The MiCA (Markets in Crypto-Assets) Regulations. represents the first organic and harmonized regulatory framework at the European level dedicated to crypto-assets. Officially approved on May 31, 2023 and gradually coming into effect from June 2023 until December 2024, MiCA introduces a number of Common rules for the entire European cryptocurrency market, with the aim of overcoming the current regulatory fragmentation among member states.

Europe, in contrast to, for example, the United States, prefers the path of caution and prior regulation to that of free experimentation and ex post regulation, and while this principle is usually justified, in the case of the digital finance is risky because the world is moving faster than Europe's regulatory capabilities: the risk is on the one hand of losing control of a phenomenon that is happening anyway and on the other hand of falling behind in the race for technological competitiveness.

MiCA regulations, like the DLT Pilot Regime, represents one of the European Union's moves to react to this situation and lead the development and experimentation of digital finance, with both defensive and proactive action.

Goals and principles of MiCA regulations

The MiCA regulations arises from some priority needs:

• Ensuring a certain legal framework For market participants.
• Protect investors and users of crypto-assets from risks such as fraud, operator failure, cyber attacks, and market manipulation.
• Preserving the financial stability, especially in light of the systemic risks associated with some digital assets. 

Indeed, in the absence of a uniform regulatory framework, the uncontrolled growth of certain instruments such as global stablecoins or highly volatile tokens can generate domino effects on interconnected financial markets, payment systems, and banks. The interconnection between traditional players and new crypto players, without adequate prudential safeguards, could amplify the transmission of financial shocks, affecting the real economy, private savings, and monetary stability.

• Prevent market abuse, including insider trading, illegal disclosure of insider information, and market manipulation.
• Countering the risk of money laundering and illicit financing.
• Fostering technological development and financial innovation.

The intent is twofold: on the one hand. Stimulate the development of a competitive and transparent European crypto-asset market, capable of attracting capital, innovation and new entrants to the regulated perimeter; on the other hand, preventing the flight of operators to non-EU countries with less stringent rules, thus ensuring a level playing field and promoting the European Union's technological and financial leadership in a booming global industry.

Crypto-assets: what it's all about

The regulation defines and regulates four main categories of crypto-assets:

• Asset-Related Tokens (Asset-Referenced Token ART): tokens whose value is pegged to multiple currencies, commodities or other assets, and used primarily as a medium of exchange or store of value (e.g., some multi-asset stablecoins).
• E-money token (E-Money Token EMT): tokens that replicate the value of a single fiat currency (e.g., euro, dollar), similar to today's electronic currencies.
• Other crypto-activities not falling into the previous categories and not classifiable as financial instruments already covered by other EU regulations (e.g., MiFID II). For example, the Utility Token, which give access to goods or services provided by the relevant issuer or a third party, but are devoid of investment purposes.

It is important to note that NFTs (Non-Fungible Tokens) and DeFi (decentralized finance) services remain partially excluded from the scope of MiCA for now, although the European Commission has already foreseen possible future extensions.

Central bank digital currencies, which have dedicated regulations, are also excluded.

We also emphasize that the crypto-assets covered by this regulation do not include Security tokens, because they are assimilated to financial instruments and thus fall within the scope of interest of MiFID II and other regulations for financial instruments proper.

What's new at MiCa

Prior to MiCA, the European crypto sector was only partially regulated, leaving wide margins of discretion to individual member states. This fragmented situation generated uncertainty for companies and investors and hindered the creation of a single European market. 

The lack of a specific body of rules for services related to crypto-assets that do not qualify as traditional financial instruments had left crucial aspects uncovered, such as the operation of trading platforms, the custody of crypto-assets for third parties, and the exchange between crypto-assets and fiat currencies or other crypto-assets.

With MiCA, however, it is introduced:

• A common authorization regime: companies wishing to issue crypto-assets or offer services on them must obtain an authorization valid throughout the EU (the so-called "European passport").
• Authorization for crypto-asset service providers subject to legal entity status and the Registered office and operational headquarters established within the European Union. This requirement of "legal and physical presence" in the EU is crucial to identify a legally responsible party in case of violations and enable supervisors to effectively exercise their inspection and sanctioning powers.
• Mandatory information requirements: obligation to prepare a white paper with complete and standardized information for issuers. This obligation is waived only for offerings with a total consideration of less than 1 million euros, provided that the crypto-assets involved are not tradable on trading platforms.
• Prudential Rules for Service Providers (CASP): capital requirements, governance, protection of client assets, and anti-money laundering controls.
• Specific limits for ART and EMT: as potentially relevant to financial stability, are subject to more stringent requirements, such as capital reserve requirements, and additional controls by the European Banking Authority and national authorities.

The regulation, in particular, lays out a package of rules that apply to all crypto-asset operators, covering transparency, good faith, anti-money laundering, buyer protection, financial stability, and then differentiated rules specific to the type of crypto-asset an operator deals with.

For example, EMT issuing operators, among other things, must:

• Issue tokens at face value upon receipt of funds
• Repay, upon request of the holder, the tokens at any time and at face value 
• Establish recovery and repayment plans to be used if they are unable to meet their obligations
• Maintain liquid reserves, consisting of safe and low-risk assets, in an amount at least equal to that of outstanding EMT.

What's New for Utility Tokens

For Utility Tokens, the MiCA regulations imposes less stringent regulations than those for other types of crypto-assets, but still represents a significant change with many new features to take note of:

• The issuance of Utility Tokens does not require prior authorization unless they exceed certain significance thresholds.
• However, it remains mandatory to publish a Informational White Paper prior to public offering or admission to trading, with detailed content on the project, governance, risks, use of funds raised.
• Principles of fairness, transparency and end-user protection, as well as the right of withdrawal, must be guaranteed.
• Promoters must notify the competent authority of the white paper prior to publication, but without the need for prior approval.
• Firms that issue Utility tokens for strictly limited use (e.g., in-house loyalty program), or that provide access to an existing and operational good or service and only to it, unless certain thresholds are exceeded, remain outside the MiCA perimeter.

What changes for enterprises that want to use Utility token

Companies that intend to use Utility token as a lever for capital raising or business development Will have to now:

• Prepare white papers that comply with MiCA requirements.
• Adapt its internal transparency and disclosure procedures.
• Integrate any AML safeguards where there is a provision of ancillary services that qualify as a financial activity under European regulations (e.g., an exchange or digital wallet).
• Carefully consider the application perimeter of MiCA from the design stage of token issuance. A key aspect to take into account are the gray areas, i.e., the rules for the "Hybrid" utility tokens, for example, that incorporate elements of governance, which may approach the nature of financial instruments and therefore need to be evaluated on a case-by-case basis to determine whether they fall under MiCa's jurisdiction or not: the burden of proper classification falls entirely on the issuer and is a sensitive issue.

Utility tokens and startups: a new scenario

White paper exemption for utility tokens that provide access to an "existing and operational good or service" could lead to a Utility token market characterized by more mature and less speculative projects at the time of public offering, but it could also make it more complex for purely innovative ideas, such as those of startups, to raise capital through Utility tokens. 

In this scenario, the token would serve more to scale the project, to create and engage a community of users, to make marketing campaigns or adding advanced functionality, rather than funding the very birth of the idea from scratch. While this scenario may appear limiting, it is consistent with MiCa's goal of incentivizing more serious project planning and development, helping to counter the spread of fraudulent or unrealistic initiatives that have damaged the industry's reputation in the past. We had discussed the proliferation of fraudulent or fragile-based ICOs in the 'Article on the different ways of issuing and placing Utility tokens.

The balance between supporting innovation and protecting the market is not easy to achieve, as is evident. For companies that want to maintain and increase their competitiveness, it is crucial to follow the development of the European digital financial scenario and learn how to Combining traditional and alternative finance, with the professional support needed to stay within the perimeter of regulatory compliance.