The Markets in Crypto-Assets (MiCA) Regulation is a significant development in the European Union, standardizing and regulating crypto-assets with a comprehensive, unified framework. Designed to replace varied regulations across EU nations, MiCA enhances transparency, consumer and investor protection, financial stability, and innovation in the cryptocurrency sector. This initiative sets clear rules for crypto-asset service providers and token issuers, filling gaps in existing financial regulations and establishing a global standard for the rapidly growing crypto-asset industry.

Applicability of MiCA

MiCA applies to crypto-asset service providers (CASPs), encompassing many entities within the cryptocurrency ecosystem. It includes:

  • Custodial wallets.
  • Crypto-to-crypto and crypto-to-fiat exchanges.
  • Crypto-trading platforms.
  • Crypto-asset advising firms.
  • Portfolio managers.

The regulation categorizes crypto-assets into several types, notably asset-referenced tokens, e-money tokens, and utility tokens.

 Critical Aspects of MiCA Regulation

  1. Unification of Licensing Process: MiCA streamlines the licensing process across the EU, allowing CASPs authorized in one member state to operate throughout the EU. It reduces the administrative burden and fosters a more integrated market.
  2. Enhanced CASP Obligations and Disclosures: CASPs must have an EU-based office and adhere to strict policies, including Anti-Money Laundering (AML) and data security protocols. Transparency in marketing, pricing, and fees is also emphasized.
  3. Regulations on Token Issuance: Issuers of crypto-assets must publish a whitepaper and ensure operational adherence. The regulation bans algorithmic stablecoins and mandates strict compliance for fiat-backed stablecoins, including maintaining a liquid reserve.
  4. Environmental Considerations: Addressing the environmental concerns associated with cryptocurrency operations, MiCA sets guidelines to minimize energy consumption and electronic waste from mining activities.
  5. Market Abuse Prevention: Provisions to prevent market manipulation and other unfair practices are included to maintain a fair and transparent market environment. 


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Classification of Crypto Assets Under MiCA

MiCA categorizes crypto assets into three main groups:

  1. Asset-Referenced Tokens (ARTs): These are not e-money tokens and maintain a stable value by referencing other values or rights, like official currencies. They could be widely adopted for value transfer or exchange. ART issuers must be established in the EU, and their whitepapers require approval by national competent authorities. ARTs may lose value, not always transferable or liquid and holders have a redemption right​​.
  2. E-Money Tokens (EMTs): EMTs aim to maintain a stable value by referencing one official currency. They are digital alternatives to banknotes and coins, primarily for payment. EMTs must fulfill several criteria, including being electronically stored, representing a claim on the issuer, and being accepted by persons other than the issuer. EMT issuers must be authorized credit or electronic money institutions and publish a crypto-asset whitepaper​​.
  3. Other Crypto Assets: This category includes all other crypto assets that don’t fall into ARTs or EMTs, such as utility tokens. These crypto assets are intended to provide access to a good or service supplied by the issuer. Issuers of these crypto assets don’t require authorization but must publish a white paper and notify the relevant authority before offering these assets to the public​​.

Significant ARTs and EMTs, based on volume and frequency metrics, will face specific provisions and additional regulatory burdens​​.

 Assets Excluded from Regulation

The Markets do not cover some assets in Crypto-Assets (MiCA) regulation. It mainly concerns non-fungible tokens (NFTs) and decentralized finance (DeFi) products. Let’s explore these exclusions in detail:

 Exclusion of Non-Fungible Tokens (NFTs)

  • Definition and Exclusion: NFTs are defined as unique and indivisible tokens that represent a specific piece of digital art, a video, a tweet, or any other unique object. They are distinct from cryptocurrencies due to their non-fungible nature; each NFT is unique and cannot be exchanged on a one-to-one basis with another NFT. MiCA explicitly states that the regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles​​​​.
  • Rationale for Exclusion: NFTs’ unique characteristics and non-interchangeability limit their financial use, reducing user and system risks. This limited financial application is a crucial reason why MiCA excludes NFTs from its regulatory framework​​.
  • Fractional NFTs and Large Series: MiCA clarifies that fractional parts of a unique and non-fungible crypto asset should not be considered special or fungible. The issuance of crypto-assets as NFTs in a large series or collection could indicate their fungibility. It could require issuers of NFT collections to publish a white paper, mainly if they make promises about future values. The issuance approach and the nature of the tokens (e.g., as part of an investment or for expanding business) are crucial in determining whether they fall within MiCA’s scope​​.

 Exclusion of Decentralized Finance (DeFi) and Other Assets

  • DeFi Exclusion: MiCA does not cover Decentralized Finance, a new way of providing financial services that does not use traditional centralized middlemen but relies on automated protocols. DeFi’s distinct operational model and risk profile necessitate further analysis to develop an appropriate regulatory framework​​. However, projects shall be assessed on a case-by-case basis, since some of the projects may have centralization factors.
  • Other Excluded Assets: Security tokens and aspects of crypto-asset finance, which either already have their regulations or require specialized regulatory treatment due to their unique features, are also outside MiCA’s scope. The regulation focuses on establishing a framework for more standardized crypto-assets, leaving the more complex and impressive digital assets for future consideration​​.

 Implications of Exclusions

  • Future Regulation: The fact that NFTs, DeFi, and other specific digital assets were left out of MiCA suggests that new rules may need to be made to deal with these assets’ unique features and risks. The evolving nature of digital assets means that regulators will likely continue to adapt and refine regulatory frameworks to ensure consumer protection and financial stability in this rapidly changing landscape. Currently, the EU has a plan to publish initial drafts of regulations for DeFi and NFTs by the end of 2024. 

In summary, MiCA’s exclusions reflect a cautious and targeted approach, focusing on more standardized crypto-assets while acknowledging the need for future regulatory development to address the unique aspects of NFTs, DeFi, and other complex digital asset paradigms.

 Requirements for Issuance (ICO) of Crypto-Assets and Their Listing

Under MiCA, the issuance and offering of crypto-assets in the EU are subject to specific regulations to ensure transparency, investor protection, and market stability. Here’s a detailed look at these requirements:

  1. Issuing Crypto-Assets in the EU
  • White Paper Requirement: Issuers of crypto-assets must publish a detailed white paper before offering any crypto-assets to the public or seeking admission on a trading platform. This white paper must contain comprehensive information about the crypto-asset, including its features, the rights it confers, the project behind it, the terms of the offer, and associated risks.
  • Conduct Rules Compliance: Issuers must comply with rules emphasizing honesty, fairness, and professionalism. It includes the obligation to act in the best interests of investors and the market.
  • EU Legal Entity Requirement: For asset-referenced tokens and e-money tokens, there is a specific requirement that the offeror must be a legal entity established within the EU. This requirement aims to ensure higher oversight and regulatory compliance for these types of tokens.


2. Stablecoins and E-Money Tokens

  • Prior Authorization: Issuers of asset-referenced tokens (commonly known as stablecoins) must obtain prior authorization from a Member State’s National Competent Authority (NCA).
  • White Paper Approval: The relevant NCA must approve the white paper for asset-referenced tokens. It ensures that all the necessary information is disclosed and meets regulatory standards.
  • Regulatory Compliance: E-money token issuers must comply with sectoral legislation relevant to their operations. It includes adherence to regulations governing electronic money and financial services.
  • Financial and Operational Requirements: Issuers of stablecoins and e-money tokens must demonstrate compliance with bespoke own funds requirements and governance arrangements. They are also required to hold reserves of assets, ensuring solid financial backing for the tokens issued.

 Services Related to Crypto Assets

MiCA establishes a regulatory framework for entities providing services related to crypto-assets. These requirements include:

  • Authorization (Licensing) Requirement: Only legal entities authorized (licensed) as crypto-asset service providers can offer services in crypto-assets. It ensures that all service providers are adequately vetted and meet the regulatory standards, which is determined by the NCA.
  • Range of Services Covered: The regulation covers a variety of services, including custody of crypto-assets, operating trading platforms, exchanging crypto-assets for fiat currency or other crypto-assets, executing orders on behalf of clients, providing advice on crypto-assets, and managing crypto-asset portfolios.
  • Oversight of Significant CASPs: For crypto-asset service providers deemed ‘significant’ – typically those with at least 15 million active users annually in the EU – there is an enhanced level of oversight and supervision. It includes closer scrutiny by their National Competent Authority to ensure they can handle the larger scale of operations without compromising client protection or market integrity.

MiCA’s regulations for issuing and listing crypto-assets and related services are designed to create a secure and transparent environment for crypto-asset transactions within the EU. These rules aim to protect investors, ensure fair market practices, and uphold the financial system’s integrity.

What is a CASP?

CASP is any company that provides services related to cryptocurrencies or other crypto-assets to customers. They work with the assets on behalf of individuals or institutions who own them.

Types of Crypto-Asset Services

Custody and Management

CASPs can store crypto holdings and handle administrative tasks for owners, like record-keeping, transaction processing, or portfolio valuations.

Operating Trading Platforms

These companies develop and maintain exchange platforms that buyers and sellers can use to trade different digital assets, like Bitcoin or Ether.

Currency Exchanges

Some provide direct currency transactions, converting crypto funds into fiat money like dollars or euros for customers and vice versa.

Crypto-to-Crypto Exchanges

Other platforms facilitate trades strictly between different cryptocurrency coins or tokens without fiat currency involvement.

 Trade Order Execution

CASPs will buy or sell cryptocurrencies on behalf of a client when instructed, per the specifics of an order request.

 Crypto Placement Services

Firms can also assist asset issuers with the distribution or allocation of new cryptocurrencies through initial coin offerings or other release mechanisms.

 Order Reception and Transfer

These receive client orders and transfer them onto exchanges or other avenues to conduct the trades as prescribed.

 Advisory Services

Some CASPs specialize in providing advisory services to inform crypto buying, selling, or investment choices.

 The common thread is that CASP platforms enable consumers, investors, and institutions to participate in the ever-growing crypto-asset marketplace more readily.

Eligibility Requirements to Apply as a CASP Under MiCA

To be eligible to apply for authorization as a CASP under MiCA, applicants must:

  • Be established as a legal entity in the EU or equivalent. Other structures may qualify if they offer equivalent third-party protections.
  • Maintain an adequate place of management in the EU. It refers to where strategic business decisions are made.
  • Formation of sufficient management and personnel who would be able to ensure proper operations.
  • Comply with the prudential requirements such as capital, insurance if applicable, sufficient own funds, etc. 

Entities that meet these prerequisite conditions can proceed to apply for CASP authorization with their national competent authority.

 The Application Process for Gaining Authorization as a CASP

The authorization process requires submitting a detailed application with the following information:

  • Scope of services the applicant intends to provide from the CASP service list
  • Governance maps and organizational charts to illustrate the structure
  • Profiles of directors, managers, and shareholders
  • Operating model, policies, procedures, systems, and controls
  • Evidence of capacity to meet capital and insurance requirements
  • Anti-money laundering and counter-terrorism financing provisions
  • Strategies for risk management, conflicts of interest, complaints
  • Plans for orderly wind down or closure of services
  • etc.

The application must be submitted to the competent authority from the applicant’s home Member State in the EU.

The authority sends a written acknowledgment of receipt within 5 working days. It starts the review timeline.

 Steps to Become a Licensed CASP in the EU

As the EU implements the Markets in Crypto-Assets (MiCA) framework, firms looking to provide custodial, trading or other licensed crypto asset services must navigate a new authorization process and operating model. Let Fintech Balance guide you through regulatory implications and strategic opportunities to position your innovative platform for compliant growth in Europe’s formalized digital asset economy. We condense complexity into clarity so you can confidently obtain your CASP license.

Competent Authority Review Period and Requests

There is a defined review period for the application as follows:

  • 25 working days for the authority to assess completeness
  • During this phase, the authority can request missing information
  • Once complete, there is a 40 working day assessment period
  • The authority reviews the substance and requests clarification
  • There is a maximum 20 working day suspension if further inquiries are made
  • Applicant must respond to information requests within this timeframe

After the allotted period, the application will either proceed to authorization or refusal.

 Decisions for Authorization or Refusal Under MiCA

The competent authority concludes the process with one of two decisions:

 Authorization Granted

  • Applicant receives CASP licensed status
  • Able to operate applied-for services across the EU
  • Competent authority informs ESMA within 2 working days

 Authorization Refused

  • Application deficiencies or non-compliance
  • Inability to mitigate risks effectively
  • Reasons for refusal must be provided

Applicants are informed of the outcome within 5 working days. Authorization details are added to the ESMA registers.

 Reasons and Conditions for Refusal of CASP Authorization

Common reasons for refusal of CASP authorization include:

  • Money laundering or terrorism financing risks
  • Conflicting rules under foreign law
  • Barriers to supervision over linked entities
  • Management competence concerns
  • Unfit shareholders/ownership
  • Capital, systems, or control inadequacies

Refusal may also be warranted if the applicant cannot demonstrate compliance with MiCA conditions around governance, risk management, safeguarding funds, complaint handling, and other requisite CASP obligations.

Conditions requiring consultation with other authorities may also lead to authorization refusal.

 Passporting CASP Services Across EU With MiCA License

Once licensed as a CASP under MiCA in one EU state, passporting allows the license holder to offer covered crypto-asset services across all EU member states without needing additional country-specific licenses.

To activate passporting rights, authorized CASPs must submit written notice to their competent authority with the following:

  • Target EU country list
  • Specific MiCA activities to offer in each
  • Planned start date of operations 
  • Potential passporting risks and risk mitigation measures

The authority shares this passporting notice with all specified member state host authorities, ESMA, and EBA within 10 working days.

The CASP can then start operations in the target countries after the notification period, at a minimum, within 15 calendar days.


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 Ongoing CASP Compliance Obligations Under MiCA

Authorized CASPs must continually comply with ongoing regulatory obligations, including:

General “Soft” Rules

  • Act honestly, reasonably, and professionally
  • Apply due skill, care, and diligence
  • Provide clear, accurate, and up-to-date information

 Conduct Risk Management

  • Establish solid systems and controls
  • Identify, assess, monitor, and mitigate risks
  • Maintain insolvency coverage commensurate with risks

 Safeguard Client Assets

  • Protect ownership rights of clients’ crypto-assets
  • Hold legal tender funds at an authorized bank (credit institution)
  • Clarify asset segregation and liability policies

 Manage Conflicts of Interest

  • Identify and document conflicts among activities
  • Evaluate materiality and manage appropriately
  • Establish Chinese walls if necessary

 Maintain Effective Governance

  • Sufficient and suitably skilled directors
  • Define clear roles and responsibilities
  • Maintain well-documented policies, procedures

 Specific additional obligations also apply to each CASP service offered. 

 Prevention and Prohibition of Market Abuse

Under MiCA, specific rules are set for crypto-assets admitted to trading on a trading platform or for which admission has been requested. These rules aim to ensure market integrity and protect investors by including:

  • Disclosure of Inside Information: Ensuring transparency and fairness in market dealings by mandating the disclosure of material non-public information.
  • Prohibitions on Insider Dealing and Unlawful Disclosure: Preventing individuals with inside information from trading on or tipping others about such information.
  • Market Manipulation: Barring practices that could distort the market, such as spreading false information or engaging in transactions that mislead other market participants.

 CASP Oversight, Enforcement Powers, and Revocation of Authorization Under MiCA

Competent authorities maintain extensive supervisory and investigative powers over licensed CASPs, including:

  • On-site inspections
  • Document reviews
  • Mandatory information requests

Authorities can impose remediation requirements, penalties, or other disciplinary measures for violations.

Under specified scenarios of non-compliance or risk, the authority may ultimately revoke a CASP’s authorization requiring cessation of crypto-asset services.

Each of these components plays a critical role in establishing a secure and trustworthy environment for the trading and servicing of crypto-assets within the EU, aligning with broader objectives of consumer protection, market integrity, and financial stability.

Collectively MiCA sets a global precedent in regulating crypto-assets, balancing the need for innovation with consumer protection and financial stability. Its comprehensive approach addresses various aspects of the crypto market, from licensing and operational standards for CASPs to specific rules for token issuance and market conduct. As such, it establishes a more secure and reliable framework for the crypto industry in the European Union.