By Iacovos Kouppas, Partner, I.K.Kouppas & Co LLC
With the implementation of MiCAR in the EU upon us, it is crucial for market participants and authorities to understand its implications and interactions with existing legal frameworks. MiCAR, primarily established for crypto-assets, intersects with other EU regulations, which requires clear delineation to ensure compliance.
How Does MiCAR Interact with Other Legal Frameworks?
Under MiCAR, crypto-assets based on Distributed Ledger Technologies (DLT) may qualify as securities, deposits, or derivatives under existing European financial regulations like MiFID II or the Capital Requirements Directive (CRD). In instances where these rules apply, MiCAR may not be applicable. For market players, determining the correct regulatory regime is crucial to ensure adherence to the appropriate legal guidelines.
What Are Tokenized Deposits?
Tokenized deposits present a unique challenge. Though they are crypto-assets when recorded on DLT, MiCAR does not apply under certain conditions. According to the European Banking Authority (EBA), account-based tokenized deposits have distinct features:
- Continuous contractual relationships with credit institutions.
- Lack of transferability in secondary markets.
- Limited to withdrawal and transfer of underlying funds rather than settling transactions.
- Ability to accrue interest.
- Denominated in an official currency.
These criteria help define which arrangements fall under deposit protection, further emphasizing the importance of identifying the applicable regime.
What Is the Relationship Between MiCAR and PSD2?
Another layer of complexity arises with e-money tokens (EMTs), which are regarded as both crypto-assets under MiCAR and electronic money under PSD2. This dual character necessitates an understanding of how EMTs are treated under payment services regulation. Crypto-asset providers handling EMTs for payment services might need dual authorization under both MiCAR and PSD2.
A recent proposal suggests that if EMTs are used primarily for investment or trading rather than payments, the burden of PSD2 compliance may be unnecessarily heavy. However, the specific approach varies among EU Member States, creating a need for a cohesive strategy to avoid unnecessary licensing burdens.
What Are the Next Steps for Crypto-Asset Service Providers?
In anticipation of the new regulations, crypto-asset service providers should:
- Evaluate the nature of their tokenised deposits and EMT activities to determine the correct legal framework.
- Engage with legal experts to ensure their operations align with evolving EU regulations.
- Stay informed on the development of PSR/PSD3 for further clarity.