As of 2020, the European Commission adopted the digital finance package, which includes a digital finance strategy and legislative proposal on crypto-assets and digital resilience. Since then, the web 3 has gained significant attention, emphasizing the core ideas of decentralisation, often referred to as the "read, write, execute web”
The regulatory framework of crypto assets has experienced significant changes with the introduction of the Market in Crypto Assets Regulation (MiCA). This new background has fully embraced crypto assets classification and services, requiring accredited Crypto Asset Services Providers (CASP) to adhere to transparency, disclosure, authorisation, and supervision of transactions. Crypto assets are digital representations of values or rights, which are transferred and stored electronically. They can serve as an access key to a service, could facilitate payments, or could be designed as financial instruments.
Entities seeking to provide crypto services or offer digital products must comply with the MiCA requirements to benefit from regulated status and recognition throughout Europe. MiCA came into effect on June 29, 2023, and since then, the European Securities and Market Authority has led consultations to issue technical standards for a better understanding of the MiCA provisions.
MiCA's introduction timeline
MiCA was published in the Official Journal of the EU on June 9, 2023. It will come into full application from December 30, 2024, except for the framework for asset-referenced tokens (ART) and e-money tokens (EMT) issuers which will apply from June 30, 2024.
ESMA Guidelines and MiCA Framework
On 29 January 2024, the European Securities and Markets Authority (ESMA) issued essential guidelines on the classification of crypto-assets as financial instruments. According to these guidelines:
“Where crypto-assets do not fall within the scope of other EU legal frameworks applicable to financial instruments, such crypto-assets are likely but not automatically subject to the MiCA framework.”
This directive means that MiCA specifically targets crypto-assets not currently regulated by existing financial laws. MiCA (Markets in Crypto-Assets Regulation) establishes comprehensive guidelines for the creation and trading of these assets, categorising them into four main types:
Utility Tokens
Utility tokens are designed solely to provide access to a good or service offered by their issuer. Unlike traditional financial instruments, these tokens offer specific functionalities within a particular platform or ecosystem.
Asset-Referenced Tokens
These tokens are backed by tangible assets such as commodities or currencies. They aim to stabilise value by referencing real-world assets, effectively bridging the gap between the traditional financial system and the digital asset space.
E-Money Tokens
E-Money Tokens are intended to function as digital forms of money, similar to traditional currencies. These tokens are designed for transactions and payment purposes, facilitating the integration of digital assets into everyday financial activities.
Other Crypto-Assets
This inclusive category encompasses all other types of crypto-assets that do not fall into the first three categories. It ensures that the evolving landscape of digital assets is comprehensively regulated under the MiCA framework.
By providing clear guidelines for these types of assets, MiCA aims to promote transparency, stability, and innovation within the crypto market. This regulation supports market integrity, financial stability, and enhances consumer protection by regulating the issuance and service provision of crypto-assets.
Crypto asset services listed by MiCA
The Markets in Crypto-Assets Regulation (MiCA) outlines the following key services related to crypto-assets:
Custody and administration of crypto-assets for third parties
Providing secure custody and administration services, MiCA ensures the safeguarding of clients' crypto-assets. These services involve the secure management of cryptographic keys, guaranteeing the integrity and accessibility of digital assets.
Operation of a trading platform for crypto-assets
This service offers access to a wide array of crypto-assets and advanced trading tools. Trading platforms under MiCA facilitate the buying, selling, and exchange of various digital assets, enhancing market liquidity and trading efficiency.
Exchange of crypto-assets
MiCA regulates both the conversion of crypto-assets into fiat currency or other digital assets and the exchange of one crypto-asset for another. These services provide secure and reliable mechanisms for liquidity and flexibility, ensuring smooth transactions and minimising market volatility. Exchange services under MiCA aim to maximise client returns by providing stable and efficient trading environments.
Execution of orders for crypto-assets for clients
Ensuring efficient and accurate execution of trades, MiCA mandates that clients' crypto-asset transactions are completed with minimal market slippage. This service focuses on optimising trade execution to benefit clients.
Placement of crypto-assets
MiCA oversees the strategic allocation of clients' crypto-assets across diversified portfolios. This service aims to optimise asset distribution, enhancing investment returns and managing risk effectively.
Reception and transmission of orders for crypto-assets for clients
MiCA includes services related to the reception and transmission of client orders, ensuring that orders are processed and transmitted securely and efficiently.
Provision of advice on crypto-assets
MiCA encompasses advisory services, offering guidance on investment strategies and market trends. This service empowers clients to make informed decisions regarding their crypto-asset investments.
Portfolio management on crypto-assets
This involves developing and managing investment strategies for clients' crypto-asset portfolios. The goal is to optimise returns, minimise risk, and achieve clients' financial objectives.
Transfer services for crypto-assets for clients
Facilitating the transfer of crypto-assets between wallets, exchanges, or other destinations, this service ensures secure and efficient movement of digital assets, minimising downtime and enhancing transaction security.
By detailing these services, MiCA aims to create a transparent and stable regulatory environment for the crypto market, fostering innovation and protecting consumers.
Luxembourg marketplace considerations
Luxembourg is taking proactive steps to attract crypto businesses and prepare its regulatory framework ahead of MiCA implementation in 2024, as it aims to be a leading EU hub for the crypto-asset industry once the new rules take effect. The CSSF is engaging with prospective ART/EMT issuers and has seen an uptick in VASP registrations.
Luxembourg has already established rules directly targeting CASPs by allowing them to register with the CSSF. This will allow CASPs to bridge the gap until MiCA comes into play. Once licensed under MiCA, Luxembourg-based CASPs will benefit from an EU passport.
Luxembourg has put in place an attractive legal framework for security tokens under its "Blockchain Laws". Several digital asset projects have already launched based on this framework.
The CSSF is encouraging issuers planning to issue ARTs or EMTs before MiCA comes into force to familiarize themselves with the relevant MiCA provisions and to notify the CSSF using a template.
UK-based liquidity provider B2C2 recently secured a virtual asset service provider (VASP) registration in Luxembourg ahead of MiCA implementation, becoming the 12th VASP on the CSSF's register. This will allow B2C2 to offer OTC spot crypto services to institutional clients in the EU.
Under MiCA, EU member states have the option to provide a transitional period of up to 18 months for existing VASPs to continue operating under national law before needing a MiCA license. There are rumors Luxembourg may opt for a 12 month rather than 18 month transition.
Jurisconsul crypto assets services
Our firm provides legal guidance and suited support for crypto assets services providers applicants, ensuring their compliance and regulatory correspondence in their licensing process to better serve their investors. Our mission is to provide the latest insights, guidance, and resources focusing on Luxembourg jurisdiction regarding Crypto Assets and their Service Providers (CASP) as defined in the EU regulation called "Markets in Crypto Assets" (MiCA).
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