MiCA: A Unified Legal Framework for Crypto-Assets

What Are Crypto-Assets?

Crypto-assets can be defined as a digital representation of value or rights that can be transferred and stored electronically using distributed ledger technology (“DLT”) or a similar technology. DLT is a term used to describe technology that enables the sharing of records within a decentralized and encrypted computer network. For this reason, crypto-assets are based on cryptography (encryption) and are decentralized (not issued by a central authority). At the same time, the term serves as an umbrella designation for electronic “coins” or “tokens.” They can either be used as a means of exchange or for investment purposes. Among the most well-known types of crypto-assets, in addition to Bitcoin, are Ethereum, Tether, Binance Coin, and USD Coin.

The Need for a Unified Legal Framework in the Field of Crypto-Assets

The main reason for adopting the Regulation is to establish clear and precise rules for crypto-assets, as well as for services and activities related to crypto-assets. This harmonized legal framework will apply not only to crypto-assets themselves but also to all services related to crypto-assets, provided that such services are not already covered by Union legislation on financial services.

The Regulation sets out:

1. requirements for transparency and disclosure of information in connection with the issuance of crypto-assets, their public offering, and their admission to trading on a crypto-asset trading platform;
2. requirements for the authorization of crypto-asset service providers, issuers of asset-referenced tokens, and issuers of e-money tokens, as well as supervision over them, together with requirements regarding their operations, organization, and governance;
3. requirements for the protection of holders of crypto-assets, their public offering, and their admission to trading;
4. requirements for the protection of clients of crypto-asset service providers;
5. measures to prevent insider dealing, unlawful disclosure of inside information, and market manipulation related to crypto-assets to ensure the integrity of crypto-asset markets.

In the interest of promoting legal certainty, the adoption of the Regulation at the Union level can be considered not only necessary but also a rational step, as it ensures uniform harmonization applicable across all Member States, while, according to the Regulation, respecting the sovereignty of the Member States. This is particularly important because some Member States have already adopted their own national legislation in the field of crypto-assets, whereas others (such as Slovakia) have waited until the adoption of the Regulation. The Regulation will therefore provide a unified and reliable legal framework, support financial innovation and fair competition within the Union, ensure market integrity while taking into account the risks associated with crypto-assets, and significantly enhance consumer protection. At the same time, once the Regulation enters into force, the crypto-asset market will become an integral part of the regulated financial markets of the Union’s Member States.

Which Crypto-Assets Will Be Subject to the Regulation?

Regulation defines three main categories of interchangeable non-financial crypto-assets:

1. E-money tokens – a type of crypto-asset designed to maintain a stable value by referencing the value of a single official currency. They serve as an electronic substitute for banknotes and coins and are primarily used as a means of payment;
2. Asset-referenced tokens (so-called stablecoins) – a type of crypto-asset that is not an e-money token but aims to maintain a stable value by referencing another value, right, or a combination thereof, including one or more official currencies. They are used as a means of payment for goods and services and as a store of value;
3. Utility tokens – a crypto-asset intended solely to provide access to a good or service offered by its issuer. They are often used as a tool to support the financing of startups.

Who Does It Apply To?

The legal regulation of crypto-assets will primarily affect issuers of crypto-assets and entrepreneurs, for whom the changes will be substantial. Under the current legal framework, Act No. 455/1991 Coll. on Trade Licensing (the “Trade Licensing Act”), entrepreneurs may offer services related to crypto-assets through regulated trades (providing virtual currency exchange services and providing virtual currency wallet services). To meet the conditions for a regulated trade, one must have completed general secondary education or full secondary vocational education.

However, the Regulation sets out much stricter requirements in this regard, as crypto-asset service providers established in the Union will now be required to obtain authorization to conduct business from the National Bank of Slovakia (the “NBS”). It should be noted, however, that not all activities will require such authorization (for example, natural and legal persons who buy or sell crypto-assets on their own account and do not provide any of the crypto-asset services defined in the Regulation will not need authorization from the NBS). Among the services falling under the scope of the Regulation that will require authorization are:

1. Custody and administration of crypto-assets on behalf of clients;
2. Operation of a trading platform for crypto-assets;
3. Exchange of crypto-assets for funds;
4. Exchange of crypto-assets for other crypto-assets;
5. Execution of orders related to crypto-assets on behalf of clients;
6. Placement of crypto-assets;
7. Reception and transmission of orders related to crypto-assets on behalf of clients;
8. Provision of advice on crypto-assets;
9. Portfolio management of crypto-assets;
10. Provision of transfer services for crypto-assets on behalf of clients.

The above-mentioned supervision by the national supervisory authority will in practice be reinforced by the fact that, under the Regulation, the European Securities and Markets Authority (“ESMA”) will have the power to establish a so-called register of non-compliant crypto-asset service providers. The purpose of this register will be to publish up-to-date information on any breach of the Regulation, or where a crypto-asset service provider offers its services without authorization or registration. This measure aims to ensure transparency in the crypto-asset market and compliance with prescribed regulations.

Among other regulatory requirements, a crypto-asset service provider is also obliged to prepare and comply with AML documentation. This obligation arises not only from the Regulation, but is already currently regulated by Act No. 297/2008 Coll. on the Prevention of Money Laundering and Terrorist Financing and on Amendments and Supplements to Certain Acts (the “Anti-Money Laundering Act”). Both the Anti-Money Laundering Act and the Regulation provide that a crypto-asset service provider is an obliged entity. The status of an obliged entity, in the case of a crypto-asset service provider, means that if it fails to fulfill its obligations (whether under the Anti-Money Laundering Act or under the Regulation), it may be subject to appropriate sanctions or, in some cases, have its authorization to carry out activities revoked (either by the National Bank of Slovakia or ESMA).

Another obligation that must be mentioned in relation to crypto-asset service providers is the duty to disclose the impact of crypto-assets on the climate and other adverse environmental mechanisms. This stems from the fact that the consensus mechanisms used to validate crypto-asset transactions have a significant environmental impact. According to various estimates, the energy consumption of the Bitcoin network is comparable to that of entire countries, with approximately 707 kWh of electricity required per Bitcoin transaction. Additionally, it is worth noting that the growing energy consumption is accompanied by an increasing number of mining devices and the generation of substantial amounts of electronic waste. For this reason, the Regulation itself also imposes requirements aimed at protecting the climate and the environment.

Last but not least, it is necessary to mention the circumstances under which, according to the Regulation, a license may be revoked from crypto-asset service providers. The National Bank of Slovakia shall revoke the authorization to carry out activities if a crypto-asset service provider:

1. has not used its authorization within 12 months from the date of its issuance;
2. has expressly renounced its authorization;
3. has not provided crypto-asset services for nine consecutive months;
4. obtained its authorization fraudulently;
5. no longer meets the conditions under which the authorization was granted and has not taken remedial measures within the prescribed timeframe;
6. does not have in place systems, procedures, and measures to detect money laundering and terrorist financing; and
7. has committed serious breaches of the Regulation, including provisions relating to the protection of crypto-asset holders or clients of crypto-asset service providers, or to market integrity.

Rules for Issuers and Crypto-Asset Service Providers

The Regulation lays down several requirements for issuers of crypto-assets. Within its scope, the Regulation applies to natural and legal persons and certain other undertakings engaged in the issuance of crypto-assets, their public offering, and admission to trading, or those providing services related to crypto-assets.

Among the important requirements imposed on issuers of crypto-assets are the following:

1. Legal form of the issuer – the issuer may be a natural or legal person or another undertaking that issues crypto-assets and has its registered office in the Union;
2. Preparation of so-called whitepapers – whitepapers constitute an information document (prospectus) through which the issuer of crypto-assets informs consumers considering their purchase. Whitepapers on crypto-assets must include, in particular, the following information:

2.1 Information about the issuer;

2.2 Information about the crypto-asset project;

2.3 Information about the crypto-asset;

2.4 Information about the underlying technology;

2.5 Information about the risks; and

2.6 Information about environmental impacts.

At the same time, the Regulation establishes the obligation to publish whitepapers and to notify the competent national supervisory authority (the NBS). However, the Regulation specifies precisely the cases in which the preparation of whitepapers will not be required (e.g., where crypto-assets are offered free of charge, where crypto-assets are offered to fewer than 150 persons in each Member State, where a public offering of crypto-assets is intended exclusively for qualified investors). Some the most significant obligations of crypto-asset service providers are:

1. Minimum capital requirements for crypto-asset service providers – the Regulation requires compliance with minimum capital requirements, depending on the type of services provided, ranging from EUR 50,000 to EUR 150,000;
2. Organizational requirements – under the Regulation, crypto-asset service providers:

2.1 Must act honestly, fairly, and professionally toward their clients and in the best interests of their clients;

2.2 Are required to have a management body of good repute and with adequate knowledge, skills, and experience to perform their duties;

2.3 Are required to notify any changes in their management body promptly; and

2.4 Must establish effective and transparent procedures for the prompt, fair, and consistent handling of client complaints.

Strengthening Consumer Protection

The Regulation introduces precise rules on consumer protection in relation to crypto-assets, primarily because, until now, there has been no unified legal framework in this area. Specifically, with regard to consumers, the following can be noted:

1. The right of consumers to be informed about crypto-assets – To ensure consumer protection, potential purchasers of crypto-assets should be informed about the characteristics, functions, and risks of the crypto-assets they intend to purchase. This enables consumers to form a comprehensive understanding of their potential investment in crypto-assets;
2. Obligation to prepare whitepapers when trading crypto-assets on a trading platform – In the event of a public offering of crypto-assets, or their admission to trading on a trading platform for crypto-assets (i.e., when crypto-assets are traded on a stock exchange), providers of crypto-asset services will be required to publish whitepapers;
3. Possibility to file a complaint – The Regulation gives consumer protection associations the right to file complaints if a crypto-asset service provider violates the Regulation;
4. Consumer’s right to withdraw from the contract – Consumers have 14 days to withdraw from their purchase agreement for crypto-assets other than asset-referenced tokens and e-money tokens, without any fees or costs and without having to provide reasons. In such cases, the withdrawal period begins on the day the contract with the consumer for the purchase of those crypto-assets is concluded. (However, the right of withdrawal does not apply if the crypto-assets are admitted to trading on a crypto-asset trading platform.)
5. Prohibition of interest – Issuers and providers of crypto-asset services for asset-referenced tokens and e-money tokens are prohibited from offering any interest in connection with these tokens.;
6. Monitoring of executed transactions – The Regulation requires providers of crypto-asset services to maintain records of all services, activities, orders, and transactions related to crypto-assets that they carry out. This obligation is intended to ensure traceability of transfers involving crypto-assets, which should ultimately help prevent tax evasion, fraud, the financing of illegal activities, or terrorism.

When will the Regulation start to apply?

The Regulation will start to apply during 2024. It is essential to note that specific provisions will take effect on June 30, 2024 (specifically, provisions related to asset-referenced tokens, such as stablecoins), while the Regulation as a whole will become applicable only as of December 30, 2024.

As mentioned above, the current legal framework for crypto-assets in Slovakia is limited mainly to the Trade Licensing Act and the Anti-Money Laundering Act. On December 30, 2024, this framework will be replaced by the Regulation, which will apply in full across all EU Member States.

Under the Regulation, it will no longer be sufficient for crypto-asset service providers to operate solely on the basis of a trade license; instead, they will need authorization from the National Bank of Slovakia (NBS) or the relevant foreign supervisory authority. However, entities in Slovakia that are currently authorized to provide services on the basis of a trade license (such as virtual currency exchange services or virtual currency wallet services) may continue providing crypto-asset services until June 30, 2026 (the transitional period).

After this date, only entities holding an authorization to provide crypto-asset services from the NBS or from the relevant foreign supervisory authority will be allowed to engage in such activities. It is also important to note that under the so-called passporting system, an entity that obtains authorization from the NBS to provide crypto-asset services will be able to freely offer these services across all EU Member States (and vice versa).

Conclusion

After this date, only entities holding authorization to provide crypto-asset services from the National Bank of Slovakia (NBS) or from the relevant foreign supervisory authority will be allowed to carry out such activities. In this respect, it is also important to note that under the so-called passporting system, an entity that obtains authorization from the NBS to provide crypto-asset services may freely offer these services throughout all EU Member States (and the same applies in reverse).

References

1. Article 3(1)(5) of the Regulation.
2. National Bank of Slovakia. Distributed Ledger Technology (DLT). Available online: <https://nbs.sk/dohlad-nad-financnym-trhom/fintech/technologia-distribuovanych-zaznamov-dlt/>.
3. National Bank of Slovakia. Crypto-assets and Initial Coin Offerings (ICOs). Available online: <https://nbs.sk/dohlad-nad-financnym-trhom/fintech/kryptoaktiva-a-initial-coin-offerings-icos/>.
4. National Bank of Slovakia. Crypto-assets and Initial Coin Offerings (ICOs). Available online: <https://nbs.sk/dohlad-nad-financnym-trhom/fintech/kryptoaktiva-a-initial-coin-offerings-icos/>.
5. Article 1 of the Regulation.
6. Articles 3(1)(6), 3(1)(7), and 3(1)(9) of the Regulation.
7. National Bank of Slovakia. Crypto-assets. Available online: <https://nbs.sk/dohlad-nad-financnym-trhom/dohlad/kryptoaktiva/>.
8. Article 3(1)(16) of the Regulation.
9. REPORT on the proposal for a Regulation of the European Parliament and of the Council on markets in crypto-assets and amending Directive (EU) 2019/1937, point 5a.
10. Article 64(1) of the Regulation.
11. Article 2(1) of the Regulation.
12. REPORT on the proposal for a Regulation of the European Parliament and of the Council on markets in crypto-assets and amending Directive (EU) 2019/1937, point 14.
13. Article 5 of the Regulation.
14. Article 108 of the Regulation.
15. 31 of the Regulation.
16. Articles 40 and 50 of the Regulation.
17. Article 68(9) of the Regulation.
18. National Bank of Slovakia. Crypto-assets. Available online: <https://nbs.sk/dohlad-nad-financnym-trhom/dohlad/kryptoaktiva/>.
19. Article 149 of the Regulation.