Author: Shen Jiangguang, Chief Economist of JD Group; Zhu Taihui, Senior Research Director of JD Group
Introduction
In June 2023, the European Union officially released the "Regulation on Markets in Crypto-Assets" (MiCA), which will come into full effect on December 30, 2024, applicable to 27 EU member states and an additional three European Economic Area countries (Norway, Iceland, Liechtenstein). This regulation addresses the fragmentation and regulatory arbitrage issues in crypto asset regulation within the EU and EEA countries, making it the most comprehensive cryptocurrency regulatory framework globally.
MiCA provides detailed regulations on the definition and use of crypto assets, the licensing of crypto asset issuers and service providers, the operational management of these issuers and service providers, the management of reserves and redemptions by crypto asset issuers, and anti-money laundering regulations for crypto asset trading activities. It is the most comprehensive global policy on crypto asset regulation to date.
MiCA recognizes the role of crypto asset development in enhancing financial service efficiency, improving financial inclusivity, and promoting economic growth, while also addressing the challenges posed by crypto asset development to the operation of payment systems, financial system stability, and the transmission of monetary policy (monetary sovereignty). It strikes a balance between supporting financial innovation and fair competition, maintaining financial stability, and protecting consumer rights. Starting in 2025, as MiCA gradually takes effect across European countries, it will significantly promote the compliant development of the global crypto asset market and lead the formulation of crypto asset regulatory policies in other countries and the construction of a global governance coordination system.
I. Classification and Definition of Crypto Assets, and Clarification of Usage and Trading Requirements
1. MiCA classifies regulated crypto assets into three main categories
Based on whether crypto assets attempt to stabilize their value by referencing other assets, MiCA classifies regulated crypto assets into three categories: Electronic Money Tokens (EMT), Asset-Referenced Tokens (ART), and Utility Tokens (UTs) along with other crypto assets, while completely decentralized crypto assets are not subject to MiCA regulation.
Among these, EMTs maintain their value by referencing an official currency (i.e., fiat-backed stablecoins) and serve as a means of payment. The issuers of EMTs are prohibited from paying interest on EMTs (including compensation, discounts, etc., similar to domestic requirements for non-bank payments).
ARTs maintain stable value by referencing another value or right or a combination of both, including one or more values or rights, commodities, fiat currencies, or crypto assets. They serve as a means of transaction and investment tool, and issuers and service providers must not pay interest related to the holding period of ARTs to holders.
The difference between EMTs and fiat currency-backed ARTs lies in the claim rights; EMT holders can redeem EMTs at face value at any time, while ART holders do not have such strong guarantees regarding redemption timing and value.
UTs and other crypto assets provide digital access to certain goods or services, are provided on distributed ledger technology, and are only accepted by the issuer of the token, serving non-financial purposes related to the operation of digital platforms and services. Additionally, non-fungible tokens (NFTs) and central bank digital currencies (CBDCs) are not within the scope of MiCA regulation, and security tokens are regulated under securities laws.
Table 1: MiCA's Regulatory Requirements for Crypto Assets and Their Issuers
2. Usage and trading requirements set limits on daily trading volume and foreign currency stablecoin usage
MiCA requires that the daily trading volume of individual ARTs and EMTs must not exceed 5 million euros, and when the market value of ARTs or EMTs exceeds 500 million euros, issuers must report to regulatory authorities and implement additional compliance measures.
MiCA allows the use of EMTs (stablecoins) for cryptocurrency trading and decentralized finance (DeFi) activities but distinguishes restrictions on the use of EMTs for payment of goods and services. Only euro stablecoins may be used for daily goods and services payments to protect the EU's monetary sovereignty and prevent the development of foreign currency stablecoins from affecting the EU monetary system.
Furthermore, MiCA imposes strict limits on the daily usage scale of ARTs, requiring that if the number of transactions exceeds 1 million or the transaction amount exceeds 200 million euros (quarterly average) within a single currency area, the issuance of that ART must cease.
II. Clarification of Licensing Requirements for Crypto Asset Issuers and Service Providers, Implementing Classification Regulation
1. Different entry and licensing requirements for different types of crypto asset issuers
MiCA recognizes that ARTs may be widely used by holders for value transfer or as a means of exchange, and to protect the interests of holders (especially retail holders) and market integrity, it imposes stricter requirements on ART issuers.
MiCA specifies the entry authorization requirements for ART issuers: ART issuers must establish themselves as legal entities in the EU, must first obtain authorization from the designated regulatory authority in their home country, and such assets must be traded on crypto asset trading platforms. However, exemptions from entry authorization may apply if the ART issuer is already a credit institution, if the outstanding ART is below 5 million euros, or if the ART is issued to qualified investors.
For EMT issuers, MiCA requires that they must be authorized as credit institutions or electronic money institutions and comply with the requirements of the Electronic Money Directive (EMD2) regarding electronic money institutions. EMT issuers may also be exempt from entry authorization if the amount of EMT does not exceed 5 million euros, but they must publish a white paper as required.
For issuers of crypto assets other than ARTs and EMTs, MiCA's requirements mainly focus on disclosure rules, but the white papers for these crypto assets need to be registered with the European Securities and Markets Authority (ESMA).
2. Clarification of the scope of crypto asset services and licensing requirements for service providers
MiCA defines the scope of crypto asset services broadly, covering the following ten business activities: providing custody and management of crypto assets on behalf of clients, operating crypto asset trading platforms, exchanging crypto assets for fiat currencies, exchanging crypto assets for other crypto assets, executing crypto asset orders on behalf of clients, making crypto investments, receiving and transmitting crypto asset orders on behalf of clients, providing advice on crypto assets, managing crypto asset portfolios, and providing transfer services for crypto assets on behalf of clients.
On this basis, MiCA classifies any individual or entity that provides crypto asset services for commercial purposes as a Crypto Asset Service Provider (CASP). Service providers intending to offer crypto asset services must register an office in one of the EU member states and apply for CASP authorization from the competent authority in the member state where their office is registered. It is important to note that crypto asset services provided in a fully decentralized manner without any intermediaries are not subject to MiCA regulation.
III. Clarification of Operational Requirements for Crypto Asset Issuers and Service Providers, with Capital Regulation as a Focus
1. Capital regulation as a top priority for the operational supervision of crypto asset issuers
MiCA sets clear requirements for ART issuers regarding information disclosure and honest operation, corporate governance mechanisms, internal control mechanisms, risk management procedures, reserve asset management, and redemption. It requires all types of crypto asset issuers to publish a white paper (except for UTs and small cryptocurrencies). For EMT issuers, they must meet the operational supervision requirements for electronic money and payment instrument institutions.
Additionally, to address the potential impact of widespread ART issuance on financial system stability, MiCA imposes specific capital requirements on ART issuers (essentially following a principle proportional to the scale of ART issuance), requiring them to always maintain at least the higher of the following amounts in their own funds: 1) 350,000 euros, 2) 2% of the average amount of reserve assets/token issuance as described in Article 32 of MiCA, or 3) one-quarter of the fixed indirect costs from the previous year (if the ART issuer is a credit institution, it must comply with capital regulatory requirements for credit institutions); for EMT issuers, the capital requirement is not less than 2% of the circulating scale of EMT issuance, and they must also meet the capital regulatory requirements for credit institutions or electronic money institutions.
Furthermore, MiCA evaluates whether ARTs and EMTs are "significant crypto assets" based on factors such as the number of customers, market capitalization, trading volume, and their connection to the traditional financial system, imposing additional risk and own funds requirements on issuers of significant crypto assets.
2. Differentiated regulatory requirements for different types of crypto asset service providers
MiCA sets differentiated minimum capital requirements for different types of crypto asset service providers, to be implemented at no less than the following standards or one-quarter of the previous year's fixed management fees: the minimum permanent capital (own capital) required to be maintained by trading platforms is 150,000 euros; the minimum permanent capital for crypto asset custodians and brokers is 125,000 euros; and the minimum permanent capital required for CASPs providing other services is 50,000 euros, with annual reviews of regulatory requirements.
At the same time, MiCA also proposes targeted regulatory requirements for different CASPs. For example, MiCA requires crypto asset custodians to establish clear custody policies, regularly communicate asset status to clients, and bear responsibility for losses of client assets due to network attacks/failures, while trading platforms need to implement monitoring for market manipulation, publicly disclose buy/sell prices and trading depth, and trading brokers need to establish non-discriminatory policies. Advisors and portfolio managers must assess whether to engage in crypto asset investments based on clients' risk tolerance and knowledge.
Table 2: MiCA's Differentiated Capital Requirements for Crypto Asset Service Providers
IV. Strengthening the Regulation of Issuer Reserve Asset Management, with Focus on Isolation of Custody and Timely Redemption
1. Clear requirements for the custody and allocation of reserve assets
To protect the reserve assets of ARTs from claims by the issuers and custodians' creditors, MiCA requires that the reserve assets of ARTs must always be completely isolated from the issuer's own assets. Issuers must entrust the reserve assets to qualified credit institutions, investment firms, or crypto asset service providers for separate custody, and reserve assets must not be used by the issuer as collateral or guarantees. In the event of a loss, custodians must return crypto assets of the same type or corresponding value to the ART issuer, unless the custodian can prove that it can be exempted from repayment obligations.
When issuers face bankruptcy or are unable to fulfill their obligations to holders, reserve assets should be prioritized for ensuring redemption payments to ART holders. However, MiCA has not yet provided specific requirements on the principles for ensuring the redemption rights of all holders when reserve assets cannot guarantee the redemption of all holders at face value.
For the management of reserve assets for EMTs, MiCA requires issuers to comply with the protection requirements of the EU's Electronic Money Directive (EMD2) and the Payment Services Directive (PSD2): reserve assets must not be mixed with funds from any natural or legal persons other than payment service users at any time; reserve funds should be invested in assets denominated in the same currency as the currency referenced by the electronic money tokens to avoid cross-currency risk; and if funds are held by payment institutions and are not used for payments by the end of the next business day, they should be deposited in a separate account at a credit institution or invested in safe, liquid, low-risk assets determined by the competent authority of the member state; EMT issuers must isolate reserve assets from the claims of other creditors, ensuring that EMT holders receive priority payments in the event of the issuer's bankruptcy.
Additionally, MiCA imposes strict requirements on the allocation and structure of reserve assets for crypto asset issuers: general ART and EMT issuers are required to keep 30% of their reserve assets as deposits in credit institutions (banking institutions), while significant ART and EMT issuers must keep 60% of their reserve assets as deposits in credit institutions.
2. Key protection of holders' redemption rights
For ARTs, MiCA requires issuers to establish liquidity mechanisms and develop orderly redemption plans for tokens to ensure asset liquidity and meet customer redemption requests. If the market price of an ART significantly deviates from the value of the reserve assets, ART holders have the right to redeem ARTs directly from the issuer, even if the issuer has not contractually granted that right. However, MiCA does not specify the time limits for the funds to be credited to holders upon redemption of ARTs, and further follow-up is needed on the specific implementation requirements from EU member states.
For EMTs, MiCA requires issuers to ensure that EMTs can be redeemed at face value at any time, either in cash or by credit transfer for the currency value held in EMTs. The conditions for redemption must be specified in the crypto asset white paper, and no fees should be charged for redemption. If the issuer of EMTs fails to meet the redemption requests of EMT holders within 30 days, holders can seek assistance from the custodian of the EMT assets and/or distributors acting on behalf of the EMT issuer.
V. Implementing Strict Anti-Money Laundering Regulations for Cryptocurrencies, Enhancing Travel Rule Implementation Standards
Crypto assets, based on blockchain issuance and trading, possess characteristics such as decentralization, globalization, anonymity, convertibility (to fiat currency), and irreversibility of transactions. The bridge technology enhances the interconnectivity of different blockchains, making the prevention of money laundering and terrorist financing risks associated with crypto assets more complex. MiCA and relevant EU regulatory frameworks have made targeted requirements in this regard.
1. MiCA requires comprehensive anti-money laundering regulations for crypto asset trading
MiCA places great emphasis on the potential illegal activities (such as insider trading, market manipulation, etc.) that stablecoins and the crypto market may generate, requiring all crypto asset service providers to implement comprehensive anti-money laundering and counter-terrorist financing measures, including strict KYC procedures and transaction monitoring, implementing rigorous customer due diligence (CDD) procedures, monitoring suspicious transactions, and reporting to relevant authorities to prevent money laundering and terrorist financing activities.
Although ARTs and EMTs operate on open systems without requiring a direct relationship with the issuer, MiCA still emphasizes that issuers should utilize chain analysis to understand the usage of tokens, allowing issuers to view the activity wallets holding their tokens in real-time, including holder behaviors (i.e., exchanges with personal wallets, holding periods), overall transaction volumes across multiple blockchains, and the scale of transactions involving sanctioned entities or jurisdictions, to prevent tokens from being used for illegal activities.
2. MiCA raises the anti-money laundering "travel rule" requirements for crypto assets
The "Funds Transfer Regulation," passed simultaneously with MiCA, provides more targeted requirements for anti-money laundering and counter-terrorist financing actions related to crypto assets, requiring crypto asset service providers to include information about the remitter and recipient when transferring crypto assets (i.e., the anti-money laundering and counter-terrorist financing "travel rule"). Transfers of any amount of cryptocurrency between accounts at their crypto asset service provider (CASP) are not allowed without personal identification information. Compared to the 1,000 euro/dollar threshold set by the FATF for the implementation of the "travel rule," the aforementioned requirements of the "Funds Transfer Regulation" are undoubtedly stricter.
Additionally, in December 2024, the European Banking Authority (EBA) officially announced the extension of the EU's "Travel Rule Guidelines" to crypto asset service providers and intermediaries, requiring the collection and reporting of information on users transferring funds or crypto assets, determining whether transactions are related to the purchase of services, and monitoring suspicious crypto asset transactions; crypto service providers and intermediaries need to declare their policies on multiple intermediaries and cross-border transfers.
VI. Impact on Global Crypto Asset Development and Regulation
The implementation of MiCA marks a shift in the global crypto asset market from "free development" to a stage of "compliant competition," which will have significant implications for the structure of global crypto asset market development, the direction of global crypto asset regulation, and the construction of a global collaborative governance system for crypto assets.
1. MiCA will promote the standardization and stratification of global crypto asset market development
Based on the differentiation of crypto asset types, MiCA implements differentiated licensing access and operational regulation for crypto asset issuers and service providers, proposing differentiated capital and liquidity requirements for different types of issuers and service providers, providing standardized action guidelines for the business activities of crypto asset market participants.
At the same time, considering that MiCA's regulatory requirements are relatively strict, such as high standards for reserve asset isolation custody, minimum capital requirements, and anti-money laundering regulations, it raises the compliance costs of operating in the crypto asset market, benefiting compliant leading issuers and service providers (such as Circle's USDC) to consolidate market share through licensing barriers while accelerating the exit of non-compliant crypto asset issuers and service providers.
Moreover, while MiCA exempts completely decentralized crypto assets from regulation, decentralized exchanges (DEXs) that involve fiat currency exchanges or custody services still need to fall under CASP regulation, forcing decentralized crypto asset trading platforms to restrict access for EU users, pushing decentralized platforms to the margins. For the entire crypto asset market, these factors will ultimately increase the overall market concentration.
2. MiCA will serve as a reference for the formulation of crypto asset regulatory policies in various countries
From the perspective of international regulatory organizations' policy recommendations, in July 2023, the Financial Stability Board (FSB) released high-level recommendations on the regulation of "global stablecoins" and high-level recommendations on the monitoring, supervision, and regulation of crypto asset businesses and markets. The recommendations regarding governance frameworks for stablecoins and crypto asset issuers and service providers, risk management, information disclosure, reserve asset management, and stablecoin redemption, as well as the principles of "same activity, same risk, same rules" and technology neutrality, are also requirements of MiCA, or can be seen as reflections of MiCA rules.
From the regulatory practices of various national regulatory authorities, regulatory agencies in EU countries will formulate specific implementation policies based on MiCA's requirements. MiCA's classification definitions for crypto assets, access regulation and operational requirements for issuers and service providers, upgraded application of anti-money laundering regulatory "fulfillment rules," and restrictions on foreign currency-backed stablecoins in physical transaction payments have also become important references for the formulation of cryptocurrency regulatory regulations in non-EU countries such as Singapore and Japan.
In this regard, MiCA not only initiates the process of compliance in the development of the global crypto asset market but also opens the door to the standardization of global cryptocurrency market regulation. Of course, during this process, it is also possible that some countries may lower regulatory requirements (regulatory competition) to promote the establishment of competitive advantages in their domestic cryptocurrency markets.
3. The construction of a global collaborative governance system for crypto assets is also expected to accelerate
Crypto assets are global in nature and inherently cross-border. Compared to traditional banking and financial markets, the globalization of the crypto asset market is higher, making it more urgent to create a global regulatory governance system. Since the second half of 2023, the global stablecoin and cryptocurrency market has entered a rapid development track. According to monitoring data from Triple A, by 2024, the number of global crypto asset holders will exceed 560 million, and entering 2025, the total market capitalization of crypto assets will remain above 3 trillion dollars for most of the time, with the integration of crypto assets into the traditional financial system and real economy transactions advancing rapidly, making the construction of a global cryptocurrency governance system even more prominent.
Currently, global cryptocurrency regulation is still in a fragmented state of each acting independently, and international regulatory organizations have not yet issued stablecoin and crypto asset regulatory standards similar to the "Basel Accords." The construction of stablecoin and crypto asset regulatory systems in various countries also lacks a specific roadmap and timeline. With the comprehensive implementation of MiCA in the EU, the United States is also accelerating the advancement of regulatory frameworks for stablecoins and crypto assets. It is expected that the FSB and other international regulatory organizations will expedite the research and formulation of unified regulatory standards for global crypto assets and the construction of a collaborative governance mechanism for global cryptocurrencies. The MiCA legislation also clearly states that the EU will continue to support the promotion of global collaborative governance of crypto assets and crypto asset services through international organizations or institutions (such as the Financial Stability Board, Basel Committee on Banking Supervision, and Financial Action Task Force).
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