MiCA Regulation Is Just Around the Corner

The European Union regulation on markets in crypto-assets, commonly known as MiCA, will come into effect on 30th December 2024. Its provisions will impact many businesses involved in cryptocurrencies. To what extent will Bitcoin and the entrepreneurs providing Bitcoin-related services be affected?

Co-authored by Marcin Liszka

In general, this regulation applies to businesses issuing crypto-assets or providing services related to them. Since Bitcoin doesn't have an issuer, the rules about issuing crypto-assets won't apply to it. However, we still need to see how the new regulation will impact businesses offering services related to Bitcoin. Specifically, we need to understand when businesses might need to get permission (authorisation) to operate.

The definition of crypto-assets in the regulation is quite broad. It includes digital representations of value or rights that are transferable and can be stored electronically using distributed ledger technology (or similar technology). Bitcoin falls within this definition as it is a digital representation of value. Also, it can be transferred or stored electronically and uses distributed ledger technology, commonly known as blockchain. Consequently, businesses offering services related to Bitcoin will be classified as crypto-asset service providers. They will need to obtain authorisation and ensure compliance with the new regulations.

To determine if the regulation applies to a particular business, it is necessary to check whether its subject matter falls into any of the categories of regulated services specified in the regulation.

Custody and Administration of Bitcoin on Behalf of Clients

The first category covers the custody and administration of bitcoin on behalf of clients. Essentially, this includes services where the provider takes control of their customers' bitcoin. The aim is to safeguard individuals who prefer not to independently store their private keys, choosing instead to trust the service provider. In doing so, they settle for an IOU, a claim for the withdrawal or refund of the entrusted bitcoin. This category of service providers encompasses centralised cryptocurrency exchanges and brokers that secure client funds in their own wallets. It also includes any service where bitcoin is entrusted, such as those provided by custodial wallets. Even if the wallet is an add-on to a shopping application, podcast platform, cashback service, crowdfunding platform, social network, or any other service, it falls into this category as long as the service provider safeguards client funds in its own wallet. In principle, businesses offering sovereign wallet services (non-custodial wallets) will remain outside this category.

Operation of a Trading Platform

This category involves services related to operating a bitcoin trading platform, allowing customers to offer to buy or sell Bitcoin and exchange monetary funds for bitcoin (or other crypto-assets) directly among themselves. This service type will be subject to regulation, regardless of whether it involves entrusting the service provider with customer funds. Additionally, this category will include businesses facilitating peer-to-peer bitcoin transactions, even if they do not hold customer funds in their own wallets.

Exchange of Bitcoin for Funds or for Other Crypto-assets

The following two categories encompass services related to exchanging bitcoin for funds or other crypto-assets. This includes services offered by exchange offices, where the provider buys and sells bitcoin from and to customers in exchange for fiat currency (such as dollars or euros) or other crypto-assets. Most exchanges and brokers will fall into this category.

Execution, Reception and Transmission of Orders

The regulation also outlines various intermediary services related to buying or selling bitcoin. The execution, reception, and transmission of orders for bitcoin will be covered by the regulation, as long as these activities are conducted on behalf of clients. This category will include brokers providing OTC (over the counter) services, who accept and execute orders for their clients, and subsequently settle these transactions.

Advisory Services

Another category of regulated services involves providing advice on crypto-assets. In traditional finance, a financial advisor assists clients in safeguarding their wealth by offering expertise on financial products and markets. The advisor's role is to analyse and assess clients' financial needs, providing recommendations for products or services tailored to them. This category encompasses businesses that offer customers advice regarding the purchase or sale of bitcoin or the use of other bitcoin-related services, including specific wallets, exchanges, or brokers.

Portfolio Management

Traditional portfolio management services typically include making investment choices and overseeing them to meet the client's financial goals. The service provider's aim is usually to maximise the client's return on investment while considering the client's acceptable level of risk. In the realm of crypto-assets, this type of service is only beginning to emerge.

Transfer of Crypto-assets

The final category is defined as transfer of crypto-assets on behalf of clients from one distributed ledger address or account to another. In the case of Bitcoin, such services can be provided by exchanges or brokers in the form of withdrawals of bitcoin to designated accounts, including transfers to other exchanges. In our view, transfers within the exchange (between its users) should not fall under this category of services because they don’t involve a change of address in the distributed ledger (i.e., on the blockchain), but rather are recorded in the exchange's internal ledger. On the other hand, transfer services performed from custodial wallets may fall into this category. It can be argued that the wallet service provider (who safeguards the keys to the client’s assets) performs the transfer on behalf of the client while the client (wallet user) merely "instructs" the transfer.

In our opinion, routing carried out by operators of Lightning Network nodes cannot be classified in this category. Routing does not entail actual control over the funds of the person instructing the transfer and does not result directly in a change in the distributed ledger. Additionally, the regulation explicitly excludes the activities of miners and nodes from the scope of the transfer service, even though they may be involved in transaction approvals and the ledger’s updating process.

Regulated Activity

Those currently providing services covered by the regulation will need to obtain an authorisation to operate. They will also need to adjust their activities to ensure compliance with the new regulations. In each EU country, the authorisation will be issued by a designated regulatory body. Poland has not yet decided whether such authorisations will be issued by the Financial Supervisory Commission (KNF) or whether a new institution will be established for this purpose.

The new rules will come into effect on 30th December 2024. In theory, service providers should be able to benefit from an additional 18-month transition period for adjustments, ending on 1st July 2026. However, it is uncertain whether this privilege will apply to entities registered in Poland. The regulation allows Member States to opt out of or shorten the transition period if their local regulations are less stringent than MiCA. Member States are bound to inform the European Commission and the European Securities and Markets Authority (ESMA) by 30th June 2024 about their decisions regarding the transition period.

The ESMA, on the other hand, has been obligated to prepare model documentation which will be required from service providers when applying for authorisation to conduct regulated activities. This model documentation should be prepared by 30th June 2024. In a communication dated 18th October 2023, the Polish Financial Supervisory Commission encourages businesses currently providing crypto-related services to take actions as early as possible to align their operations with the requirements specified in MiCA. They also warn that potential current operations of the service providers which harm the interests of customers or threaten the integrity of the market may affect chances of such service providers for obtaining authorisation in the future.