The European Commission has published the highly-anticipated EU legislative framework for crypto assets, which came as part of the broader policy initiative on digital finance.
The new proposal offers a bespoke legislative regime for markets in crypto-assets (dubbed ‘MiCA’) and relevant service providers not covered elsewhere in the EU financial services regime.
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In addition, the MiCA will offer a pilot regime for crypto-related market infrastructures, which represents a so-called ‘sandbox’ approach. The term has particular relevance for the crypto industry, and the EU scheme was described as a controlled environment under which new firms or new ventures from established brands would be able to live test their ideas.
The commission further explained that successful applicants can test their new products without the cost of overheads such as compliance and exhaustive consumer protection. This allows ‘temporary derogations from existing rules’ so that regulators can gain experience on the use of distributed ledger technology in market infrastructures while ensuring that they can deal with ‘risks to investor protection, market integrity and financial stability’.
The new rules will also allow operators granted approval in any member state to provide their services at the EU level (passporting). Safeguards include capital requirements, custody of assets, a mandatory complaint holder procedure available to investors, and rights of the investor against the issuer.
The legislative initiative covers activities including crypto-to-fiat and crypto-to-crypto trading, custody, and asset-backed coins. For stablecoins in particular, a bespoke legislative framework is to be considered, and issuers of stablecoins would be subject to more stringent requirements in terms of capital, investor rights and supervision.
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Further, it should ensure that the relevant authorities have the necessary powers, tools, and resources to supervise stablecoins, including their multi-functional activities. Another recommendation is for the authorities to have in place a governance framework, with a clear allocation of accountability. This includes obliging issuers to preserve a ratio of 1:1 with fiat currency, reserve assets to be dominated in euro or other European currencies. Furthermore, the watchdog will recommend fiat or other asset reserves to be deposited in an EU-approved institution.