In-depth discussion on the key points and impacts of the EU encryption asset regulation.

Introduction

In June 2023, the European Union officially released the "Regulation on Markets in Crypto-Assets" (MiCA), which will come into full effect on December 30, 2024. It applies to 27 EU member states as well as 3 other European Economic Area countries (Norway, Iceland, Liechtenstein), addressing the fragmentation and regulatory arbitrage issues in crypto asset regulation within the EU and EEA countries. It is the most widely applicable cryptocurrency regulatory framework in the world.

MiCA has provided detailed regulations on the classification and use of crypto assets, the licensing of crypto asset issuers and service providers, the management of crypto asset issuers and service providers, the reserve and redemption management of crypto asset issuers, and the anti-money laundering supervision of crypto asset trading activities, making it the most comprehensive crypto asset regulatory framework globally to date.

MiCA not only recognizes the role of the development of crypto assets in enhancing the efficiency of financial services, improving financial inclusiveness, and promoting economic growth, but also pays attention to the challenges that the development of crypto assets poses to the operation of the payment system, the stability of the financial system, and the transmission of monetary policy (monetary sovereignty). It has struck a balance between supporting financial innovation and fair competition, maintaining financial stability, and protecting consumer rights. Starting from 2025, as MiCA gradually comes into effect in various European countries, it will greatly promote the compliant development of the global crypto asset market and will also lead to the formulation of regulatory policies for crypto assets in other countries and the construction of a global governance coordination system.

1. Classify and define cryptocurrency assets, and clarify the usage and trading requirements.

1. In terms of asset definition, MiCA classifies regulated crypto assets into three main categories.

According to whether crypto assets attempt to stabilize their value by referencing other assets, MiCA categorizes regulated crypto assets into three main types: Electronic Money Tokens (EMT), Asset-Referenced Tokens (ART), "Utility Tokens" (UTs) and other crypto assets, while fully decentralized crypto assets are not regulated by MiCA.

Among them, EMT is a payment method that maintains the value of assets by referencing an official currency (i.e., a fiat-backed stablecoin). The issuer of EMT is prohibited from paying interest on EMT (including compensation, discounts, etc., similar to domestic requirements for non-bank payments).

ART is a means of maintaining stable value by referencing another value or right, or a combination of both, including one or more values or rights, commodities, fiat currencies, or crypto assets. It serves as a medium of exchange and an investment tool. The issuer and service providers should not pay holders interest related to the duration of ART holdings when providing services related to ART.

The difference between EMT and fiat currency-backed ART lies in the redemption rights. EMT holders can and have the right to redeem EMT at face value at any time, whereas ART holders do not have such strong guarantees regarding the redemption time and value.

UTs and other cryptocurrencies provide digital access to certain goods or services, offered on distributed ledger technology and only accepted by the issuer of the token, serving non-financial purposes related to the operation of digital platforms and digital services, and represent a specific type of cryptocurrency. Furthermore, non-fungible tokens (NFTs) and central bank digital currencies (CBDCs) are not within the regulatory scope of MiCA, and security tokens are also not regulated by MiCA, but are regulated according to securities laws.

Table 1: Regulatory requirements of MiCA for crypto assets and their issuers

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)# 2. In terms of usage and trading, limits have been set on the daily trading volume of crypto assets and the use of foreign currency stablecoins.

MiCA requires that the daily trading volume of a single ART or EMT must not exceed 5 million euros, and when the market value of ART or EMT exceeds 500 million euros, the issuer must report to the regulatory authorities and take additional compliance measures.

MiCA allows the use of EMT (stablecoins) for cryptocurrency trading and decentralized finance (DeFi) activities, but imposes distinct restrictions on the use of EMT for payment of goods and services. Only euro stablecoins can be used for daily goods and services payments to protect the monetary sovereignty of the EU and to prevent the influence of foreign currency stablecoins on the EU monetary system.

In addition, MiCA has imposed strict limits on the daily usage scale of ART. If the usage volume exceeds 1 million transactions or a transaction amount of 200 million euros (quarterly average) within a single currency area, the issuance of that ART must be halted.

( 2. Clarify the licensing requirements for issuers of encrypted assets and service providers, and implement classified regulation.

)# 1. Implement different access and licensing requirements for the issuance of different types of crypto assets.

MiCA believes that ART may be widely used by holders to transfer value or as a means of exchange, and has imposed stricter requirements on ART issuers to protect the interests of holders (especially retail holders) and market integrity.

MiCA clarifies the access authorization requirements for ART issuers: ART issuers must establish themselves as legal entities within the EU, must first obtain authorization from the designated regulatory authority in their home country, and such assets must be traded on cryptocurrency exchanges. However, exemptions from access authorization can be made in cases where the ART issuer is already a credit institution, the outstanding ART is less than 5 million euros, or the ART is issued to qualified investors.

For the issuers of EMT, MiCA requires them to be authorized as credit institutions or electronic money institutions and to comply with the requirements of the Electronic Money Directive (EMD2) regarding electronic money institutions. In cases where the amount of EMT does not exceed 5 million euros, EMT issuers may also obtain an admission authorization exemption, but they need to issue a white paper as required.

For issuers of crypto assets other than ART and EMT, MiCA's requirements mainly focus on disclosure rules, but the white papers of these crypto assets need to be registered with the European Securities and Markets Authority (ESMA).

2. Clarify the scope of cryptocurrency asset services and the licensing requirements for cryptocurrency asset service providers.

MiCA defines the scope of services related to crypto assets quite broadly, mainly covering the following ten types of business activities: providing custody and management of crypto assets on behalf of clients, operating crypto asset trading platforms, exchanging crypto assets for fiat currency, swapping crypto assets for other crypto assets, executing crypto asset orders on behalf of clients, investing in crypto assets, receiving and transmitting crypto asset orders on behalf of clients, providing advice on crypto assets, offering portfolio management for crypto assets, and providing transfer services for crypto assets on behalf of clients.

On this basis, MiCA classifies any individuals and entities that provide crypto asset services for commercial purposes as Crypto Asset Service Providers (CASP). Service providers intending to offer crypto asset services must register an office in one of the EU member states and apply for CASP authorization from the competent authority of the member state where their office is registered. It is important to note that crypto asset services provided in a fully decentralized manner without any intermediaries are not within the scope of MiCA regulation.

3. Clarify the operational requirements for cryptocurrency issuers and service providers, with capital regulation being a key focus.

1. Make capital regulation a top priority for the operational supervision of cryptocurrency issuers.

MiCA sets out clear requirements for information disclosure and honest operation of ART issuers, corporate governance mechanisms, internal control mechanisms, risk management procedures, reserve asset management and redemption, etc., and requires all types of cryptoasset issuers to publish white papers (except UT and small cryptocurrency). For EMT issuers, they need to meet the regulatory requirements for the operation of electronic money and payment instrument institutions.

At the same time, in order to address the potential impact on the stability of the financial system caused by the widespread issuance of ART, MiCA has established specific capital requirements for ART issuers (essentially following a principle proportional to the scale of ART issuance), requiring them to always maintain at least the higher amount of the following self-owned funds: first, 350,000 euros; second, 2% of the average reserve assets/token issuance amount as described in Article 32 of MiCA; third, one-fourth of the fixed indirect costs from the previous year (if the ART issuer is a credit institution, it must comply with the capital regulatory requirements for credit institutions); the capital requirement for EMT issuers is not less than 2% of the circulating scale of EMT issuance, and they must also meet the capital regulatory requirements for credit institutions or electronic money institutions.

In addition, MiCA also refers to the regulation of "systemically important financial institutions" to evaluate whether ART and EMT are "important crypto assets" based on factors such as the number of customers, market capitalization, trading volume, and their correlation with the traditional financial system. It imposes additional risk and own capital requirements on issuers of important crypto assets.

2. Implement differentiated regulatory requirements for service providers of encrypted assets in different scopes.

MiCA sets differentiated minimum capital requirements for different types of crypto asset service providers, to be executed at no less than the following standards or one-quarter of the previous year's fixed management fees: the minimum permanent capital (own capital) that trading platforms need to maintain is €150,000; the minimum permanent capital for crypto asset custodians and brokers is €125,000; CASPs providing other services need to hold a minimum permanent capital of €50,000, with an annual review of regulatory requirements.

At the same time, MiCA also presents targeted regulatory requirements for different types of CASPs. For example, MiCA requires cryptocurrency custodians to establish clear custody policies, regularly communicate asset status to clients, and take responsibility for losses of client assets due to network attacks/failures, among other things. Trading platforms need to implement monitoring for market manipulation, publicly disclose trading prices and depths, while brokerage firms must establish non-discriminatory policies. Advisors and portfolio managers need to assess whether to engage in cryptocurrency asset investment based on clients' risk tolerance and knowledge.

Table 2: MiCA's Differential Capital Requirements for Crypto Asset Service Providers

![In-depth Discussion on the Key Points and Impacts of EU Cryptocurrency Asset Regulation]###https://img.gateio.im/social/moments-427cc6d724c8ddc5f664014b5a6aa3fb###

4. Strengthening the management and supervision of the issuer's reserve assets, with a focus on isolation of custody and timely redemption.

(# 1. Clear requirements have been set for the custody and allocation of reserve assets.

In order to protect the reserve assets of ART from claims by creditors of the issuer and the custodian, MiCA requires that the reserve assets of ART be completely segregated from the issuer's own assets at all times. The issuer must entrust the reserve assets to qualified credit institutions, investment firms, or cryptocurrency service providers for safekeeping. The reserve assets may not be used by the issuer as collateral or as security. In the event of a loss, the custodian must return cryptocurrency assets of the same type or of corresponding value as the lost assets to the ART issuer, unless the custodian can prove that it is exempt from repayment obligations.

When an issuer faces bankruptcy or other situations where it cannot fulfill its obligations to holders, reserve assets should be prioritized for ensuring redemption payments to ART holders. However, MiCA has not yet provided specific requirements regarding the principles for ensuring the redemption rights of all holders when the reserve assets cannot guarantee the redemption at face value for all holders.

For the management of reserve assets for EMT, MiCA requires issuers to comply with the safeguards of the EU's Electronic Money Directive (EMD2) and the Payment Services Directive (PSD2): Reserve assets must not be mixed with the funds of any natural or legal person other than payment service users at any time; reserve funds should be invested in assets denominated in the same currency as the currency referenced by the electronic money token to avoid cross-currency risk; and if funds are held by payment institutions and are not used for payments by the end of the next working day, they should be deposited in a separate account at a credit institution or invested in safe, liquid, low-risk assets determined by the competent authorities of the home Member State; EMT issuers must isolate reserve assets from the claims of other creditors to ensure that EMT holders receive priority repayment in the event of the issuer's bankruptcy.

In addition, MiCA imposes strict requirements on the allocation and structure of reserve assets for cryptocurrency asset issuers: general ART and EMT issuers are required to deposit 30% of their reserve assets in credit institutions (bank institutions), while significant ART and EMT issuers must deposit 60% of their reserve assets in credit institutions.

)# 2. Key to ensuring the redemption rights of asset holders.

For ART, MiCA requires issuers to establish liquidity mechanisms and develop orderly plans for the redemption of tokens to ensure asset liquidity and meet customer redemption requests. If the market price of ART deviates significantly from the value of the reserve assets, ART holders still have the right to redeem ART directly from the issuer, even if the issuer has not granted this right through a contract. However, MiCA does not provide specific requirements for the timing of funds arriving when holders redeem ART, and further follow-up is needed on the specific implementation requirements from EU member states.

For EMTs, MiCA requires that issuers must be able to redeem at par at any time, either in cash or by credit transfer, in cash or by credit transfer, with redemption conditions stated in the cryptoasset whitepaper and no fees for redemption. If the issuer of the EMT does not satisfy the redemption request of the EMT holder within 30 days, the holder may turn to the custodian of the EMT assets and/or a distributor acting on behalf of the EMT issuer.

5. Implement strict anti-money laundering regulations for cryptocurrencies and enhance the standards for the implementation of travel rules.

Cryptographic assets are issued and traded based on blockchain, characterized by decentralization, globalization, anonymity, convertibility (exchangeable for fiat currency), and irreversibility of transactions. Additionally, bridge technology enhances the interconnectivity between different blockchains, making the prevention of money laundering and terrorist financing risks associated with cryptographic assets more complex. MiCA and relevant regulatory regulations from the European Union have specific requirements addressing this.

1. MiCA requires cryptocurrency asset trading to adhere to comprehensive anti-money laundering regulatory requirements.

MiCA places great emphasis on the illegal and criminal activities that may arise from stablecoins and the cryptocurrency market (such as insider trading, market manipulation, etc.), requiring all crypto asset service providers to implement comprehensive anti-money laundering and anti-terrorist financing measures, including strict KYC procedures and transaction monitoring, enforcing rigorous Customer Due Diligence (CDD) procedures and monitoring suspicious transactions, and reporting to the relevant authorities to prevent money laundering and terrorist financing activities.

Although ART and EMT are tokens that operate on open systems without the need to establish a direct relationship with the issuer, MiCA still emphasizes that issuers should utilize chain analysis to understand the usage of the tokens. This allows issuers to view in real-time the active wallets holding their tokens, including holder behaviors (i.e., exchanges with personal wallets, holding periods), the overall transaction volume across multiple blockchains, and the scale of transactions involving sanctioned entities or jurisdictions, in order to prevent the use of tokens for illegal activities.

2. MiCA has increased the anti-money laundering "travel rule" requirements for crypto assets.

The Funds Transfer Regulations, adopted at the same time as MiCA, provide more targeted requirements for cryptoasset AML and terrorist financing operations, requiring cryptoasset service providers to transfer cryptoassets with information about the sender and recipient (i.e., the "travel rules" for AML and terrorist financing) and not allowing any amount of cryptocurrency to be transferred between accounts on their cryptoasset service providers (CASPs) without personally identifiable information. Compared to the €/USD threshold set by the FATF for the implementation of the Travel Rules, the above requirements of the Money Transfer Regulations are undoubtedly more stringent.

In addition, in December 2024, the European Banking Authority ###EBA### officially announced the extension of the EU's "Travel Rule Guidelines" to include cryptocurrency service providers and intermediaries, requiring them to collect and report information on users transferring funds or cryptocurrency assets, determine whether transactions are related to the purchase of services, and monitor suspicious cryptocurrency transactions; cryptocurrency service providers and intermediaries need to declare their policies on multiple intermediaries and cross-border transfers.

VI. Impact on the Development and Regulation of Global Crypto Assets

The implementation of MiCA marks the transition of the global cryptocurrency market development from a phase of "free development" to "compliant competition," which will have a significant impact on the structure of the global cryptocurrency market development, the direction of global cryptocurrency regulation, and the construction of a global collaborative governance system for cryptocurrencies.

(# 1. MiCA will promote the standardization and stratification of the global cryptocurrency market.

MiCA implements differentiated licensing access and operational supervision for the issuers and service providers of crypto assets based on the classification of crypto asset types. It also proposes differentiated capital and liquidity requirements for different types of issuers and service providers, providing a normative guideline for the business activities of entities in the crypto asset market.

At the same time, considering the strict regulatory requirements of MiCA, such as high standards for reserve asset segregation custody, minimum capital requirements, and anti-money laundering regulations, the compliance costs for operating in the cryptocurrency market are increased, which benefits leading compliant issuers and service providers (such as Circle's USDC) in solidifying their market share through licensing barriers, while also accelerating the exit of non-compliant cryptocurrency issuers and service providers.

In addition, MiCA exempts fully decentralized crypto assets from regulation, but decentralized exchanges (DEX) that involve fiat currency exchanges or custody services still need to be included under CASP regulation, thereby forcing decentralized crypto asset trading platforms to restrict access for EU users, pushing decentralized platforms to the margins. For the entire crypto asset market, these factors will ultimately increase the concentration of the market as a whole.

)# 2. MiCA will become the "reference framework" for the development of regulatory policies for crypto assets in various countries.

From the perspective of policy recommendations from international regulatory organizations, in July 2023, the Financial Stability Board (FSB) released the "High-Level Recommendations on the Regulation of Global Stablecoins" and the "High-Level Recommendations on the Monitoring, Supervision, and Regulation of Crypto Asset Activities and Markets." These recommendations regarding the governance framework of stablecoins and issuers and service providers of cryptocurrencies, risk management, information disclosure, reserve asset management, and stablecoin redemption, as well as the principles of "same activity, same risk, same rules" and technology neutrality in regulation, are also requirements of MiCA, or can be seen as reflecting the MiCA rules.

From the regulatory practices of authorities in various countries, it can be seen that regulatory agencies in EU countries will formulate specific implementation policies based on the requirements of MiCA. The MiCA's classification of crypto assets, the admission regulations and operational requirements for issuers and service providers, the upgraded application of anti-money laundering regulatory "fulfillment rules," and the specific requirements regarding the restrictions on fiat currency-backed stablecoins in physical transaction payments have also become important references for the formulation of cryptocurrency regulatory laws in non-EU countries such as Singapore and Japan.

In this regard, MiCA has not only initiated the process of compliance for the global crypto asset market but also started the standardization process for the regulation of the global cryptocurrency market. Of course, during this process, it is also possible that some countries may lower regulatory requirements (regulatory competition) to promote the establishment and development of advantages in their own cryptocurrency markets.

3. The construction of a global governance collaborative system for encrypted assets is expected to accelerate.

Cryptographic assets are global and essentially cross-border. Compared to traditional banking and financial markets, the globalization level of the cryptographic asset market is higher and there is an urgent need to establish a global regulatory governance system. Since the second half of 2023, the global stablecoin and cryptocurrency markets have entered a rapid development track. According to monitoring data from Triple A, by 2024, the number of global cryptographic asset holders exceeded 560 million, and after entering 2025, the total market value of cryptographic assets has been above 3 trillion dollars most of the time. The integration of cryptographic assets with traditional financial systems and the real economy is advancing rapidly, making the construction of a global cryptocurrency governance system even more prominent.

Currently, global cryptocurrency regulation is still in a fragmented state, with each jurisdiction acting independently. International regulatory organizations have not yet published standards for stablecoin and crypto asset regulation similar to the "Basel Accords", and there is no specific roadmap timeline for the construction of stablecoin and crypto asset regulatory systems in various countries. With the full implementation of MiCA in the European Union, the United States is also accelerating the advancement of its regulatory framework for stablecoins and crypto assets. It is expected that organizations like the FSB will expedite the research and formulation of unified global regulatory standards for crypto assets and establish a collaborative governance mechanism for global cryptocurrencies. The MiCA legislation also explicitly states that the EU will continue to support international organizations or institutions (such as the Financial Stability Board, the Basel Committee on Banking Supervision, and the Financial Action Task Force) in promoting global collaborative governance of crypto assets and crypto asset services.