MiCA Regulation and Its Impacts on Traditional Financial Institutions

On 31 May 2023, the European Parliament and the Council enacted the Regulation on Markets in Crypto-assets (MiCA Regulation). In collaboration with our clients, we have been closely monitoring the preparation of the MiCA Regulation, its various versions, and have thoroughly studied the finalized regulation. With its 149 articles, the MiCA Regulation is a comprehensive framework that regulates various activities related to crypto-assets within the European Union (EU).

In this article, we focus on the opportunities MiCA Regulation presents for traditional financial institutions, such as banks, investment firms, and electronic money institutions.

Impact of the MiCA Regulation on the Reliability of the Crypto-Asset Market

The MiCA Regulation can be considered the entire world's first significant crypto-asset legislation. As a EU regulation, it applies uniformly across the entire EU, allowing the crypto-asset market operators to anticipate the impact of their operations not only in their home country but also in other EU member states.

The MiCA Regulation identifies various actors in the crypto-asset markets, including:

• stablecoin issuers,
• issuers of asset-referenced tokens (related to so called tokenization of real word asset),
• providers of crypto-asset custody,
• operators of crypto-asset trading platforms (e.g., crypto-asset exchanges), and
• portfolio managers for crypto-assets.

All the referred operations shall become subject to financial authorization after the MiCA Regulation starts to apply, requiring compliance especially with the obligations of MiCA Regulation. Importantly, the MiCA Regulation mandates EU member states to grant extensive powers to supervisory authorities to intervene in the activities of such operations,

Therefore, with the MiCA regulation, more reliable entities will operate in the EU, offering and handling various crypto-assets that are more precisely regulated than before. This integration of various crypto-asset market operators into the EU financial markets should lower barriers for consumers to engage in crypto-asset markets while enabling traditional financial market institutions to collaborate more easily with entities in the crypto-asset markets.

Opportunities for Traditional Financial Institutions under the MiCA Regulation

With the integration of crypto-asset market operators into the EU financial markets, the MiCA Regulation provides an excellent opportunity for traditional financial institutions to make a flexible transition into the crypto-asset markets. The MiCA Regulation follows a regulatory model typical for financial markets, allowing entities already subject to more demanding regulations, such as capital requirements and reporting obligations, to incorporate less-regulated financial services more easily without undergoing a separate licensing process.

Credit institutions, or more famously just banks, are permitted under the MiCA Regulation to offer asset-referenced tokens and electronic money tokens under their credit institution license, provided they adhere to specific MiCA Regulation articles tailored for them. Similarly, a credit institution can expand its range of crypto-asset services by notifying and providing certain information to its home member state's competent authority. Thus, credit institutions do not need to complete a separate and extensive licensing process to enter the crypto-asset markets and fall within the scope of the MiCA Regulation.

Investment firms are granted the opportunity to offer crypto-asset services equivalent to their investment services and activities, subject to their existing license. The MiCA Regulation also precisely regulates how various crypto-asset services correspond to different investment services and activities and what information should be provided to the competent authority.

Entities issuing electronic money (or e-money) under the existing EMD2 regulation have been accustomed to issuing electronic money. The MiCA Regulation allows these electronic money institutions (EMI) to seamlessly transition to issuing e-money tokens if desired. These institutions can also provide certain crypto-asset services solely based on notification to their home member state's competent authority.

Therefore, traditional financial institutions have the opportunity to incorporate crypto-related services into their service offerings, such as issuing e-money tokens or providing advice and portfolio management related to crypto-assets without undergoing a separate licensing process. As of writing this article, Deutsche Bank has already announced its intention to offer crypto-asset custody in collaboration with the Swiss crypto-asset company Taurus.

In Conclusion

While the MiCA Regulation provides traditional financial institutions with flexible means to enter the crypto-asset market, other provisions of the MiCA Regulation apply to them as usual. Therefore, these entities must familiarize themselves with the MiCA Regulation's provisions, especially those related to the various crypto-assets they intend to engage with. Furthermore, it may be that the traditional players lack the required expertise in the crypto-asset market, which could/should leave room for collaborations with the already established crypto-asset market operators.

At Nordic Law, we have extensive experience assisting the crypto-asset market operators as well as supporting traditional financial market institutions. Over the years, we have assisted numerous crypto-asset entities before any regulation existed, facilitated their initial registrations and licensing processes, and are currently helping them prepare for the regulatory framework introduced by the MiCA Regulation.

We are more than happy to discuss the opportunities that the MiCA Regulation presents for your business and, conversely, the obligations you need to prepare for to smoothly leverage these opportunities.

Our Associate Trainee Mikael Huhtala took part in writing this article.