Author: Romain Swertvaeger, Clément Robert; Translator: TaxDAO
This summer, the first part of the EU MiCA regulation will officially come into effect. Financial institutions (FIs) that are currently working with or exploring crypto assets will need to make operational adjustments. What specific actions are needed and how will this affect EU crypto customers?
In June 2024, the EU will begin to implement some of the provisions of MiCA, focusing first on asset-referenced tokens (ARTs) and electronic money tokens (EMTs). In doing so, the EU provides the financial industry with a framework for offering new digital products and services to customers. This development is significant because it integrates crypto assets into mainstream financial services and creates a legal framework for the operation, provision and distribution of these products. Understanding how these new assets work is crucial for credit institutions to anticipate upcoming products on the market and even start building their own products around these tokens.
1. Evolution of financial value storage and transaction methods
Digital tokens combine the stability of traditional financial instruments with the flexibility of digital assets. ARTs and EMTs represent an evolution in the way value is stored and traded. ARTs, often referred to as "stablecoins", maintain their value through a basket of underlying liquid assets, making them an ideal digital currency for savings or payments. This applies not only to financial assets such as currencies and crypto assets, but also to commodities such as precious metals such as gold, provided that the value of ART can be stabilized.
EMTs, on the other hand, are often referred to as "electronic money tokens", which are the online equivalent of fiat currencies (traditional currencies issued by governments that are not backed by commodities, such as the US dollar or the euro) and promise to simplify electronic payments while providing the security and reliability that traditional currencies should have. Such tokens have similarities with traditional electronic money, such as those covered by the Electronic Money Directive 2 (EMD2) and the upcoming PSD3/PSR payment package. In fact, MiCA even stipulates that EMTs will be subject to the same issuance and redemption requirements as traditional electronic money. What makes EMTs different is the way they are implemented and issued, which can enable different use cases than traditional electronic money. This also applies to ART, as it is the act of tokenization and the use of innovative technology that opens up new ways for both tokens to enhance existing financial services.
2. Enable cross-border real-time payments
Faster cross-border transactions are a hot topic in the financial industry. At the EU level, the recently introduced Instant Payments Regulation (IPR) will require EEA banks to provide cross-border instant payments in euros or member state currencies. At the global level, there are also private initiatives underway between the European Banking Authority’s (EBA) RT1 instant clearing system and US/UK clearing houses to achieve international interoperability for real-time payments. However, digital tokens do not need to rely on established clearing houses and existing rules, and can enable cross-border real-time payments by default. The minimal number of intermediaries involved in the value chain also reduces the processing costs of each transaction for banks and customers.
3. Added value through convenience and reduced counterparty risk
Since tokens leverage blockchain technology, customers can benefit from value-added features such as smart contracts. Such features could include setting up a “cash on delivery” arrangement (where a smart contract would hold a portion of the customer’s funds and automatically pay when the customer receives the goods). These new use cases not only make it easier for customers to pay when they receive the goods, but also limit counterparty risk in business relationships and reduce friction and delays in transaction processing.
4. Fighting payment fraud and enhancing financial security
The use of blockchain technology also offers a variety of other benefits to the financial industry due to the inherent structure and approach behind distributed ledger technology (DLT). In these highly encrypted systems, transactions are recorded on a secure, unchangeable ledger that is accessible only to a small number of authorized network members. In such systems, transactions are highly traceable, data integrity is ensured by many co-validators, and it can be ensured that the transactions occurring in the blockchain are legitimate and authorized. Such measures reduce the risk of unauthorized access and fraudulent operations, which are key issues in the payment field.
5. Market examples of early entrants
For example, some fintech companies offer EMT in currencies such as US dollars and euros. These EMTs are pegged to the price of the fiat currencies they represent, but bring digital flexibility and advantages to the use of these fiat currencies. This includes the ability to use Euro EMTs in conjunction with features such as blockchain applications and smart contracts, which can further support many complex financial transactions and use cases. These include automatic and fair processing and execution of financial agreements based on code, enabling near real-time international payment settlements, etc.
Alternatively, financial institutions can also trade without issuing tokens. Some licensed entities already provide clients with access to large cryptocurrency trading platforms, allowing investors to easily access a more diverse range of products.
6. Preparation for June 2024
Financial institutions seeking to enrich their existing services should explore the possibility of providing such services, as well as enhancing their ability to provide more complex services to more demanding customers. MiCA's provisions on ARTs and EMTs will apply from June 2024, and the full legal rules will apply from December 2024. Therefore, in-scope financial institutions should prepare to apply for a licence to issue or trade tokens, draft a detailed crypto-asset whitepaper for their product, and engage with the National Competent Authority (NCA) to discuss their intention to commence or continue operations. Keep in mind, too, that the remaining requirements will apply eight months later.
In particular, the crypto-asset whitepaper forms an important part of the approval process for financial institutions to offer ARTs or EMTs. While the whitepaper requirements vary for different tokens, for both ARTs and EMTs, financial institutions must disclose the underlying mechanisms, such as the issuance and redemption process, the rights and obligations of token holders, measures to safeguard assets, and report on their own governance structure and controls regarding the intended crypto-asset service offering. In addition to these factors, they must also disclose details of the token type, such as the underlying assets behind the ART and how the ART value references these assets.
7. Looking ahead to December 2024 and beyond
Although not as exciting as Christmas, financial institutions should also look forward to the full provisions of the MiCA regulation coming into force this December. In particular, this will bring licensing requirements for “crypto-asset service providers” (CASPs) into the legal scope. Although some established entities such as authorized credit institutions, investment firms, AIFMs, etc. do not require a separate license when providing crypto-asset services, this licensing provision will allow more types of companies in addition to pre-authorized financial institutions to provide crypto-asset services. This may lead to increased competition in the provision of such tokens and surrounding services, and financial institutions can enter these areas early from July.
In addition, a number of regulatory and compliance requirements will be introduced after this, and it is hoped that entities providing crypto-asset services will effectively monitor and prevent insider trading, market manipulation and market abuse, ensure adequate protection measures for customers, and clearly follow the appropriate disclosure requirements that apply to them.