MiCA Regulation: How the EU is Shaping the Future of Crypto Asset Compliance?

MiCA, short for the Markets in Crypto Assets, is the EU’s comprehensive regulatory framework that is established to regulate the crypto assets market in the European Union.

The total crypto market size has already surpassed $3.6 trillion. As the popularity of cryptocurrencies and digital assets soars and market capitalization increases across the globe, jurisdictions tighten their regulatory scrutiny of the sector to ensure transparency and safeguard users’ interests.

The European Union’s MiCA regulation takes the lead in this context.

Despite being an EU-specific regulation, MiCA is making waves across the globe for its comprehensive approach to regulating different classes of digital assets against market abuse.

Ever wondered what its provisions are for the digital currency market?

Before December 30, 2024, the official date of MiCA’s implementation, the crypto industry was subjected to regulations limited to criminal activity prevention, with limited oversight in other areas like consumer protection and financial stability.

With MiCA regulation in full practice, an emphasis on clear asset licensing and asset class management, like stablecoins and asset reference tokens, in Europe is provided.

The MiCA regulatory framework offers fundamental requirements for Crypto Asset Service Providers (CASPs) during the issuance of cryptocurrencies in order to enhance financial transparency and transaction supervision.   

Looking to understand how this framework regulates the EU’s crypto operations?

This blog covers the major regulatory requirements and how this act influences the operational resilience of the EU’s digital financial operations.

What is the MiCA Regulation?

The Market in Crypto Assets (MiCA) regulation is Europe’s landmark framework that is formulated to administer and harmonize the crypto assets regulation in the EU.

The aim of this regulation is to address the crypto challenges faced by European countries, including a lack of legal clarity, stablecoin risks, and insider trading.

“Crypto-assets are one of the main applications of distributed ledger technology. They are the digital representations of value or of rights that have the potential to bring significant benefits to market participants, including retail holders of crypto-assets.”

 MiCA crypto framework 

When used as a means of payment, crypto-assets can present opportunities in terms of cheaper, faster, and more efficient payments by limiting the number of intermediaries. MiCA EU regulates the crypto assets market across the European Union by categorizing them into three definite classes.

It includes:

• asset-referenced tokens (ARTs),
• e-money tokens (EMTs),
• and other crypto assets not facilitated in the previous regulations.

ARTs sustain consistent market charges by actively deriving value from an official currency, which is noticeably discussed under the 3rd title of the MiCA regulation.

Simultaneously, the 4th title of the said regulation discusses that EMTs are subjected to informed regulatory requirements as they are backed by fiat currency.

To briefly examine the major provisions and requirements of the MiCA regulation, thoroughly read through the next section:

What are the Primary Requirements of the MiCA Regulation?

The goal of MiCA regulation is to redefine the performance of the crypto sector through the formulation of comprehensive and harmonized rules within the European Union.

Primarily, this regulation is developed to protect the crypto sector from insider trading and market abuse and preserve financial integrity.

MiCA regulation establishes that the crypto sector is far more than just a lawless frontier. Below are the primary requirements of this regulation, which defines that the crypto sector now functions within an authorized system:

New Token Issuance Rules

CASP’s reliance on decentralized exchange offerings (DEXs) severely lacked accountability and led to anonymous crypto transactions in the past. Under the MiCA regulation, the token issuers must follow certain requirements that include the publication of a relevant whitepaper.

The paper must explain the project’s overall scope, risks, and the technologies that are to be used. Additionally, proper document filing with the concerned regulatory body must be presented.

MiCA regulation prohibits token issuers from engaging in decentralized operations without compliance with a competent regulatory authority to ultimately protect investors from cyber threats and financial risks.

Article 62(i) of EU Regulation 2023/1114 of the European Parliament and of the Council mandates the provision of the applicant CASP’s internal control mechanisms and procedures to assess and manage recurring money laundering crimes. Therefore, CASPs require effective AML screening solutions to mitigate financial crimes.

Simplified Project Licensing Across the EU

Formerly, the diversification of the EU’s crypto regulatory laws across different states complicated the acquisition of crypto licenses.

With MiCA regulation, cryptocurrency project licensing was harmonized due to the development of a single authorization system, which is applicable to all the concerned EU member states.

MiCA regulation optimizes the CASP’s operational resilience and promotes digital innovation simultaneously to ensure secure transactions. It formulates a legitimate framework to strengthen financial growth through the incorporation of new asset classes.

CASP Obligations

It is evident under the MiCA that the CASPs must ensure the implementation of new crypto rules to promote data security, service continuity, and AML compliance.

All the CASPs are prompted to maintain a registered office in the member state to promote transparent crypto operations across the region. Moreover, MiCA mentions that CASPs exceeding 15 million users are subjected to extensive supervision and regulatory oversight.

Stablecoins Regulation

MiCA regulation focuses on the development of competent guidelines for the regulation of stablecoins. Under these new EU guidelines, fiat-based stablecoins must maintain a 1:1 ratio reserve in liquid assets to reduce financial discrepancy. Following this rule, EMTs and ARTs authorization is to be ensured before crypto token offerings in European nations.

What are the Implications of the MiCA EU Regulation?

Across the European nations, MiCA optimizes crypto asset trading and offerings through a unified regulatory module. Thereby, MiCA’s impact in promoting operational resilience against evolving crypto scams is overviewed below:

Global Ramifications of the MiCA Crypto Regulation

In light of the recent events, the members of the US Congress showed interest in obtaining information regarding the MiCA’s crypto management approach.

The impact of the MiCA crypto regulation is not confined to the European region. Perhaps it is strong enough to regulate crypto operations on an international scale.

Due to this reason, discussions are underway regarding the implementation of related guidelines in other regions to regulate crypto assets and prevent possible online scams.

This process could actively prompt a ripple effect while encouraging global data security checks of the crypto industry.

MiCA’s Impact on Europe’s Web3 Businesses

ESMA supervises the functionality of various legal tokens, including payment and utility. Through its transparent financial operations, the MiCA framework significantly revolutionizes the DLT and digital finance strategy through a comprehensive legislative initiative.

This prohibits the issuance of tokens that fail to comply with the licensing and transparency standards established by the ESMA. The emphasis on operational resilience shapes the effectiveness of the digital financial framework in the long run.

Want to examine MiCA’s importance through some real-world examples? Here are a few prominent case studies about the concerned guidelines:

How are Crypto Service Providers Responding to MiCA Regulation?

The MiCA regulatory framework implements strict compliance requirements, specifically for stablecoins. These modifications significantly enhance the transparency and regulation in several crypto exchanges, some of which are examined in the next section:

Coinbase’s Compliance Measures against Tether (USDt)

Coinbase, a prominent cryptocurrency exchange, has delisted the Tether due to the observance of regulatory uncertainty. MiCA regulation imposes stringent regulatory measures for stablecoin issuers, including issuer licenses and independent reserves in recognized banks.

As per the MiCA framework, other stablecoin issuers must secure an e-money license to prove the legitimacy of their crypto operations in order to mitigate the laundering of monetary funds across the EU.

Since Tether is also a stablecoin, concerns are being raised about its legitimacy due to the fact that it may not have an e-money license for the EU.

Kraken’s Regulatory Expansion

With MiCA guidelines, positive responses from crypto exchanges have been observed that think MiCA may further boost user confidence across the crypto sector.

Kraken, a renowned EU-based crypto exchange, emphasizes the importance of the MiCA guidelines. According to Kraken, MiCA regulation is likely to stimulate investors’ trust in cryptocurrency exchanges and issuers.

Kraken continuously advocates crypto licensing to promote secure investment opportunities across the region. It firmly believes that MiCA serves a crucial role in promoting market stability while reducing cybercriminal attacks in the cryptocurrency sector.

MiCA’s Role in Countering Money Laundering and Terrorist Financing in Crypto Sector

Any legislative action that is adopted in the field of crypto-assets must be able to keep pace with technological developments and AML requirements.

Below are some of the critical legislations established by the European Parliament and the Council, specifying the AML requirements for CASPs:

• Any legal rule adopted in the field of crypto-assets should also contribute to the anti-money laundering objectives and counter-terrorist financing measures. Thereby, entities within the scope of this regulatory framework must offer such services that ensure compliance with applicable AML and CFT rules of the union.
• The management body of such service providers should be free from any conviction of money laundering, terrorist financing, and any such activity that could affect their reputation. Additionally, the members and shareholders with qualifying holdings in such issuers, whether direct or indirect, must not have been convicted of any such ML and TF offenses.
• The competent authorities are required to withdraw the authorization of a CASP if it fails to detect ML and TF due to non-regulated screening solutions.
• CASPs that are actively involved in operating the crypto-asset trading platforms are required to establish clear transparency rules, including the integration of effective customer due diligence requirements to address money laundering practices.
• Point 77 of the article suggests that in order to ensure the protection of the Union’s financial system from illicit activities, CASPs must increase the assessment of institutions and customers associated with high-risk jurisdictions.

The Markets in Crypto Assets (MiCA) regulation is the cornerstone of promoting crypto security in the EU. Considering the recent events in the crypto industry, the MiCA guidelines mandate that European exchanges acquire approval from the national AML regulatory bodies.

For secure crypto exchanges in the EU, CASPs must present clear terms of service to protect the customers from potential threats.

Advancing the Crypto Sector with MiCA Compliance

The MiCA regulation influences the utility and trading volume of stablecoins by capping the payment transactions to €200 million per day.

An asset-referenced token should be considered to be used widely as a means of exchange when the average number and average aggregate value of transactions per day associated with uses as a means of exchange within a single currency area is higher than 1 million transactions and EUR 200 000 000, respectively.

Since the MiCA bill was primarily formulated to protect the euro’s value, its rules are specifically applicable to the tokens, DeFi services, NFTs, and stablecoins.

The EU considers stablecoins as a potential threat to the Euro due to their non-volatile nature. Therefore, MiCA emphasizes the regulation of stablecoins to protect the value of the euro in the EU.

With MiCA rules in practice, more financial investors are attracted to the profitable opportunities that come with it. The implementation of transparent and compliant crypto operations stimulates AML measures, ensuring a risk-free and secure financial environment for European investors and crypto asset service providers.

Adjustment of Crypto Operational Practices

The MiCA’s AML requirements extend the scope of AML laws as directed in the 5th AML Directive to regulate the sector’s financial health through enhanced data management operations.

Moreover, MiCA aims to increase internal and external crypto audits to evaluate the legitimacy of compliance measures in various crypto exchanges.

Financial Partnerships with Custodians

One of the crucial aspects of the MiCA compliance framework is the collaboration of crypto exchanges with financial institutions. This law requires CASPs to maintain business ties with licensed FIs.

The aim of this practice is to fortify secure asset management and regulatory compliance with the global AML framework. Furthermore, legitimate financial partnerships regulate the EU’s overall compliance infrastructure, which ultimately reduces the severity of criminal offenses in real time.

Prepare Your CASP for MiCA Regulation with AML Watcher

As per MiCA guidelines, crypto asset service providers obtaining licenses must adhere to effective customer due diligence measures. To ensure that these regulatory practices are in place, trust AML Watcher’s enhanced data-driven screening checks to reduce illicit crypto operations.

The regulation primarily regulating the crypto sector and various asset classes makes it mandatory for crypto asset service providers, including wallets, to ensure compliance with the EU AML regulations and do the customers’ due diligence just like other AML obligated sectors.

Demonstrating that a crypto asset service provider has a substantial AML compliance program with customer due diligence procedures in place is crucial for these services to ensure compliance with MiCA.

Effective Customer Due Diligence for EU’s Crypto Asset Service Providers- How AML Watcher Can Help?

AML Watcher’s screening tool is based on proprietary data mined by compliance experts and updated regularly to reflect the regulatory changes, particularly in response to the EU’s restrictive measures that enable CASPs in ensuring robust risk assessment.

Crypto Wallet Screening

With AML Watcher, crypto wallet screening against the EU sanction lists is promised. Through its proactive risk management modules, the identification of sanctioned crypto wallets is ensured in real time.

Global and EU-Specific Sanction Screening

AML Watcher’s customer screening measures allow CASPs to identify customers against sanction lists to prevent potential terrorist financing through the crypto platform.

Our screening solution helps CASPs maintain compliance with the MiCA guidelines to streamline the identification of money laundering attempts by ensuring the provision of real-time alerts.

Unified Customer Risk Scoring

As per the requirements set forth by point 77 of the MiCA adopted draft, CASPs must carry out extensive risk assessments against institutions operating in high-risk countries. AML Watcher helps CASPs implement strict regulatory checks to counter ML/TF deficiencies in crypto operations.

With our enhanced risk-scoring checks, AML deficiencies, including money laundering, crypto fraud, and risky customer activities, are significantly reduced due to the assessment of diverse risk parameters across various high-risk European countries.

AML Ongoing Monitoring

AML Watcher, through its ongoing monitoring capabilities, provides unparalleled screening support in adapting to the dynamic nature of customers’ changing risk profiles.

Since customers’ risk profiles are subjected to changes due to their varying PEP status and criminal backgrounds, our ongoing monitoring checks assist with enhanced due diligence by promptly showing changes in the customers’ risk profiles.