In our latest article, we provide crucial insights and tips on preparing for the implementation of the EU's Markets in Crypto-Assets Regulation, commonly known as MiCAR. Our expert, Michael Kirchmayer from Boerse Stuttgart Group, highlights the key aspects to ensure your company stays ahead of the regulatory requirements and remains informed about the impending legal changes. Whether you’re a compliance expert or a crypto enthusiast, we’ll decode the complexities of MiCAR and provide practical insights to help you navigate the dynamic regulatory environment of cryptocurrencies.

How has the regulation of cryptocurrencies evolved in recent years, and what impact will MiCAR have on the market?

With increasing relevance and growing trading volumes, the crypto market has captured the attention of financial regulators worldwide. Until 2019, European regulatory authorities faced ambiguity due to the absence of appropriate legal frameworks for this new asset class. However, in recent years, significant progress has been made in regulating cryptocurrencies and associated service providers at both national and European levels.

In Germany, legislation recognized crypto custody as a service in 2019 as part of the implementation of the 5th EU Anti-Money Laundering Directive (AMLD5). The regulation of cryptocurrencies was addressed in the Payment Services Oversight Act (Zahlungsaufsichtsgesetz) and the Banking Act (Kreditwesengesetz). As a result, cryptocurrencies became subject to the requirements of the Money Laundering Act (Geldwäschegesetz), and a legally compliant Know Your Customer (KYC) process had to be established. Since 2020, a “license for crypto custody business,” similar to a financial services license, has been required in Germany. Additionally, the Crypto Asset Transfer Regulation came into effect in October 2021, positioning Germany as a pioneer in crypto regulation.

Another significant milestone in the EU single market is the Markets in Crypto-Assets Regulation (MiCAR). MiCAR aims to create a harmonized European regulatory framework for crypto assets, promoting innovation and unlocking the potential of cryptocurrencies while ensuring financial stability and investor protection. This regulation seeks to prevent a patchwork of national regulations across Europe. MiCAR includes provisions for:

• transparency and disclosure requirements for the issuance and trading of crypto assets,
• licensing requirements and supervision of crypto asset service providers (CASPs) and issuers of crypto assets,
• proper business organization of crypto asset issuers and service providers,
• investor and consumer protection regulations for the issuance, trading, and custody of crypto assets,
• provisions to combat market abuse.

The regulation was published in the Official Journal of the European Union on June 9th, 2023, and came into force on June 29th, 2023. It applies to all EU member states. The various provisions of MiCAR become applicable at different times, with the regulations on the licensing and ongoing supervision of CASPs fully effective from December 30th, 2024.

In Germany, MiCAR is implemented through the Financial Market Digitization Act (FinmadiG), which is currently in the legislative process.

What challenges do market participants and crypto asset service providers face in implementing MiCAR?

MiCAR requires adjustments to existing national laws and regulations. In Germany, the Financial Market Digitization Act (FinmadiG) and the accompanying Crypto Market Supervision Act (KMAG) support its implementation. These laws regulate the requirements for a European crypto license, the anti-money laundering obligations for CASPs, and issuers of asset-referenced tokens. The regulation also offers the possibility of "passporting" for the crypto license. This "European Passport" allows companies licensed in one EU or EEA member state to offer their services in other EU or EEA countries, forming the foundation of the EU single market for financial services.

CASPs offering custody and management of cryptocurrencies for third parties must apply for a license, requiring careful preparation and adherence to regulatory requirements. Additionally, crypto asset service providers must fulfill disclosure obligations on their homepage and, starting from 2027, create a whitepaper containing essential information about the issuer and the issued cryptocurrency. This whitepaper must be submitted to regulatory authorities, published on the homepage, and serves to protect consumers. 

Moreover, issuing crypto assets requires a resilient IT infrastructure. Companies must ensure their IT systems are secure and meet the requirements of MiCAR and DORA. CASPs and issuers must fulfill due diligence obligations and identify customers through a KYC process, necessitating expertise and resources.

How can market participants address these changes?

Issuers and CASPs should familiarize themselves thoroughly with the MiCAR regulations. Due to MiCAR’s complexity, legal advice is often necessary. Implementing MiCAR technically requires integrating compliance tools, monitoring systems, and reporting mechanisms. Providers must offer transparent information about cryptocurrencies without violating data protection regulations. Overall, a proactive approach is essential to meet MiCAR challenges and ensure compliance.

How could the regulation of cryptocurrencies impact growth and innovation in the industry?

Clear rules and requirements through MiCAR instill trust among private and institutional investors, leading to broader acceptance of cryptocurrencies. Balanced regulation is crucial, as it ensures consumer protection and security without stifling innovation. Furthermore, EU-wide regulation provides legal certainty for institutional investors, who have previously been hesitant due to uncertainties. This increased certainty fosters greater willingness to invest in this industry.

Overall, MiCAR’s impact on growth and innovation depends on the implementation and adaptability of market participants.

What opportunities and risks arise from MiCAR for companies operating in the cryptocurrency sector?

MiCAR is shaking up the crypto asset market - here are some of the opportunities and risks:

Opportunities

• Unified legal framework: MiCAR establishes a unified legal framework for cryptocurrencies within the EU.
• Trust and market integrity: The regulation aims to bolster trust in cryptocurrencies and ensure market integrity.
• Pioneering role: The EU is setting regulatory standards for cryptocurrencies that could serve as a model for other countries.

Risks

• New obligations: Companies must meet organizational and operational requirements to obtain and maintain permission for crypto services.
• Whitepaper requirements: Issuers must publish a whitepaper with detailed information about the cryptocurrency.
• Expanded market abuse rules: MiCAR prohibits insider trading and market manipulation with cryptocurrencies.

Overall, the opportunities for companies to establish themselves in a clearly regulated environment and gain investor trust outweigh the risks.

How could the regulation of cryptocurrencies strengthen consumer confidence? 

The regulation of cryptocurrencies strengthens consumer confidence by introducing clear standards and protective mechanisms. Regulatory requirements set security standards that ensure the protection of user accounts, transactions, and personal data. Consumers can rely on the safety of their assets. Overall, balanced regulation helps to build consumer trust in cryptocurrencies and create a sustainable market.

How might the regulation of cryptocurrencies develop in the future and what trends can be expected? 

The future of crypto regulation is a fascinating topic, with several developments anticipated in the coming years. Initially, it is important to gather experiences with the implementation and handling of MiCAR before introducing new regulations. Cryptocurrencies are likely to see continued mainstream adoption, with more companies, institutions, and investors integrating them into their business models. Regulatory authorities will undoubtedly keep adapting AML and KYC requirements to combat illegal activities and enhance consumer protection. Another emerging trend is the tokenization of assets.

MiCAR establishes the European regulatory foundation for the widespread use of cryptocurrencies and digital assets. This opens numerous new opportunities for banks, brokers, and asset managers to implement their offerings in this area, either independently or collaboratively with a regulated partner. Collaboration can save valuable resources that would otherwise be needed to build the infrastructure and ensure compliance with all MiCAR requirements. As a leading infrastructure partner in Europe, Boerse Stuttgart Digital adheres to the highest regulatory standards within the full scope of MiCAR's applicability.

We'll serve as your fully regulated, trustworthy compass as you embark on your journey into the world of crypto and digital assets. Enter the digital world of finance with Boerse Stuttgart Digital!