European Mica Act

The MiCA Act, whose full name is "Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937", is a comprehensive regulation formulated by the European Union to regulate and supervise the crypto-asset market. It is part of the EU's digital finance strategy, which aims to provide legal clarity and promote innovation while ensuring financial stability and investor protection.

MiCA aims to provide a unified legal framework for issuers and service providers in the crypto-asset market, eliminating legal differences between EU member states. Through this regulation, crypto asset service providers can operate across the EU after obtaining authorization in one member state.

With the Markets in Crypto-Assets (MiCA) regulation set to come into effect on June 2024, 6, major cryptocurrency exchanges such as Binance, Kraken, and OKX are considering delisting Tether’s USDT from their European platforms. Binance announced that it will restrict the use of unauthorized stablecoins by users in the European Economic Area after MiCA comes into effect, and gradually guide users to use regulated stablecoins. While existing unauthorized stablecoins will not be delisted, they will be put into “sell-only” mode to allow users to convert to Bitcoin, regulated stablecoins or fiat currency.

At the same time, member states are adapting their respective legislation and regulatory frameworks to comply with MiCA standards. Some countries have begun training regulators for MiCA implementation and building the technical infrastructure to support enforcement of the new regulations.

欧盟Mica法案，大部分条款从2024年12月30日开始实施，一些特别条款提前到2024年6月30日，还有技术性条款自2023年6月29日起生效。此分阶段实施安排旨在确保市场有足够时间准备和调整，确保加密资产市场的平稳过渡和有序发展。（分阶段，期限为12到18个月）。如下图所示：

The EU Crypto-Asset Market Regulation (EU) 2023/1114 on transparency and disclosure requirements ensures market transparency of project issuance and protects the rights and interests of investors through a detailed white paper writing and publishing process, strict information update requirements, and standardized marketing materials. The following are the project issuance requirements:

1. Investor Rights Protection

(1) Information transparency:

• Companies issuing crypto assets must provide detailed and accurate information so that investors know what they are buying and what the risks and benefits are.
• This information includes company details, technical details of crypto assets, trading and distribution methods, potential risks, etc.

(2) Fair treatment:

• The company must ensure that all investors are treated fairly during the transaction process without any form of discrimination.
• If there are special treatments, they must be clearly stated in the white paper and marketing materials to ensure transparency and fairness.

(3) Risk Disclosure:

• The company must fully explain all possible risks, including technological risks, market risks and legal risks, so that investors are aware of the risks of investment.

2. Client Funds Protection

(1) Independent hosting:

• The company must manage the client's funds and the company's funds separately to ensure the safety of the client's funds.
• This is done to prevent the company from misappropriating client funds and to protect the interests of clients if the company goes wrong.

(2) Compensation mechanism:

• If problems arise or the company defaults, there must be a clear compensation and reimbursement mechanism to ensure that customers are compensated in a timely manner.
• The company needs to have adequate resources and arrangements in place to make compensation.

(3) Transparent pricing:

• Companies must disclose all fees and charges and ensure that customers know the specifics of each fee.
• This information should be prominently posted on the company's website to ensure transparency.

3. Investor suitability assessment

(1) Customer information collection:

• When providing advice to clients or managing client assets, service providers need to collect relevant information about the clients, including investment experience, risk tolerance and financial situation.
• This information is used to assess whether crypto assets are suitable for clients and to ensure that recommendations are consistent with the client's investment objectives and risk appetite.

(2) Risk Warning:

• Service providers need to clearly inform customers of the risks associated with crypto assets, including value volatility risk, liquidity risk and possible risk of total loss.
• Clients need to understand that crypto assets are not protected by traditional investor compensation schemes and deposit protection schemes.

(3) Regular evaluation:

• Service providers are required to review their suitability assessments for clients regularly (at least every two years) to ensure that their advice and services remain relevant.
• In line with the needs and risk tolerance of customers.

4. Customer complaint handling

(1) Complaints handling procedures:

• The company must have an effective complaints handling procedure to ensure that customer complaints are handled promptly and fairly.
• Customers can submit complaints free of charge, and the company is required to provide a complaint template and record all complaints and handling results.

(2) Complaint transparency:

• Companies must make details of their complaints handling procedures public on their websites so that customers understand the complaint process and resolution options.
• Companies are required to investigate all complaints within a reasonable time and notify customers of the outcome.

1.Insider Trading Prevention

(1) Definition of inside information:

• Insider information refers to non-public information that directly or indirectly relates to one or more crypto assets or issuers, which, if made public, could have a significant impact on the price of those crypto assets.

(2) Prohibition of insider trading:

• People who hold insider information are not allowed to use this information to buy or sell crypto assets, and cannot recommend or induce others to engage in insider trading. Insider information holders must not disclose this information to others unless the disclosure is made within the normal scope of their profession or position.

(3) Penalty measures:

• If insider trading is discovered, relevant agencies have the right to investigate the individuals or companies involved and impose penalties in accordance with laws and regulations, including fines, bans from business, etc.

2. Market manipulation prevention

(1) Definition of market manipulation:

Market manipulation includes but is not limited to the following:

• Create false supply and demand signals to influence crypto asset prices.
• Manipulate the price of crypto assets through false transactions, spreading false information and other means.
• Taking advantage of market position to directly or indirectly fix buying and selling prices, or create unfair trading conditions.

(2) Typical market manipulation behaviors:

• For example, by placing a large number of buy and sell orders, the normal operation of the trading platform is disrupted and false market trends are created.
• Spread false or misleading information in the media or on the Internet to affect the price of crypto assets.
• Using their dominant position in the market to directly or indirectly manipulate the buying and selling prices of crypto assets.

3. Prevention and detection mechanisms

(1) Preventive measures:

• Crypto asset service providers need to establish effective internal control systems to prevent market manipulation. These systems include monitoring trading activities, detecting abnormal trading behavior, etc.

(2) Testing and reporting:

• When a service provider discovers suspicious transactions, it should immediately report them to the competent authorities. These reports must include all relevant information, such as transaction orders, operation of the trading platform, etc.
• The European Securities and Markets Authority (ESMA) will develop technical standards to help service providers better meet these prevention and detection obligations.

(3) Cross-border cooperation:

• When it comes to cross-border market manipulation, the competent authorities of relevant countries need to coordinate and cooperate to jointly combat market abuse.

1. Administrative penalties and other administrative measures

(1) Scope of Violations:

• The regulations clearly list the violations that require punishment, including failure to release information in accordance with regulations, failure to comply with prohibitions on market manipulation and insider trading, and failure to cooperate with investigations.

(2) Penalty measures:

• Public statement: The competent authority may issue a statement identifying the offending company or individual and their violation. This is equivalent to "naming and criticizing" the entire market.
• Corrective Order: Requires the violator to stop the violation and take steps to prevent it from happening again. This is akin to asking the offender to “correct the error immediately.”
• Fines: Fines are imposed on natural persons (individuals) and legal persons (companies), and the amount of the fine is calculated based on the severity of the violation and the illegal benefits obtained. For example:

  Fines for individuals can be up to €70.

  Fines for companies can be up to €500 million, or 5% of their annual turnover.

(3) Particularly severe penalties:

In the case of particularly serious violations, such as repeated violations or serious impact on market stability, the competent authorities may:

• Temporarily or permanently prohibit relevant managers from continuing to engage in management work related to crypto assets.
• Revoke or suspend a company’s operating license.

2. Publication of penalty decisions

(1) Openness and transparency:

• The competent authority must publish every penalty decision on its official website. This is equivalent to "public notification of criticism", allowing all market participants to know the violations and the consequences of the handling.

(2) Privacy protection:

• In certain circumstances, authorities may choose to publish an anonymous penalty decision or withhold publication if publishing the offender’s identity would cause disproportionate harm or affect an ongoing investigation.

3. Implementation of fines and other penalties

(1) Execution of fines:

• Fines and other penalties need to be enforced in accordance with the legal procedures of the country where they are located. If the person punished does not pay the fine, the competent authority can enforce it through legal means.

(2) Purpose of fines:

• The fines collected will go into the EU budget and be used for public spending.

4. Right to appeal against penalty

(1) Appeal Procedure:

• The person punished has the right to appeal against the punishment decision. This is like a "grounded complaint" and they can challenge the penalty decision through the court.
• If the application for a license is rejected or there is no result for more than six months, the applicant also has the right to appeal.

Through these international cooperation and coordinated regulatory measures, the EU hopes to ensure regulatory consistency and effectiveness in the crypto asset market worldwide. By working closely with regulators in other countries and sharing information, we can better prevent and combat transnational violations.

1. Cooperation between regulators

(1) Cooperation within the EU:

• Regulators from different countries need to work closely together to ensure consistent regulatory standards for crypto assets. It's like traffic police in different countries need to cooperate with each other to ensure that cross-border drivers follow the same traffic rules.

(2) Information Sharing:

• Regulators across countries must share information in a timely manner, especially when violations are discovered or investigations are needed. It's like information about a suspect needs to be passed quickly between police stations so that timely action can be taken.

2. Cooperation with non-EU countries

(1) Cooperation with supervisory authorities in non-EU countries:

• Regulators in EU member states are required to enter into cooperation agreements with regulators in non-EU countries to exchange information and jointly enforce the law. This would ensure that even cross-border crypto-asset transactions can be effectively regulated, just as international police forces work together to combat transnational crime.

(2) Security of information exchange:

• These cooperation agreements must ensure the confidentiality and security of information exchanges and prevent the leakage or misuse of sensitive information. It's like when police from different countries share intelligence, they have to make sure that the intelligence is not obtained by terrorists or criminals.

3. The role of the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA)

(1) Coordination and promotion of cooperation:

• ESMA and EBA are responsible for coordinating cooperation among EU regulators and developing standardized cooperation agreements and information exchange procedures. Just like Interpol coordinates actions between police forces in different countries to ensure that everyone follows the same standards and procedures.

(2) Formulate technical standards:

• ESMA and EBA will develop technical standards to ensure that the format and content of information exchanged are consistent and easy for regulators in various countries to use. It's like developing a unified language so that police in different countries can understand and use shared information.

4. Dealing with cross-border issues

(1) Transnational investigation and supervision:

• When dealing with cross-border crypto asset violations, regulators in relevant countries need to jointly investigate and supervise. This is similar to a joint operation by police from multiple countries to catch transnational criminal gangs.

(2) Solving cooperation problems:

• If one country’s regulator refuses to cooperate or does not respond to a request for information in a timely manner, other countries can escalate the issue to ESMA or the EBA, which will coordinate a resolution. It's like submitting the problem to Interpol and asking them to coordinate and resolve it.

Impact 1: Delisting of privacy coins

Crypto assets with built-in anonymity features (such as "privacy coins" such as Monero and Zcash) can only be allowed on trading platforms if CASP or relevant regulatory authorities can identify token holders and their transaction history. Since this is practically impossible, EU-regulated cryptocurrency exchanges are expected to remove privacy coins from their offerings.

Impact 2:CASP, which has obtained relevant European licenses, will find it easier to obtain Mica's license

CASPs that have already been licensed under the national framework will benefit from a streamlined MiCA authorization process and have up to 18 months to obtain a final MiCA license. For example, regulated crypto custodians in Germany may benefit from these simplified procedures and transitional measures. However, only MiCA-licensed CASPs will have the opportunity to provide services across the EU Single Market through a so-called inter-regional licence. That’s why most cryptocurrency businesses are expected to apply for MiCA authorization as soon as possible.

Impact 3: UnificationLarge European Market

The MiCA regulations will bring about unified supervision, enhance competitiveness and promote institutionalization. Until now, crypto companies in the EU have had to apply to regulators in every country if they want to serve the entire EU market, which is costly and cumbersome. Under MiCA, the same binding EU requirements will apply to all 27 member states. Once a company obtains a MiCA licence in one country, it will be able to provide licensed services across the EU Single Market through a ‘cross-regional licence’.

Impact 4: Offshore companiesWill be restricted, EU companies will benefit

Once MiCA comes into force, offshore, unregulated firms will not be able to actively attract clients from the EU. Even the rules under which foreign companies can take on customers if they are contacted by EU users will become stricter. This means that MiCA-regulated crypto businesses will take more EU market share from these unregulated overseas competitors.

Impact 5: MiCA promotes institutional participation and European banks accelerate their deployment

MiCA could lead to increased institutional adoption and activity in the EU crypto market. According to Bloomberg, only 4% of European institutional funds are exposed to crypto assets. Regulatory uncertainty is one of the main concerns that prevents institutions from entering this space. It is expected that within the next 48 months, major European banks will launch crypto asset services, whether it is custody, trading, or the issuance of e-money tokens or asset-referenced tokens.

Impact 6: MiCA’s impact on stablecoin issuers

MiCA’s new regulatory rules will bring significant compliance challenges to stablecoin issuers represented by Tether, especially considering that Tether has not been able to fully disclose the status and composition of its reserves, nor has it been fully audited by an authoritative independent organization. Tether has also been involved in multiple lawsuits and investigations, including an $1850 million settlement with the New York Attorney General's Office and a rumored investigation by the U.S. Department of Justice for alleged bank fraud, money laundering, and illegal operations. In the future, stablecoin issuers represented by Tether will face greater compliance reform costs.

To meet these challenges, Tether should actively advance its own compliance process and establish good cooperative relations with EU regulators and third-party auditing agencies to enhance its market credibility and competitiveness. Faced with increasingly stringent regulatory requirements, Tether has taken steps to advance its compliance process. For example, Tether recently announced that it will work with the Italian branch of BDO International, the world’s fifth-largest accounting firm, which will be responsible for auditing the company’s reserve assurance and certification reports and plans to change the frequency of audit reports from quarterly to monthly.

Under the MiCA framework, stablecoin issuance will become more compliant and transparent. Stablecoin issuers such as Tether need to accelerate their compliance process to adapt to the new regulatory environment and remain competitive in the EU market.

Impact 7: MiCADefiImpact

MiCA applies to businesses – both natural and legal persons and “certain other businesses”. “Other businesses” could include entities that are not legally established, but the EU has clarified that decentralized DAOs and protocols are not newly targeted. Paragraph 22 of MiCA clarifies that “crypto-asset services should not be within the scope of this Regulation if they are provided in a fully decentralized manner, without any intermediaries.” This core statement is supported by multiple public statements by key officials from the European Commission and Parliament.

However, details determine success or failure. The bill states that MiCA may apply even if some activities or services are performed in a decentralized manner. This means that if there are certain parts or links in a DeFi project that are not fully decentralized, it may still be necessary to comply with the relevant provisions of MiCA.

What level of decentralization (technical, governance, legal, etc.) is needed to be out of scope? It is an unambiguous subjective judgment. I expect some enforcement and litigation cases to develop around this issue. The EU is generally reluctant to enforce its laws in other countries, but it will pay special attention if some DeFi projects are nominally decentralized but actually centralized and provide services in Europe or to EU users.

DeFi projects have two options if they want to be outside the scope:

• Prove full decentralization (high threshold)
• Blocking EU users

However, the EU deserves praise for excluding truly decentralized DeFi projects when formulating regulations for traditional financial companies. It would be good news if something of MiCA could become a global standard.

Impact 8: Challenges and uncertainties

However, the actual success of MiCA is highly dependent on the implementation standards and enforcement practices that EU regulators develop over the next 12-18 months. Some provisions may impose burdens on industry participants, and their full impact will only become apparent once technical implementation standards provide practical operational guidance.

Impact 9: High compliance costs and hindered innovation

As in Hong Kong’s recent situation, compliance costs were too high and companies fled. Mica’s compliance costs will similarly cause stablecoin issuers to bypass the EU. The disclosure requirements and responsibilities faced by exchanges are too onerous to bring benefits to consumers, making their products less competitive than offshore competitors. EU consumers can either be cut off from innovation or continue to use (and be exposed to) the largest pool of offshore liquidity and utility. Additionally, regulators may decide that most NFT and DeFi projects are actually within the scope of MiCA and need to comply — a door that the current MiCA preamble remains open to interpretation. This will inevitably lead to the relocation of teams and resources out of the EU.

MiCA has the potential to become the GDPR of the cryptocurrency space, a widely adopted regulatory standard around the world, but this is not a foregone conclusion yet.

It is undeniable that MiCA will have a significant impact on the crypto-asset frameworks of other jurisdictions, especially those with insufficient experience in financial regulation and supervision. Many of the concepts in the recent Financial Stability Board (FSB) recommendations for crypto service providers and a “global stablecoin arrangement” have been inspired by MiCA.

The EU market is the world’s largest internal market, with 4.5 million relatively affluent consumers. With its market size, MiCA will prompt many companies around the world to adopt MiCA’s operating standards, and potentially even adapt them internationally to maintain consistency in global operations and products. The global impact of EU regulatory standards has been observed in multiple industries, from chemicals to agriculture to technology, a phenomenon that Columbia Law School professor Anu Bradford has dubbed the “Brussels effect.”

Current U.S. Commodity Futures Trading Commission (CFTC) Commissioner Caroline Pham warned: “As the U.S. struggles to provide regulatory clarity for the domestic crypto industry, a global regulatory framework like MiCA could fill the gap.”

As the regulatory vacuum for crypto assets in the United States continues, the global influence of the MiCA standard is expected to grow.

However, ultimately it is the actual success of MiCA that is key, and much of the practical implementation work still lies ahead. If MiCA proves viable for industry, consumers and regulators, it will have global impact. Otherwise, many jurisdictions may choose a completely different policy path. Only time and the market will tell us the answer.

After the complete debacle of FTX, even the staunchest crypto maximalists had to admit that some form of sensible regulation was needed to move the space forward and prevent the worst scams.

Based on Aiying’s research on various regional bills and client services in recent years, the MiCA Act should be the most comprehensive crypto asset regulatory framework we have seen globally. It should be able to provide reference for many other countries and regions. Aiying will continue to pay attention to updates on the bill.