Authored by: TaxDAO

1 Introduction

In recent years, the rapid development of the cryptocurrency capital market has become the focus of attention for young investors in the West. However, the bankruptcy of cryptocurrency exchanges such as FTX has raised concerns among financial regulatory authorities in various countries. The European Parliament has approved the first cryptocurrency regulation, the "Markets in Crypto-Assets Regulation" (MiCA) (MiCA may come into effect in January 2025. However, stablecoin-related rules may come into effect in mid-2024 after a 12-month transition period.), making it the world's first major jurisdiction to introduce comprehensive cryptocurrency regulations. This article will analyze the background, main content, and comparison with other international regulatory frameworks (FSM Bill, CARF, CRS) of this regulation.

2 MiCA Implementation Background

The introduction of MiCA aims to provide a legal framework for cryptocurrency assets not covered by existing EU financial services legislation; to support innovation by establishing a sound and transparent legal framework, promote the development of cryptocurrency assets, and the wider use of Distributed Ledger Technology (DLT); ensure appropriate consumer and investor protection and market integrity; and further enhance financial stability considering that some cryptocurrency assets may be widely accepted.

In the process of implementing MiCA, there are also some challenges and risks. As the cryptocurrency market continues to evolve and new technologies emerge, ensuring that regulations are consistent with market practices may be difficult. Additionally, the implementation of MiCA may exacerbate market monopolies or oligopolies as only a few large companies may have the capability to meet regulatory requirements. If MiCA's regulatory standards differ from those of other countries or regions, the European cryptocurrency market may face international competitive pressure, and companies may prefer to transfer relevant assets to regions or countries with lower compliance costs and regulatory requirements. The implementation of the regulation also places higher demands on active cooperation and effective enforcement among the supervisory authorities of EU member countries, and differences in the execution of MiCA among countries may affect regulatory consistency and effectiveness.

3 MiCA Regulation Content

MiCA mainly covers three types of cryptocurrency assets:

Asset-Referenced Tokens (ART): Cryptocurrency assets that stabilize their value by referencing the value of other legal tender currencies, commodities, or cryptocurrency assets (single or multiple assets or asset combinations), such as Digix (DGX), which is backed by equivalent gold reserves.

Electronic Money Tokens (EMT): Tokens that stabilize their value by referencing the value of other legal tender currencies. The difference between ART and EMT lies in the underlying asset allocation supporting the price. ART uses non-cash assets or a basket of currencies, while EMT uses only a single currency, closer to the concept of electronic money, such as Alipay or WeChat Pay.

Other cryptocurrency assets: Cryptocurrency assets that do not fall under the categories of Asset-Referenced Tokens and Electronic Money Tokens, such as utility tokens, which aim to provide digital access to goods or services, enabling them to be used on Distributed Ledger Technology (DLT).

MiCA does not cover assets such as DeFi, NFTs, and security tokens that meet the conditions of other regulated instruments. In addition, Central Bank Digital Currencies (CBDCs) or digital currencies issued by other international public organizations (such as the International Monetary Fund) are also not within the scope of MiCA.

In addition to defining the scope of application, MiCA also specifically regulates market abuse behavior to prevent market manipulation and fraudulent activities, protect the interests of investors, and ensure the stability and transparency of the cryptocurrency asset market. MiCA explicitly prohibits any form of market manipulation, including but not limited to:

• Disseminating false or misleading information, including false advertising, misleading statements, or other fraudulent behavior, to influence cryptocurrency asset prices or guide other market participants to make incorrect investment decisions.
• Trading using undisclosed insider information to gain unfair trading advantages.
• Manipulating the supply and demand of cryptocurrency assets by fabricating trading volume or other means to manipulate prices.
• Exploiting market deficiencies or other loopholes to gain unfair advantages.

According to MiCA, token issuers need to obtain authorization to provide services in the EU. Authorization requires submitting an application to the national supervisory authority of the issuer's country, including detailed information related to their business and services, such as business models, technical implementation, white papers, investor information, etc. Token issuers may be subject to certain requirements, such as financial requirements and organizational operations, to meet relevant requirements in areas such as finance, risk management, compliance, and corporate governance, to ensure that token issuers can comply with relevant regulations, have sufficient financial strength to fulfill their commitments, and protect the rights of investors. Subsequently, the application will undergo a review process, where the national supervisory authority may review the application materials and may also seek the opinion of the European Securities and Markets Authority (ESMA), conduct interviews and investigations with the applicant to ensure compliance with MiCA regulations.

If an Electronic Money Token issuer fails to meet MiCA requirements or violates regulations during operation, the national supervisory authority has the right to revoke its authorization and prohibit it from providing services within the EU.

4 Comparison of MiCA with Other International Tax Regulatory Frameworks

The following will compare and analyze MiCA with the UK's 2022-23 Financial Services and Markets Bill (draft) (FSM Bill 2022). Both MiCA and FSM Bill 2022 involve related content on cryptocurrency asset management. Especially against the backdrop of Brexit, the differences between the UK's approach to cryptocurrency asset management and the EU's MiCA have attracted the attention of consumers and investors.

FSM Bill 2022 and MiCA both define them as digital representations of value or rights, with the difference that the scope of cryptocurrency asset definition in FSM Bill 2022 is broader. Whether or not it is protected by encryption, as long as it can be used for payment, transferred, stored, or traded electronically, and recorded or stored using technologies such as distributed ledger, it falls within the scope of cryptocurrency assets. Therefore, FSM Bill 2022 may also apply to other digital or cryptocurrency assets that meet the above conditions, in addition to stablecoins. MiCA, on the other hand, emphasizes the use of distributed ledger technology or similar technologies, and specifically classifies cryptocurrency assets, and formulates corresponding regulatory rules and requirements for different types of cryptocurrency assets.

MiCA and FSM Bill both propose regulation of the issuance of cryptocurrency assets when they enter regulated trading venues or are publicly offered. MiCA mainly requires disclosure documents in the form of a "white paper." The UK indicates that a similar approach may be adopted, but further assessment is needed, and continuous requirements for issuers may be considered, as traditional securities disclosure regulations may not be well applied to cryptocurrency assets.

The regulatory requirements for overseas issuers and service providers differ between MiCA and FSM Bill. MiCA requires issuers to establish a legal entity in the EU; cryptocurrency asset service providers must also have "actual management" in the EU; and at least one director must reside in the EU and have a registered office in a member state where they are authorized. FSM Bill explicitly states that the UK wants to regulate activities "in" or "towards" the UK. The question of whether it is necessary to establish a physical entity in the UK is not clear.

Table 1 Comparison of Major Cryptocurrency Asset Regulatory Frameworks

![Interpretation and Comparison of the EU's "Markets in Crypto-Assets Regulation" (MiCA)aicoinFigure 1](https://static.aicoinstorge.com/attachment/article/20230804/169113028068684.jpg "Interpretation and Comparison of the EU's "Markets in Crypto-Assets Regulation" (MiCA)aicoinFigure 1")

5 Conclusion

Undoubtedly, the "Markets in Crypto-Assets Regulation" will help improve the transparency and credibility of the cryptocurrency market, largely protecting the rights and interests of consumers and investors. However, the implementation of the regulation will also face many unknown new issues, leading to short-term market fluctuations. In conclusion, the implementation of this regulation will be groundbreaking and may have far-reaching effects on the cryptocurrency market, and it is worth continuous attention from all parties.

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