The European Parliament's approval of the Markets in Crypto-Assets (MiCA) rules marks a pivotal moment for financial institutions.

The EU has set out a regulatory framework for any financial institution offering crypto services, which will hopefully spur innovation while increasing accountability and protecting consumers. But what exactly does this mean for banks, and what impact will this have on their existing compliance procedures?

In this article, we delve into the complexities of MiCA, its implications for banks, and practical first steps you can take to prepare.

Understanding MiCA  

MiCA—Markets in Crypto Assets—is the new legislation developed by the European Union to provide a uniform and comprehensive framework for the use and trading of crypto assets. It entered into force in June 2023 and has three primary aims:

• Protecting consumers  
• Supporting financial stability and market integrity
• Encouraging innovation

Currently, MiFID II (Markets in Financial Instruments Directive) only covers crypto assets that were already considered financial instruments, such as transferable securities, money-market instruments, units in collective investments, and various derivatives.  

MiCA will cover 3 types of crypto-assets currently not covered by MiFID II:

• Asset referenced tokens (ARTs): Pegged to the value of at least one asset, i.e., fiat currency, cryptocurrency, physical asset
• Electronic money tokens (EMTs): Pegged to a single fiat currency
• Other CAs: Crypto tokens such as utility tokens intended to provide access to a good or a service supplied by its issuer

Any crypto assets covered already by MiFID will not fall under MiCA. MiCA will replace any national frameworks of EU member states.  

It also sets rules for crypto-asset service providers (CASPs), including licensing requirements, to ensure they operate in a secure and compliant manner. For entities already offering CA services, there will be a ‘grandfathering’ period to ease the transition and provide time to apply for their CASP license.  

What doesn’t MiCA cover?

Aside from digital assets already covered by existing regulations such as MiFID, PSD, and DGSD, MiCA will also not cover the following CAs:

• Any fully decentralized CAs
• Unique and non-fungible CAs such as digital art and collectibles. However, NFTs in a large series may not be considered truly non-fungible (especially if their only distinguishing feature is a serial number) and may fall under MiCA.
• Unique, non-fungible CAs representing services or physical assets (i.e., real estate).

Over time, MiCA will most likely expand its scope to cover NFTs and other crypto-related instruments.

Who is not under the scope of MiCA:  

• Persons providing CA services exclusively for their parent companies, their subsidiaries, or other subsidiaries of their parent companies  
• A liquidator or insolvency administrator  
• The IMF, the BIS, the ECB, the EIB, the EFSF, and the ESM
• Public international organizations  

What MiCA means for banks

While the main advantage for banks is that MiCA provides a clear legal framework for banks operating in the crypto space, offering certainty on regulatory requirements and compliance standards, there are many other advantages:

• Diversified revenue streams: New services complete with transaction fees and interest rates.
• New customer base: Attract younger generation and crypto holders. ‍
• Transparency: Licensing of issuers, AML, KYC, regulated exchange services. ‍
• Trust: Uniform standards and accountability for any non-banks working in the crypto space. This can make partnerships with crypto firms a viable option. ‍
• Investor confidence: Traditional investors may feel more comfortable in engaging with crypto-assets through banks. ‍
• Global competitiveness: Compliance with MiCA can position European banks as leaders in the global crypto market, attracting international clients and partners.

There are also disadvantages to banks who decide to offer CA services:

• Direct costs: Training, implementation, compliance, increased capital requirements.
• Complexity: The additional compliance requirements may require consultation with experts.
• Hidden costs: Ongoing compliance monitoring, reporting, and adapting to amendments in MiCA.
• Reputational: Potential risk to reputation, such as the impact of pivoting to crypto for banks who have previously positioned themselves as anti-crypto.

Do banks need a MiCA license?

Banks will not have to apply for a MiCA license; however, they will have to broaden their current banking license to offer CA services. This is subject to approval from their national license issuer.  

There are many requirements that banks must fulfill, such as creating a whitepaper (essentially a prospectus), the approval of this whitepaper (primarily for ARTs), early notification, and registration with the ESMA (ARTs). Many national central banks may also require banks to increase their capital funds based on the value of CAs held.  

How to navigate MiCA safely

The complexities of MiCA may seem daunting for banks hesitant to venture into this space or banks who want to simply test the waters and see if there is a market for providing CA services to their clients.

A simple service to offer would be a passive overview of clients' crypto assets with the rest of their portfolio. As this doesn’t need MiCA approval, it’s a good starting point for crypto-curious banks. It can help test the waters and gauge the popularity of digital assets with your clients.  

With Blockmate, you can integrate our passive aggregate overview with your existing banking products to allow clients to connect their wallets and view their entire portfolio in one location. We also have an enhanced AML and fraud solution that can automate transaction monitoring, helping you to spot and stop any fraudulent transactions.  

After this, banks may want to take the next steps towards offering crypto services to their clients. Here are some essential steps that any bank considering offering crypto services should undertake:

• Understand MiCA and conduct a regulatory impact assessment
• Consult legal counsel
• Evaluate existing infrastructure and compliance procedures
• Market assessment  
• Engage with regulators
• Consider potential partnerships with crypto firms
• Explore services that could be offered in terms of cost, complexity, and risk
• Develop a compliance roadmap

These steps will lay the groundwork for offering CA services safely while remaining compliant with MiCA and other regulations.  

The potential of MiCA on a global stage

A huge opportunity is being created by the transformative impact of MiCA. With a lack of clear regulation around the world, EU banks are in the unique position of being able to set potentially global standards. Of course, it’s not without its challenges, but by starting small, banks can reduce the initial costs and resources required, as well as test the waters safely with no risk.

If you're interested in learning more, reach out to us today.