Regulatory framework for crypto-assets will see the light of day soon
Objectives of the MiCA regulatory framework
It aims to ensure high standards of financial services, transparency and legality in the area of rendering crypto-asset services, as well as to protect consumers and ensure stability in the financial system.
Currently, the provision of crypto-asset services is unregulated in Latvia and can pose financial risks to consumers, including the risk of permanently losing funds invested on unregulated platforms or falling victim to fraud schemes.
The MiCA regulatory framework will set common rules and standards for crypto-asset service providers to protect and manage customers' money and strengthen internal controls to ensure that consumers are protected from risks. The regulatory framework will require crypto-asset service providers to meet high standards of financial services and will introduce harmonised rules for the operation of crypto-asset service providers in European Union (EU) countries.
The MiCA Regulation will support the development of innovation and fair competition in the market by creating a scope for rendering crypto-asset services and issuance of crypto-assets.
By supporting innovation, the MiCA Regulation will strengthen the attractiveness of the EU as a suitable place for the development of fintech companies. The Regulation will also strengthen the attractiveness of the EU for consumers who have already invested in these assets and prevent the abuse of crypto-assets.
The regulatory framework will strengthen the EU's role as a digital standard setter. MiCA creates a harmonised and regulated environment for the development of the crypto-currencies and crypto-assets market, creates confidence in trading partners and investors, as well as in companies offering crypto-asset services (issuance, trading, exchange, safekeeping).
It is important to note that the MiCA regulatory framework will ensure that the crypto-asset market is integrated into the financial sector to offer additional opportunities such as reduced transaction costs. This integration can open up new opportunities for innovation and thus help to foster the development of the financial sector in Europe.
What does the MiCA regulatory framework provide?
The MiCA regulatory framework will apply to legal and natural persons and businesses involved in the issuance, public offer, admission to trading or the provision of services related to crypto-assets in the EU (including the existing financial market participants) and any transactions or activities related to crypto-assets.
The MiCA regulatory framework sets out the following:
- transparency and disclosure requirements for the issuance, public offer and admission to trading of crypto-assets on crypto-asset trading platforms;
- authorisation and supervision of crypto-asset service providers (including the existing financial market participants on a facilitated basis), issuers of asset-referenced tokens and issuers of electronic money tokens;
- the operation, organisation and management of issuers of asset-referenced tokens, issuers of electronic money tokens and crypto-asset service providers;
- the requirements for the protection of holders of crypto-assets in relation to issuance, public offer and admission to trading; and the protection of customers of crypto-asset service providers;
- measures to prevent insider trading, unlawful disclosure of inside information and market manipulation in relation to crypto-assets in order to ensure the integrity of the crypto-asset markets.
The MiCA regulatory framework is important to ensure stability in the traditional financial system, as crypto-asset providers operating domestically or passporting can create new interconnectedness between financial markets, organisations and sectors, as well as pose liquidity and security risks. In order to minimise financial stability risks, the regulatory framework ensures that providers of crypto-asset services are accountable and properly supervised to prevent criminal activities such as fraud, corrupt practices and terrorism financing.
From a consumer protection perspective, the regulatory framework will ensure that customers have the same and consistent rights and protection across the EU.
The regulatory framework will define and set standards for cybersecurity, data protection and privacy, as well as rights and obligations regarding processing and management of personal data. It will also ensure that consumers have access to clear and simple information about the functionality of the respective service and how it affects their data protection and privacy. The MiCA regulatory framework will thus promote a trusted and secure digital economy, protecting consumers and their data.
What types of crypto-assets are subject to the MiCA regulatory framework?
The MiCA regulatory framework provides for three categories of crypto-assets.
This type of crypto-assets, other than an e-money token, aims to maintain a stable value by reference to any value or right or combination thereof, including one or more official currencies.
An example of this type of crypto-asset is a relatively new type of crypto-asset: stablecoins. They can be pegged to a specific currency (e.g. US dollar, euro) or a basket of currencies, as well as to other types of crypto-assets or a basket of crypto-assets to reduce price volatility.
This is a type of crypto-assets that refers only to the official currency of one country and, like electronic money, is issued and used for the purpose of making payments or storing value.
This group of crypto-assets covers a wide range of crypto-assets, including utility tokens that provide digital access to goods or a service.
The MiCA regulatory framework distinguishes between and does not cover:
- financial instruments as defined in Article 4(1)(15) of Directive 2014/65/EU;
- electronic money as defined in Article 2(2) of Directive 2009/110/EC, except where they can be considered as electronic money tokens under the MiCA Regulation;
- deposits as defined in Article 2(1)(3) of Directive 2014/49/EU of the European Parliament and of the Council;
- structured deposits as defined in Article 4(1)(43) of Directive 2014/65/EU;
- securitisations as defined in Article 2(1) of Regulation (EU) No 2017/2402 of the European Parliament and of the Council.
Challenges and the scope of oversight of the MiCA Regulation
The implementation of the MiCA Regulation may pose various challenges, for example, new market entrants have to invest more in order to participate competitively in the market and to comply with prudential requirements. The requirements for issuers of crypto-assets and other service providers differ, with stricter requirements for issuers of e-money tokens. Interpretation of legislation may also pose challenges, as technical standards for the regulatory framework will be developed within 12–18 months after the Regulation enters into force. The existing market participants will need to adapt their operations, internal processes and services to comply with the new requirements.
From a regulatory enforcement perspective, the situation in Latvia compares favourably with other European countries, which already have national regulation, sometimes even stricter than that of MiCA. EU supervisory authorities face a dilemma of whether to maintain the existing national requirements in addition to those of MiCA.
The MiCA Regulation provides that the supervisory authority will carry out regular compliance checks and controls in a number of areas:
- operational (programme) compliance with the MiCA authorised services;
- compliance with internal control mechanisms, policy and procedures to ensure compliance with the measures transposing Directive (EU) 2015/849; the risk assessment framework, including the management of risks related to money laundering and the financing of terrorism and proliferation; and the business continuity plan;
- technical documentation and implementation of IT systems and security measures;
- separation and safekeeping of a customer's crypto-assets and funds;
- holding and managing crypto-assets on behalf of third parties;
- compliance of crypto-asset trading platforms with operational rules, procedures and framework for the detection of market abuse;
- compliance of exchange transactions (crypto-assets for funds or crypto-assets for other crypto-assets) with the non-discriminatory commercial policy governing customer relationships; methodology for pricing crypto-assets;
- compliance with the requirements of the requlatory framework regarding the execution of crypto-asset orders on behalf of third parties;
- advice or portfolio management;
- protection of customers' rights;
- assessment of compliance of the token/e-money white paper with MiCA requirements;
- and other management requirements.
It will be easier for licensed market participants in Latvia – credit institutions, investment firms, payment and e-money institutions – to obtain authorisation for the provision of crypto-asset services, as most of the MiCA regulatory requirements have already been met and compliance is assured.
Meanwhile, the new potential entrants can start preparing for MiCA compliance now. The MiCA regulatory framework is expected to see the light of day in April 2023, but the basic requirements and the text of the Regulation are already available, including regulatory conditions. This means that businesses can start doing their research to understand how the regulatory framework applies to the services they offer and to their business models and to make sure that consumer protection standards are being met as required by MiCA. There will be a transition period after the MiCA Regulation comes into force, during which crypto-asset service providers can make technical and organisational improvements to ensure compliance with transaction authentication and auditing and to make sure that appropriate risk management and control mechanisms are in place.
Following the entry into force of the MiCA Regulation, the Latvian legislator will designate a national authority to issue permits for rendering crypto-asset services and to supervise this market segment.
The Innovation Hub, a consultancy local point for fintechs established by Latvijas Banka, is already open for consultations and discussions with companies that intend to operate under the new regulation or are already operating in the crypto-asset sector in Latvia.
To book a consultation, please fill in this form or write us to firstname.lastname@example.org. Latvijas Banka's experts will explain the regulatory framework and will carry out an initial assessment of the planned/existing business model and provide advice regarding the licensing process.
To support the sector, fintechlatvia.eu portal contains more information about crypto-asset services and fintech development in Latvia.