Regulations for the crypto market: MiCAR and BCBS DIS55
The crypto markets have long been a hot topic among investors and are now worth billions. They promise stability and can be traded around the clock. The underlying blockchain technology has also long since arrived and is being used in pilot projects as part of the DLT (distributed ledger technology) pilot regime for the settlement of financial instruments. However, cryptocurrencies have not been regulated in the EU until now, and this will only begin in 2023. This is now changing with the MiCAR (Markets in Crypto-Assets Regulation), which has now been adopted and entered into force. We have summarized and prepared the most important changes and new regulations for you here.
Markets in Crypto-Assets Regulation (MiCAR)
The MiCAR (Markets in Crypto-Assets Regulation) defines uniform EU-wide requirements for the offering and trading of crypto assets for the first time. The aim is to close national regulatory gaps and establish a uniform understanding of crypto assets in the EU.
MiCAR is aimed at all natural and legal persons who issue or offer crypto assets in the EU or provide services in this context (so-called crypto asset services). The ordinance is valid on entered into force on July 29, 2023, 20 days after their publication. However, it will not be fully applicable until 18 months later, on December 30, 2024.
Crypto assets are defined in MiCAR as “digital representations of a value or right that can be transferred and stored electronically using distributed ledger technology or similar technology” (Article 3, paragraph 1, point 5 MiCAR). This definition closes gaps in national German legislation (KWG), as it now also includes well-known cryptocurrencies such as Bitcoin or Ethereum.
However, non-fungible tokens (NFT) or security tokens do not fall under the definition of MiCAR.
It is important to add that MiCAR must be considered in addition to MiFID II (Markets in Financial Instruments Directive) and EMD II (Electronic Money Directive) as well as national regulations such as the German Banking Act (KWG). The EU directives complement each other in this respect; contradictions with national laws must be balanced out at national level through new formulations or the omission of articles.
One focus of MiCAR is to create a common understanding. MiCAR differentiates between different types of tokens and assigns them different regulatory requirements:
- E-money tokens: crypto assets whose value stability is to be maintained by an official currency (Art. 3, para. 1, no. 7, MiCAR).
- Asset-backed tokens: crypto assets that are not e-money tokens and whose value stability is to be maintained by reference to another asset or right or a combination thereof, including one or more official currencies (Art. 3, para. 1, no. 6, MiCAR).
- Utility tokens: crypto assets that are intended solely to provide access to a good or service provided by their issuer (Art. 3, para. 1, no. 9, MiCAR).
- Other crypto assets (Art. 4, MiCAR).
The tokens are regulated more strictly in descending order as listed above.
The MiCAR also regulates who may be an issuer of crypto assets and who may offer services related to crypto assets, as well as which authorities are responsible for supervision. Many services, such as the operation of a trading platform for crypto assets or the custody and management of crypto assets, will be subject to authorization for customers.
MiCAR also enacts market regulations, such as the ban on insider trading and the requirements for information for investors in crypto assets in so-called white papers. These new compliance obligations, particularly through services for crypto assets, will present many providers with new challenges, such as the creation of white papers or compliance with ESG regulations.
The topic of outsourcing is also regulated in the MiCAR, with strict requirements in compliance with the Digital Operational Resilience Regulation (DORA).
What happens next:
On March 8, 2024, the EBA published a consultation paper (Draft Guidelines on redemption plans under Articles 47 and 55 of Regulation (EU) 2023/1114), which deals with the redemption of cryptoassets. The redemption of cryptoassets is intended to increase market stability and prevent crypto runs (similar to bank runs). The paper evaluates various options for cost allocation and timeframes, with a preference for covering the take-back costs from the reserves and setting flexible but clear deadlines. The redemption process should be clearly described and comply with measures to combat money laundering and terrorist financing. A communication plan will be required to inform token holders in good time. In the case of joint token issuance, issuers should act in a coordinated manner and the authorities should work closely together to evaluate and activate the redemption plans.
The EBA’s consultation ran until June 10, 2024 and will then be evaluated.
On March 25, 2024, ESMA (European Securities and Markets Authority) published a further consultation paper (ESMA75-453128700-1002) dealing with systems for the prevention and detection of market abuse . This includes the use of software to analyze and warn of suspicious activities as well as the possibility of delegating these tasks under certain conditions. Reporting obligations include the use of standardized templates (STOR) for detailed and accurate reports to authorities in the event of suspicious cases. Regular training should ensure that employees are able to effectively recognize and prevent market abuse. In addition, the regulation places requirements on investor protection, in particular with regard to advisory services and portfolio management, as well as on operational resilience, especially when dealing with cryptographic keys. ESMA conducted a public consultation on this until June 25, 2024 and plans to publish technical standards by the end of 2024 and submit them to the EU Commission.
Until now, providers of trading platforms and services in the field of crypto assets, particularly those from outside Europe, have been able to operate in a legal gray area. This is now changing with MiCAR. The companies affected must expect compliance costs to rise, but can also benefit from the common EU-wide rules if they position themselves in good time.
BCBS DIS55: Regulatory requirements for bank exposures from cryptoassets
In December 2022, the Basel Committee on Banking Supervision (BCBS) published proposals for the treatment of cryptoasset exposures in its publication “SOC60 – Prudential treatment of cryptoasset exposures”. These topics were summarized in the publication “Disclosure of cryptoasset exposures” on 17 October 2023 and published for consultation. The aim is to specify requirements and implement them by January 1, 2025.
The following structure is proposed:
- Table CAEA: This table contains qualitative information on the bank’s activities in connection with cryptoassets and the assessment of the classification conditions.
- Template CAE1: This template provides an overview of the cryptoasset exposures and the corresponding capital requirements.
- Template CAE2: This template covers the accounting classification of exposures to cryptoassets and crypto liabilities.
- Template CAE3: This template contains the liquidity requirements for exposures to cryptoassets and crypto liabilities.
The Basel Committee on Banking Supervision’s consultation document on the disclosure of cryptoasset exposures represents an important step towards increasing transparency and consistency in banks’ reporting. The proposed disclosure templates are intended to help standardize information on cryptoasset exposures and thus better inform market participants. The Committee expects that these measures will strengthen confidence in the stability of the financial system.
For banks that interact with cryptoassets, the Basel Committee’s new disclosure requirements are a significant development. Through early and careful preparation, adaptation of internal processes and systems and improved risk management practices, banks can ensure that they meet the new requirements.
What does the future hold in terms of the regulation of crypto assets?
The BCBS has analyzed the risks arising from stablecoins (FSI Insights No 57) and identified inconsistencies in international supervision.
Stablecoins are cryptoassets whose value is linked to a reference asset and can be redeemed on demand. Stablecoins, which are linked to a single currency, could become widely used as a means of payment. The connection to the reference asset is intended to ensure greater stability. Despite their potential benefits, they carry significant risks such as loss of value, illegal use and threats to financial stability. Regulatory requirements vary: Stablecoins can be issued either by banks, certain non-banks or new financial companies with special licenses.
Differences in the regulatory regimes lead to inconsistencies in monitoring. International cooperation is crucial to ensure harmonized regulation. It can be assumed that the BCBS will publish a harmonized guideline for monitoring stablecoins, which will then have to be implemented nationally.
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