize an effective evolution in all parameters.
2. The MiCA Regulation
To address these difficulties, the MiCA Regulation arises, with the main objective of establishing strict conditions that regulate the provision of services related to crypto-assets – both at the level of entities authorized to issue crypto-assets, in the definition of crypto-assets, in the protection of users and in the creation of a regulation that harmonizes the form of European action, preventing unfair competition in the internal market and facilitating the provision of crypto-assets services at a cross-border level.
Although, until 2023, some crypto-assets were already considered financial instruments within the meaning of Directive 2014/65/EU of the European Parliament and of the Council, falling within the scope of the current EU legislative acts on financial services[11], there were no rules that applied to the provision of services related to unregulated crypto-assets, relating to crypto-asset trading, exchange, custody, and administration platforms. Such a regulatory gap has led Member States to come up with diverse approaches, with considerable divergences in policy and legal interpretations.
The policy dissonance is reflected not only in the fragmentation of the European internal market, but also in the lack of receptivity to technological development in the financial sphere. The lack of regulation increases legal uncertainty on the part of companies, investors, and non-professional users in the crypto-asset market, emerging as an obstacle to innovation.
The Regulation, published in June 2023, is not yet in force, and Titles III and IV are expected to apply on June 30 2024, and Titles I, II, V, VI and VII will enter into force as of December 2024. Titles VIII and IX deal with delegated acts and transitional and final provisions[12], which do not require public feedback or adjustment periods by MS.
3. Key Points
To try to achieve the objectives to which it is predisposed, MiCA is based on a set of key points, which define the pillars of action of the Regulation, which can be divided according to different understandings. In the article in question, I will adapt the division that results from the Medium site[13].
Key Point 1: Scope à The Regulation aims to cover as many crypto assets as possible.
As is clear from the Regulation itself, any definition of «electronic money cryptocurrencies» should be as broad as possible, to cover all types of crypto-assets that are based on a single official currency.
To facilitate understanding, the Regulation divided crypto-assets into three types: (i) e-money token, (ii) asset-referenced token and (iii) utility token.
The first crypto-asset aims to stabilize its value by reference to other assets, namely an official currency. Its function is like the function of electronic money[14], being electronic substitutes for coins and banknotes, and can also be used to make payments. The second crypto-asset aims to stabilize its value with reference to another value, right or a combination of both. It encompasses what is not part of the aforementioned, trying to ensure a regulation prepared for the future. These two crypto-assets are usually integrated into the emerging category of stablecoins[15].
Finally, utility tokens encompass those that do not fall into the previous two situations, encompassing a variety of crypto-assets.
As for stablecoins, it should be noted that being of widespread use, they will be subject to reserve requirements and supervision by central banks.
Key Point 2: Regarding crypto issuers
Here, we can identify five elements that deserve special attention: (i) authorization, (ii) compliance with requirements, (iii) investor protection, and (iv) public offering of a crypto-asset that is neither an asset-referenced crypto-asset nor an electronic money crypto-asset, (v) issuance of crypto-assets.
Regarding authorization, this essentially results from title V[16], and it is now necessary to obtain an authorization from the national regulatory authorities to operate throughout the EU bloc. The authorization shall also specify the crypto-asset services that the service providers are authorized to provide (art. 59th/6 Reg.), the application for authorization must be submitted to the competent authority of each MS, and must include the information resulting from art. Reg. 62/2, It should be noted that obtaining an authorization through irregular means or if the entity fails to meet the legal requirements allows the competent authorities to revoke the initially recognized authorization, art. 64th Reg. If the service provider intends to provide crypto-asset services in more than one MS, it must submit to the competent authority of its MS of origin a set of information regarding the MS where it intends to operate, the services it intends to provide, among other information arising from art. 65th.
As for compliance with requirements, they stand out not only related to capital and organizational requirements (e.g. art. 34 – governance mechanisms; art. 35 – capital requirements; art. 36 to 40 as regards the reserve of assets…), but also those referring to the obligations of honest, loyal, and professional action, as set out in Chapter 2 of Title V. We come to another point concerning investor protection, requiring service providers to warn customers about the risks inherent in crypto-asset transactions, to provide advice[17], to make their pricing, cost, and commission policies available to the public, by publishing them online in a prominent place on their website[18].
Such obligations are intended to ensure transparency and enable investors to make informed decisions.
Regarding the possibility of providing crypto-assets that did not fall into the categories provided for by the Regulation, there are requirements aimed at an attempt to apply the Regulation to the future, providing for the emergence of crypto-assets that do not yet exist.
Paying attention to art. 4/1 of the Reg., the public offering of a crypto-asset that is not an asset-referenced crypto token or an electronic money crypto token, can only occur if it is made by a legal person, who has written a crypto asset booklet in relation to that crypto-asset (in English, crypto-asset white paper), with the content and form of art. 6, has notified it under the terms of art. 8 and published according to art. 9. It is also necessary that you have prepared any commercial communications regarding this crypto-asset in accordance with art. 7 and has published them in accordance with Article 9. Finally, it must comply with the requirements applicable to offerors, established in article 14.
The obligation to prepare, notify and publish the white paper, that is, a document with mandatory information about the issued crypto-asset, clarifying the (potential) users about the characteristics, functions and risks of the products they intend to acquire, which must include information about the issuer, offeror or person who intends to be admitted to trading; the crypto-asset project; the environmental and climate impacts… allows the creation of a climate of trust, reducing the risks to which users (whether investors or non-professional users) are exposed.
Finally, it is possible to read in[19] the initial considerations of the Regulation that strict conditions should be established for the issuance of electronic money cryptocurrencies, including the obligation for such cryptocurrencies to be issued by a credit institution authorized under Directive 2013/36/EU of the Parliament and of the Council, or by an electronic money institution authorized under Directive 2009/110/EC. Cryptographic issuers must ensure that potential holders of crypto-assets are informed of the characteristics, functions and risks of the crypto-assets they intend to acquire.
Credit institutions authorised under Directive 2013/36/EU should not need another authorisation under this Regulation to offer or request admission to trading of cryptographic referenced assets.[20]
Key point 3: Environmental policies
As an example, see art. 66th/5 Reg. establishing that crypto-asset service providers shall make available to the public, in a prominent place on their website, information related to the main negative impacts on the climate and other negative impacts related to the environment of the consensus mechanism used to issue each crypto-asset in relation to which they provide services. This information can be obtained from the booklets of the crypto-assets, art. 66th/5.
Key Point 4: Crypto-Asset Service Providers
Platforms that provide services such as foreign exchange, custody and trading will need authorization and will comply with specific operational and prudential requirements (e.g. art. 10/3, b))
On the other hand, crypto service providers must implement AML measures[21], including customer due diligence, transaction monitoring, and reporting of suspicious activity.[22]
Key Point 5: The cross-border passport
Title VI sets out a set of instructions for authorities to enable the emergence of a framework for cooperating jurisdictions. Each MS will be responsible for designating a national regulatory authority that will supervise compliance with the MiCA. The national authority will have the obligation to report to the European Banking Authority and the European Securities and Markets Authority (ESMA), compliance with the guidelines issued by them.
Once authorized in an EU Member State, crypto-asset service providers can operate across the EU without additional authorization, establishing a stable internal market that seeks to maintain fair competition by facilitating the cross-border provision of crypto-asset services.
Effectively, existing crypto service providers will have a transition period to comply with the new regulations.
5. What are the prospects for the future?
The establishment of strict requirements for transparency, data protection and corporate governance is expected to effectively mitigate the risks of illicit activities. By establishing that companies responsible for issuing, trading or are responsible for the custody of crypto-assets must follow due diligence, identity verification and money laundering prevention procedures, it establishes a turning point in those that are the risks associated with the use of crypto-assets.
However, complying with all MiCA rules can present a challenge for smaller companies and startups, limiting their market access and restricting innovation. According to economist Tiago Martins[23], the new regulation is most likely to benefit those who are already solidified in the market, both at the level of crypto-assets (for example, Bitcoin or Ether) and companies (in the case of Binance or Coinbase[24]).
Until 2023, Portugal was known by many as a “cryptographic tax haven”, the gains from the profitable sale of crypto-assets that were not qualified as securities (therefore, most of them) had not associated a fee, the gains and losses associated with the successful sale of crypto-assets were disregarded for taxation purposes[25], which made Portugal attractive to both foreign investment and the use of digital financial means, such as cryptocurrency.
With the entry into force of Law No. 24-D/2022, of December 30, which approves the State Budget for 2023 (OE/2023), changes were introduced in the tax framework related to the taxation of crypto-assets, which stand out in terms of the Personal Income Tax Code (CIRS), the Stamp Tax Code (CIS) and the Municipal Tax Code on Onerous Transfers of Real Estate (CIMT).
Thus, as a mere example, currently, crypto-assets, at the CIRS level, can fall into Categories G, E or B. Although there is still no distinction in Portuguese legislation regarding the concept of crypto-asset (as in MiCA), the use of crypto-assets begins to emerge as an increasingly common practice, which registers developments.
From this point of view, the entry into force of the MiCA (only at the end of 2024) associated with a change in national regulations, essentially at a fiscal level, allows us to predict that the use of the concept of “paradise” will be seriously life-threatening.
At this stage, it should be noted that not all crypto-assets are regulated, such as transactions between certain entities and public groups; digital assets of the Central Bank; non-transferable digital assets; non-fungible tokens (usually known as NFT’s – non-fungible token), among others. According to an update from the European Central Bank, future changes or updates to MiCA are open, however, we should not fall into the error of overly strict regulation that may discourage innovation.
In fact, the emergence of regulation per se already calls into question some of the founding principles of cryptocurrencies, such as decentralization and anonymity, an increasingly restricted continuous action will increase the distance from such principles, which may result in an inadequacy of policies to the use of crypto-assets and an attempt to develop ways to “escape” such regulation.
In the words of Lawyer João Ascenso[26], “Our role as lawyers should be to guide the ethics of our clients, anticipate regulatory trends, and help this industry navigate the unknown with the public interest in mind.
Luana Gomes, Legal Summer-Inter @NOVA Legal
[1]Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937.
[2] Digital currencies and cryptocurrencies used for virtual payment that are registered on a blockchain. The blockchain is a kind of “database” where the entire transaction history is stored.
[3]Recital (2) of the Regulation
[4]Recital (4) of the Regulation
[5] Not forgetting the existence of digital currencies by states, such as the US e-dollar and the digital euro that aims to be launched by the ECB by 2025.
[6] There has been an increase in commissions about cryptocurrency operations, which are essentially highlighted in the cost of mining. Effectively, the greater the demand for transactions on a given cryptocurrency blockchain, exceeding the processing capacity of the network, the slower the mining of a given transaction. Thus, with a view to faster processing of their transaction, users can offer commissions that the higher they are, the faster they will be mined, that is, the faster their transaction occurs. However, such an increase is still something that results from the user’s decision, and there are not the same costs that arise at the level of banking institutions for payment and maintenance of the account.
[7] They are controlled by institutions such as central banks. They are centralized currencies, always having a claim on the issuer of the electronic money and have the contractual right to repayment, at any time and at face value, of the monetary value of the electronic money held – MiCA Regulation Mica
[8]According to recital (19) of the Regulation, the fact that the holders of such crypto-assets do not have a claim on their issuers, or that such claim does not have nominal parity with the reference currency, could undermine the confidence of the holders of such crypto-assets. In the same recital, they understand that issuers of cryptocurrencies must ensure that their holders can exercise the right to repayment of their cryptocurrencies, at any time and at face value, in their respective reference currency.
[9] Mining (or proof of work) is a process that consists, in a simplified way, of solving mathematical problems in the shortest possible time. The first device capable of resolving them adds a block (i.e. a transaction) to the blockchain and is rewarded with crypto fiches. If a user wants to make a transaction, it will generate a “kind of code” that will have to be mined to form a new block on the blockchain. Each block is a transaction.
[10] “CRYPTOCURRENCIES – A WONDERFUL NEW WORLD?” published in the Boletim da Ordem dos Advogados, No. 32 May – August 2021 (pp. 26 ( 1 )
[11]Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU See Annex II Section C by reference to art. 4/15 of the directive, these crypto assets continue to be regulated by this directive and not by the MiCA regulation.
[12] They discuss the adoption powers and the committee’s responsibility to report to the European Parliament and the Council on the effect of the legislation and any developments. An interim report is expected to be delivered by 30 June 2025 and a final report by 30 June 2027.
[13] Available at: https://medium.com/@KyotoProtocol.io/what-does-new-regulation-on-markets-in-crypto-assets-mica-mean-for-the-crypto-assets-industry-in-3abc5c0d9fbe
[14] This function is defined in Directive 2009/110/EC
[15] Its value is tied to external assets such as fiat currencies. The main objective is to offer the price stability of traditional currencies while maintaining the decentralized characteristics of cryptocurrencies.
[16] It defines who is authorized to provide crypto-asset services and where you can do so based on your location in the Union.
[17]Art. 66th/3rd Reg.
[18]Art. 66th/4th Reg.
[19] Consideration (19)
[20] Initial consideration (44) of the Regulation
[21] Anti Money Landing – preventing and combating money laundering
[22] Due diligence procedure that ensures transparency in the transaction, includes, for example, verification of the identity of customers
[23] https://www.deco.proteste.pt/investe/investimentos/criptomoedas/analises/2023/06/regulamento-mica-o-que-muda-nas-criptomoedas-a-partir-de-2024
[24] Lawsuits have already been filed against Coinbase and Binance for not complying with certain rules.
[25] https://mcs.pt/en/is-portugal-a-crypto-tax-haven-complete-guide-for-2023/
[26] “CRYPTOCURRENCIES – A WONDERFUL NEW WORLD?” published in the Boletim da Ordem dos Advogados, No. 32 May – August 2021 (pp. 26-28)
