Shearman And Sterling


November 17, 2020

Decrypting the Proposed Regulation of Crypto-Assets in the EU


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On September 24, 2020 the European Commission (EC) launched proposals for a new EU-wide regime to regulate crypto-assets and distributed ledger technology (DLT) in the financial sector through a Digital Finance Package. Key issues relevant to companies and stakeholders in digital finance are set out below.

What Does the EC Seek to Achieve?

The EC is looking to plug gaps in existing laws that regulate digital finance and to harmonize fragmented rules on crypto-assets across EU Member States. It also hopes to boost digital innovation and access to cross-border services through greater legal certainty and investor protection via safeguards such as capital requirements, custody of assets, and mandatory complaint procedures.

How Does the EC Intend to Regulate Crypto-Assets?

Regulation on Markets in Crypto-Assets (MiCA)

MiCA aims to replace existing national frameworks on crypto-assets and has a very broad scope. It covers previously unregulated crypto-assets, including “stablecoins.” Crypto-assets that are already caught by existing financial services legislation will not be covered (e.g. financial instruments).

MiCA focuses on three categories of crypto-asset: (i) asset-referenced tokens; (ii) e-money tokens; and (iii) other crypto-assets. It regulates crypto-assets that are traded or offered to the public as well as service providers.

Passporting. The EC envisions an “EU passport” system which will allow crypto-asset issuers and providers to offer their services across Europe, once authorized in one Member State.

Preventing market abuse. MiCA sets out a “market abuse regime” for traded crypto-assets to prevent insider dealing and market manipulation. To ensure compliance and deter potential market abuse, crypto-asset service providers will need to put in place surveillance and enforcement mechanisms. Competent authorities will be able to impose a range of sanctions for breach of the market abuse provisions, including pecuniary sanctions of up to EUR 15 million or 15% of the total annual turnover on legal persons, or EUR 5 million on natural persons.

Regulation on a Pilot Regime for Market Infrastructures Based on DLT (DLT Pilot)

The EC has concurrently proposed a pilot regime, which will allow entities to test out transactions in crypto-asset form. This “sandbox” approach will permit temporary derogations from existing rules to enable regulators to gain experience on DLT in market infrastructures and to identify improvements to enable innovation. To take part in the DLT Pilot, qualifying entities should make an application to their relevant national authority which will consult with the European Securities and Markets Authority (ESMA) in making its decision. The DLT Pilot is expected to run for an initial five years from entry into force. Following this, the EC will determine the DLT Pilot’s future based on a report produced by ESMA evaluating the regime’s success.

What Should Crypto-Asset Issuers be Aware of Under MiCA?

Any person who offers crypto-assets to third parties is considered a crypto-asset issuer under MiCA. Issuers of asset-referenced tokens and e-money tokens must be established in an EU Member State, but the same does not apply to issuers of other crypto-assets. All crypto-asset issuers will be required to publish a white paper, setting out core information relating to the crypto-assets, including a detailed description of the issuer, the project and planned use of funds, conditions, rights, obligations and risks. However, some smaller issuers of “other crypto-assets” will be exempt from the white paper requirement, e.g. where the offering is limited to qualified investors or fewer than 150 investors per Member State, or the total consideration for the offering is below EUR 1 million over a period of 12 months.

More onerous requirements apply to issuers of asset-referenced tokens and e-money tokens. For example, issuers of asset-referenced tokens are subject to prudential and governance requirements, conflict of interest rules, investment rules and additional white paper requirements, while issuers of e-money tokens must be authorized under the E-Money Directive.

What Should Crypto-Asset Service Providers be Aware of Under MiCA?

Crypto-asset service providers must be established in an EU Member State and authorized by its competent national authority. The provider must comply with requirements relating to capital reserves, governance and cybersecurity. However, credit institutions that fall under the Capital Requirements Regulation and firms authorised under MiFID to provide investment services which are similar to the crypto-asset services they intend to provide will not be required to seek additional authorisation.

MiCA places other obligations on crypto-asset service providers, including prudential requirements, governance standards and cybersecurity requirements. There are also additional service-specific requirements in which certain crypto-asset services are provided.

What are the Next Steps?

Legislative process. These proposals must first be approved by the European Parliament and the Council. This is a process that may take one to two years for MiCA and the DLT Pilot to be formally adopted. The EC anticipates all regulations under the Digital Finance Package to be in effect by 2024. Once the new regulations are adopted, MiCA provides a transition period of 18 months to allow crypto-asset service providers operating under the existing rules to become authorized. However, issuers of asset-referenced tokens and e-money tokens must comply with new requirements as of MiCA’s entry into force. Those subject to the DLT Pilot will need to comply 12 months after its entry into force.

Key Terms

“Asset-referenced tokens”

are a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets.


are broadly defined in MiCA as digital representations of values or rights, which may be transferred and stored electronically, using distributed ledger technology or similar technology.

“Distributed-ledger technology” or “DLT”

means a type of technology that supports the distributed recording of encrypted data.

“e-money tokens”

means a type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender.


are cryptocurrencies that are tied to stable assets, such as currencies or commodities. Asset-referenced tokens and e-money tokens are often described as stablecoins.


Authors and Contributors

Elvira Aliende Rodriguez



+32 2 500 9837

+32 2 500 9837


Barnabas Reynolds


Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5528

+44 20 7655 5528