The European Commission introduced the Markets in Crypto-Assets (MiCA) framework in 2020 as part of its digital finance package. MiCA stands as the primary EU regulation governing crypto-assets, offering harmonisation across Member States. Unlike a directive, MiCA functions as a regulation, making it directly applicable without the need for national-level transposition. Malta demonstrated forward-thinking in 2018 by enacting the Virtual Financial Assets Act (Chapter 590, Laws of Malta), signalling its support for financial innovation. The Malta Financial Services Authority (MFSA) has already initiated discussions with stakeholders to ensure a smooth transition to MiCA once the VFA Act is repealed.
The definition of "crypto-asset" according to MiCA is broad and encompasses any "digital representation of value or rights that can be electronically transferred and stored, utilising distributed ledger technology or similar methods." MiCA categorises crypto-assets into three sub-groups: asset-referenced tokens (“ARTs”);
- Asset-referenced tokens (“ARTs”)
- e-money tokens (“EMTs”); and
- other crypto-assets (a catch-all category for tokens that are not ARTs or EMTs) such as utility tokens and other cryptocurrencies including Bitcoin or Ether.
MiCA establishes three distinct, but interrelated, regulatory regimes, which are:
- a regime for issuers of stablecoins (ARTs and EMTs),
- a regime for issuers of non-stablecoins (other crypto-assets), and
- a regime for entities providing services in respect of crypto-assets, who are referred to as crypto-asset service providers or CASPs in short.
Primary Market Players (Issuers of Crypto-Assets)
One of the central stipulations within MiCA is the obligation for issuers of all three categories of crypto-assets to produce a comprehensive white paper. This document should encompass information about the issuer, the attributes of the crypto-assets, project timelines, associated risks, and other relevant aspects. The objective is to establish a standardised disclosure framework for crypto-asset issuers, reminiscent of the EU Prospectus Regulation (Regulation (EU) 2017/1129).
MiCA introduces disclosure, transparency, and governance standards for crypto-assets beyond ARTs or EMTs. Issuing these crypto-assets to the public or listing them on a trading platform doesn't necessitate pre-approval from the national regulator. Instead, issuers are required to notify the regulator and publish the white paper beforehand.
The regulations for stablecoins (ARTs and EMTs) are notably more demanding. MiCA essentially mandates authorisation for ART issuers. Conversely, EMTs are typically only allowed for offering or listing on a trading platform by authorised credit institutions or e-money institutions, as per Directive 2009/110/EC (EMD2). Although MiCA doesn't entail a distinct authorisation process for EMT issuers, compliance with various requirements is obligatory.
An application for the authorisation of an ART issuer will principally require:
- a programme of operations, with the intended business model;
- proof of initial capital – €350,000 or 2% of the average of ART reference values in reserve (or at least the highest thereof);
- details on the issuer’s governance arrangements and shareholding structure;
- a legal opinion confirming that the ART does not qualify as an EMT or a crypto-asset excluded from MiCA;
- the crypto-asset white paper
- the various policies and procedures, business continuity plan, internal control mechanisms, risk management framework and security safeguards required under MiCA.
Crypto-Asset Service Providers
MiCA sets forth overarching and service-specific regulations for CASPs. The delineation of crypto-asset services under MiCA draws inspiration from the MiFID II regime (Directive 2014/65/EU), which similarly informed the VFA Act in Malta. CASPs aiming to offer crypto-asset services, such as investment advice, portfolio management, brokerage services, or operating a trading platform, to EU clients will need to establish a presence in Europe and obtain authorisation from the national regulatory body.
MiCA introduces 10 distinct categories of crypto-asset services that necessitate authorisation for CASPs. This requirement applies to (i) entities situated or established within the EU and (ii) entities established outside the EU, including those in the UK and Switzerland, who are targeting EU clients. Following a pattern seen in other EU regulations, MiCA incorporates passporting privileges for CASPs (and issuers). This means that a CASP licensed in Malta can extend its operations to other EU member states, either through cross-border activities or by establishing a physical branch, and engage with clients in those member states without needing additional authorisation.
MiCA also affects AIFMs, UCITS management companies, MiFID firms, credit institutions, and electronic money institutions, which are already authorised under different regulatory frameworks but engage in providing crypto-asset services. Although a distinct authorisation under MiCA isn't mandatory, these entities typically must inform the national regulator at least 40 days before commencing the provision of crypto-asset service(s). This notification should include the program of operations and other documentation mandated by MiCA.
Recent Developments
MiCA will be published in the EU's official journal and become effective 20 days thereafter. MiCA will be implemented in two phases. The initial phase, concerning stablecoins, is slated to take effect after 12 months (in Q2 2024), while the subsequent phase, addressing CASPs, is set to take effect after 18 months (in Q4 2024).
During this interim period, the European Banking Authority and the European Securities Markets Authority will work on developing technical standards and guidelines to supplement MiCA. The industry will be keenly interested in understanding the criteria for classifying crypto-assets under MiCA and determining which tokens qualify or disqualify as financial instruments under MiFID II. Classification has gained significant attention, especially after Ether, the world's second-largest cryptocurrency, was characterised as a security, akin to stocks and bonds, by the New York attorney general last month.
How will MiCA effect the VFA Landscape in Malta?
The Malta Financial Services Authority (MFSA) is actively pursuing initiatives to ensure Malta's readiness for MiCA implementation. A consultation document was published in the third quarter of 2023, whereby proposals of amendments to the Rulebook for Crypto-Asset Service Providers were made.
There have been a number of notable changes in respect of Chapter 3 of the VFA Rulebook including the following:
- The systems audit requirement has been removed.
- The initial capital requirements for Class 3 and 4 licence holders in Malta has been reduced to €125,000 and €150,000 respectively in line with MiCA.
- The requirement for professional indemnity insurance has been deleted.
- The outsourcing requirements have been updated in line with MiCA.
- The service-specific rules in Articles 75 to 81 of the MiCA have been included in the VFA Rulebook. Accordingly, the requirements applicable to VFA Exchanges, order execution and client suitability will be amended.
- The requirements relating to client categorisation have been removed.
- The requirement for a Risk Management and the Internal Capital Adequacy Assessment Report will no longer apply.
- Other prudential/ conduct of business requirements have been added to reflect the obligations for Crypto-Asset Service Providers under MiCA.
Moreover, recent amendments to Malta's Virtual Financial Assets (VFA) Act (Chapter 590, Laws of Malta), ratified by the Maltese Parliament, through the Virtual Financial Assets (Amendment) Act, 2024 (VFA Amendment Act) which shall come into force on the 30th June 2024 mark a pivotal step in aligning domestic legislation with the upcoming Markets in Crypto-Assets Regulation (MiCAR). These changes reinforce Malta's position as a premier jurisdiction for crypto-asset issuers and service providers.
The amended VFA Act now incorporates the terms "asset-referenced token" and "electronic money token" as well as reference to MiCAR itself. This implementation is essential as MiCAR's Titles III and IV, focus on obligations related to these tokens.
A significant change introduced by the amendments is the elimination of the VFA Agent role. The VFA Agent was previously responsible for handling whitepaper registrations and license applications on behalf of applicants. Due to the fact that MiCAR does not envisage this role, the amended Act promptly eradicates the role.
Under the amended Act, obligations towards the Malta Financial Services Authority (MFSA) now fall directly on:
- Issuers seeking to register a whitepaper under Article 3 of the VFA Act, and
- Individuals applying for a license to offer a VFA service as per Article 14(1) of the VFA Act,
since the role of the VFA Agent has been eliminated. Issuers and applicants are now responsible for submitting required information and documentation directly to the MFSA themselves, as well as submission of an annual certificate of compliance.
To ensure a smooth transition for stakeholders, transitory provisions have been introduced. As previously mentioned, issuers and license applicants are no longer required to appoint VFA Agents for whitepaper registration or license submissions. However, if a VFA agent applied on behalf of an applicant before June 30, 2024, they may continue to serve that client until three months from the enactment of the Virtual Financial Assets (Amendment) Act, 2024, or until the competent authority renders a decision on the application, whichever occurs earlier. It is imperative for crypto-asset service providers to be aware that the MFSA will cease accepting license applications under Article 14 of the VFA Act after August 1, 2024. This deadline emphasises the need for entities to ensure compliance with regulations well in advance of MiCAR's implementation on December 30, 2024.
About the Authors
This article has been authored by Dr Simon Mangion, Regulatory & Business Advisor, and Dr Chanelle Meli, Regulated Industries & Compliance Advisor.
Should you require regulatory assistance in relation to the VFA Act and the upcoming amendments, and/or MiCAR, please get in touch with us here or via [email protected].
