Markets in Crypto-Assets Regulation (MiCA)
CASP Services
1. Crypto-asset service providers
MiCA distinguishes between two groups of crypto-asset service providers: (1) companies that acquire a license under MiCA, or (2) companies that already hold a license to provide (traditional) financial services.
All crypto-asset service providers must have their registered office in an EU member state where they conduct at least part of their service business. They must also have their place of effective management in the Union, and at least one of the managers must be an EU resident. Providers may provide their services throughout the Union; this may be done either under the freedom of establishment (e.g. through a branch), or under the freedom to provide services (i.e. without establishment).
For companies that already hold a financial services license, MiCA outlines which services can be provided by which entities:
- Credit institutions are generally allowed to provide all services.
- Central securities depositories are allowed to hold and administer crypto-assets for customers.
- Investment firms may provide services equivalent to those activities for which they are licensed in connection with financial instruments, i.e. custody and administration, operation of a trading platform, exchange for funds or other crypto-assets, execution of orders for clients, placement, reception and transmission of orders, advisory services or portfolio management.
- Electronic money institutions may issue e-money tokens and provide custody and administration on behalf of customers as well as transfer services for these electronic money tokens.
- A UCITS management company or an alternative investment fund manager may provide such services that are equivalent to the individual management of individual portfolios and the ancillary services for which a license exists with regard to fund units, i.e., e.g., acceptance and transmission of orders, advisory services, or portfolio management.
- A market operator may operate a trading platform for crypto-assets.
These companies may provide the respective crypto-asset services after following a certain procedure. First, the companies must notify the competent authority at least 40 working days in advance and provide certain information, which is further defined by MiCA. This includes, among other things, a business plan and various descriptions of internal operations and processes. The authority will review the information within 20 working days and may request additional information as necessary. The company may provide the services if the requested information has been fully provided to the authority.
However, this simplified procedure is only available to the above-mentioned companies that are already supervised. All other companies must submit an application for authorization to the competent supervisory authority. This is the regulator of the member state in which the company has its registered office, e.g. the FMA for companies based in Austria, or BaFin for companies based in Germany.
MiCA contains detailed information on the application procedure and the necessary documents to be submitted. After examining the application, the authority can issue improvement orders and request additional information. MiCA provides authorities multiple grounds to reject a license application. This includes, for example, concerns about the personal reliability of persons involved or deficient internal control procedures.
Overall, it is expected that the approval process will become significantly more difficult compared to the legal situation prior to MiCA. This will create significant barriers to entry. And since a license will allow services to be offered throughout the Union, it is to be expected that individual member states will seek to establish themselves as hotspots for crypto-asset service providers. France is already noticeably positioning itself as a potential center of Europe. We also expect a pro-crypto commitment from the Baltic states or Malta. For crypto-asset service providers, the advantage of concentrating on just a few member states is that regulators can gain more experience and respond better to the specifics of the industry.
2. General requirements for all service providers
All crypto-asset service providers are subject to certain general obligations. These include, on the one hand, the duty to act honestly, fairly and professionally in the best interests of the customer, which also applies to offerors of crypto-assets. The duty to provide fair, clear and not misleading marketing communications and to warn of risks also apply to crypto-asset service providers as well as to offerors of crypto-assets.
MiCA also provides certain prudential requirements, e.g., minimum capital requirements, as well as governance arrangements. MiCA further requires as a general principle that all service providers store crypto-assets and funds securely, in a way that in case of insolvency of the service provider the crypto-assets and funds of the clients are protected. For Austria, this means rights for segregation and preferential rights in case of insolvency must exist.
All crypto-asset service providers must also have a functioning complaint management system and adequate procedures to identify, prevent, manage and disclose conflicts of interest. Outsourcing may only be undertaken in accordance with MiCA requirements, and each service provider must have a plan in place to properly manage its business should the outsourcing provider cease operations.
In addition to these general obligations, MiCA imposes a number of specific obligations, each of which affects providers of certain services.
3. Special provisions for individual services
a) Custody and administration of crypto-assets
Custody and administration of crypto-assets means the safekeeping or controlling, on behalf of clients, of crypto-assets or of the means of access to such crypto-assets, where applicable in the form of private cryptographic keys. This primarily refers to the model known on the market as custodial wallet, in which a person other than the owner holds the private keys to certain crypto-assets.
MiCA contains specific requirements for companies wishing to provide this service to customers. First of all, all essential contractual duties and responsibilities must be clearly specified. Service provider must also maintain a register for all clients, in which, for example, the ownership positions and other rights of all clients are to be recorded. If a crypto-asset grants its holder rights against the issuer, the service provider must enable its customer to easily exercise these rights. In general, the customer is entitled to all rights, even in the case of a hard fork with regard to the newly created crypto-assets.
MiCA provides for a liability provision for custodians in case of loss of crypto-assets. The custodian is liable to its clients for all losses suffered by them if the respective event is attributable to the service provider. The liability is limited to the market value of the lost crypto-assets at the time of the loss.
b) Operation of a trading platform for crypto-assets
Under MiCA, the operation of a trading platform for crypto-assets means the management of one or more multilateral systems, which bring together or facilitate the bringing together of multiple third-party purchasing and selling interests in crypto-assets, in the system and in accordance with its rules, in a way that results in a contract, either by exchanging crypto-assets for funds or by the exchange of crypto-assets for other crypto-assets. MiCA also contains specific requirements for entities that wish to provide this service to clients.
MiCA requires companies to lay down, maintain and implement clear and transparent operating rules for the trading platform. Service providers are required to have policies on the approval procedures for listing new crypto-assets; this includes exclusion criteria as well as listing fees. Furthermore, rules on participation in trading activities shall be established, fair and orderly trading shall be ensured, and objective criteria for the execution of orders shall be established. Rules on securing trading, suspension of trading and settlement of orders shall be included.
All crypto-assets that are to be admitted to trading must be evaluated in advance, including with regard to the reliability of the technical solutions used and potential links to illegal activities. The issuer&s experience, track record and reputation must also be taken into account. Anonymous crypto-assets may not be admitted to trading unless the service provider can verify the transaction history.
The service provider may not become active on its own trading platform, i.e. may not use the trading platform on its own account. The platform must also be resilient, have sufficient capacity to function at peak times, and also be able to detect market abuse. In addition, there are a number of other obligations. All trading prices must be published in real time (for a fee) and with a fifteen-minute delay (without a fee). All data must also be retained for five years.
c) Exchange of crypto-assets for funds or other crypto-assets
Exchange of crypto-assets for funds means the conclusion of purchase or sale contracts concerning crypto-assets with clients for funds by using proprietary capital. The same applies mutatis mutandis to the exchange of crypto-assets for other crypto-assets. MiCA contains specific requirements for companies that wish to provide this service to clients.
The requirements are relatively manageable compared to other services. Companies must ensure that they pursue a non-discriminatory business policy, publish the method used to calculate the price offered in each case, actually trade at this price, and publish information about the transactions they have concluded.
d) Execution of orders on crypto-assets for clients
Execution of orders on crypto-assets means the conclusion of agreements, on behalf of clients, to purchase or sell one or more crypto-assets or the subscription on behalf of clients for one or more crypto-assets, and includes the conclusion of contracts to sell crypto-assets at the moment of their offer to the public or admission to trading. MiCA contains specific requirements for entities that wish to provide this service to clients.
The primary obligation is to achieve the best possible result for the customer when executing orders (e.g., market orders). This does not apply only if the customer gives specific instructions (i.e. limit orders). The execution policy must be disclosed; it must in principle be implemented swiftly and in good faith and prevent market abuse and the use of insider information.
e) Placing of crypto-assets
Placing of crypto-assets means the marketing, on behalf of or for the account of the offeror or a party related to the offeror, of crypto-assets to purchasers. The essential duty of the service provider is to specify to its client, i.e. the issuer of a crypto-asset, exactly what tasks will be undertaken. This includes specifying guarantees or minimum quantities, amount of transaction fees, expected schedule, procedures and prices. Prior to a placement, the issuer&s consent must be obtained in order to be allowed to use the white paper.
f) Reception and transmission of orders
Reception and transmission of orders for crypto-assets on behalf of clients means the reception from a person of an order to purchase or sell one or more crypto-assets or to subscribe for one or more crypto-assets and the transmission of that order to a third party for execution. The specific provisions contained in MiCA are manageable. The service provider must provide procedures for how client orders are to be routed. They may not demand remuneration or other benefits from trading platforms for the forwarding of client orders.
g) Providing advice on crypto-assets and portfolio management
Providing advice on crypto-assets means offering, giving or agreeing to give personalized recommendations to a client, either at the client&s request or on the initiative of the crypto-asset service provider providing the advice, in respect of one or more transactions relating to crypto-assets, or the use of crypto-asset services. Portfolio management means managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more crypto-assets. MiCA includes specific guidance for entities seeking to provide these services to clients.
Among the core obligations is to consider whether crypto-assets are suitable for the client. Just as in the area of financial instruments, the knowledge and experience with investments in crypto-assets, their investment objectives, risk tolerance and financial situation must be taken into account, including the customer&s ability to bear losses.
Anyone providing advice on crypto-assets must inform their clients whether the advice is provided independently, is based on an extensive or more limited analysis of various crypto-assets, or is limited to crypto-assets issued by entities that have close ties to the service provider or otherwise have a legal or economic relationship.
If the advice is provided on an independent basis, it must be sufficiently diversified. In this case, the advisor may also not accept commissions or other benefits from third parties. However, even in the case of non-independent advice, advantages may only be accepted if they are intended to improve the quality of the service and do not impair the service provider in the fulfillment of his duty to act honestly, fairly and professionally and in the best interests of the client.
In addition, these service providers are subject to certain other obligations, such as the obligation to identify risks or not to recommend crypto-assets or not consider them in portfolio management if they do not fit the customer profile. A record of the advice must be prepared and handed over. In the case of portfolio management, the measures taken and the development of the portfolio must be reported to clients on an ongoing basis.
h) Crypto-asset transfer services
Providing transfer services means providing services of transfer, on behalf of a natural or legal person, of crypto-assets from one distributed ledger address or account to another. Thus, only book-entry transfers that are not settled on the blockchain are also covered. The requirements under MiCA are quite straightforward and are limited to the requirement for a clear contractual basis with specific content.