Explore the latest European crypto-asset regulations in our article. Learn how the MiCaR and DORA regulations impact the crypto-asset market.
The size of the crypto-asset market is growing exponentially on a global scale. The challenging classification of crypto-assets within traditional systems has made it clear to European legislators that a specific environment needed to be created for these digital assets, one that could integrate with traditional systems.
Governments, central banks, and regulatory authorities have also turned their attention to this phenomenon, considering the potential risks that uncontrolled use of such instruments can pose to the market.
Strategy for Digital Assets regulation
In September 2020, the European Commission outlined a strategy for digital finance in the EU, known as the Digital Finance Package. Its goal was to support digital transition within the EU based on a dual approach: the Digital Finance Strategy and the Retail Payments Strategy. Among the identified priorities were reducing market fragmentation in digital financial services, ensuring a common regulatory framework (regarding transparency, anti-money laundering, and data protection), creating a financial data space, and managing the risks associated with digital transformation. As a result, the European Parliament and Council adopted EU Regulation No. 1114 on May 31, 2023, concerning crypto-asset markets (MiCaR), EU Regulation No. 2554 on December 14, 2022, regarding digital operational resilience for the financial sector (DORA), and Regulation No. 858 on May 30, 2022, establishing a pilot regime for distributed ledger technology-based market infrastructures.
MiCaR introduced uniform requirements for the public offering and admission to trading of crypto-assets, as well as for service providers. It included provisions to protect crypto-asset holders and measures against insider trading and market manipulation. MiCaR came into effect in June 2023 and will apply from December 30, 2024, except for Title III and Title IV, which will apply from June 30, 2024. It also excluded certain crypto-assets from coordination with other financial sector regulations, such as “financial instruments,” funds, securitization-derived securities, insurance products, pension products, Non-Fungible Tokens (NFTs), and Decentralized Finance (DeFi). MiCaR applies to all crypto-assets and reaffirms their categorization as “utility tokens,” “asset-referenced tokens” (ART), and “E-Money tokens” (EMT). It also includes a substantial number of level II and III measures to be developed during the implementation phase. ESMA, in close collaboration with EBA, EIOPA, and the ECB, will initiate a series of consultations, with the first ending on September 30, 2023, on new technical standards.
DORA, set to come into effect on January 17, 2025, aims to establish a comprehensive framework of rules for the identification and management of ICT risks, as well as the adoption and application of policies, procedures, tools, and protocols for digital operational resilience. It applies to entities in the traditional financial sector and providers of crypto-asset services, crypto-asset issuers or token issuers, and third-party ICT service providers, with specific exceptions (Art. 2). Among its goals are streamlining and harmonizing conduct rules for financial entities in ICT risk management, increasing supervisory authorities’ awareness of cyber risks and incident management, granting supervisory authorities the power to oversee ICT service providers, centralizing the role of supervisory authorities to ensure accurate monitoring of risks from third parties, and requiring periodic threat testing and prompt implementation of corrective measures.
Finally, with the Pilot Regime, the issuance and circulation of digital financial instruments are regulated through a temporary experimental regime, enabling financial market infrastructures to provide trading and transfer services for financial instruments using Distributed Ledger Technology (DLT). Temporary exemptions and waivers from specific regulatory requirements set by European financial legislation are allowed to facilitate the gradual adaptation of new technologies. The regulation applies to infrastructures falling under the definition of DLT market infrastructures (i.e., DLT multilateral trading systems, DLT settlement systems, DLT trading systems, commonly known as MTF DLT, SS DLT, or TSS DLT).
The challenge, in reality, is to find a balance between the need to open the new regime to a broader investor base compared to traditional markets and simultaneously protect these investors from financial losses resulting from the use of this innovative technology.
The pilot regime also establishes limitations on securities that can be admitted for trading or regulated by a DLT market infrastructure (see Art. 3). In terms of supervision, it requires ESMA to assess whether existing regulatory technical standards need to be modified to be effectively applied to securities issued, traded, or registered on DLT distributed registers.
One of ESMA’s functions is to present a detailed report on the pilot regime to the Commission by March 24, 2026, based on which the Commission will draft a report to determine whether it should be maintained, modified, or extended to new classes of financial instruments.
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