Regulation Digital Assets: Review and forecast 2024

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2023 was an eventful year for digital assets – a lot has happened on the technical side but especially from the regulatory point of view, there were many innovations that will have an impact on the entire European market. This is reason enough to review the last year and then to look ahead to the upcoming year and the regulatory changes. Key topic is the European regulation in the form of the Markets in Crypto-Assets Regulation (MiCAR) with its impact on German legislation and the associated regulatory requirements.

1. MICAR is coming

On June 29, 2023, the first parts of MiCAR came into force as already highlighted in one of our previous blog articles. Europe is hereby one step closer to the idea of a harmonized and legally sound market for crypto-assets. MiCAR focuses on promoting innovation and fair competition as well as ensuring investor protection and market integrity. This is implemented through new regulatory obligations for issuers of crypto-assets and crypto-asset service providers. MiCAR distinguishes between three categories of crypto-assets – asset-referenced tokens, e-money tokens and crypto-assets other than asset-referenced tokens or e-money tokens. At the same time, all three categories feature different regulatory requirements.

First, the regulations for asset-referenced tokens (Title III) and e-money tokens (Title IV) come into force on June 30, 2024. All other regulations of MiCAR follow on December 30, 2024. The Regulatory Technical Standards (RTS) and the Implementing Technical Standards (ITS), which are developed by the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA), are going to be officially released in 2024 as well. Both publications are highly relevant for issuers of crypto-assets and crypto-asset service providers as they specify in detail the obligations and requirements of MiCAR. ESMA and EBA are currently in the consultation phase and aim for submitting a draft for the RTS and ITS to the European Commission until June 2024.

MiCAR comes along with an important constraint. The regulation is only referring to crypto-assets that are not affected by other European regulations. Consequently, financial instruments pursuant to MiFID II and their tokenized counterparts are not affected by MiCAR. However, these instruments are potentially already regulated by other national legislation. This is the case for electronic securities pursuant to the German eWpG, for example. This constraint has two consequences. First, MiCAR is not going to cover all crypto-assets from a regulatory perspective, hence leaving room for other national legislation and related requirements. Second, existing national legislation has to be amended when the European regulation is transferred into German law in order to avoid an “overlapping”.

2. Transferring MiCAR into national legislation

With MiCAR being a European-wide regulation, it needs to be transferred into German law. For this purpose, the draft of the German omnibus law for the digitalization of the financial market (FinmadiG) was published in December 2023. This omnibus law addresses not only the implementation of MiCAR but also the implementation of the Digital Operational Resilience Act (DORA) and money transfer act. The actual transfer of MiCAR into German law is covered by the crypto markets supervision law (KMAG), which is part of the FinmadiG. The latter is expected to come into force in 2024.

Another important amendment that is to be highlighted is the definition of the term crypto-asset with regard to the German KWG. With crypto-assets that are addressed by other European regulations not being affected by MiCAR, a strict either-or relation is established between MiCAR and MiFID II with regard to the classification of crypto-assets. In contrast to that, the current definition of a crypto-asset pursuant to the German KWG allows for an ambiguous regulatory classification, i.e., crypto-assets such as asset-referenced tokens might fall under the new KMAG and the current KWG, for example. The German KWG is therefore revised in order to avoid this ambiguity.

The draft of the revised KWG aims for a crypto-asset definition that is in line with MiCAR. For all other cases, the new term of a cryptographic instrument is going to be introduced with crypto-securities and shares in crypto-fonds being explicitly excluded from this new definition. Cryptographic instruments can consequently be considered as a regulatory last resort if no other definition or regulation applies. For example, this is the case for NFT with investment purpose that do not belong to a series or collection and are therefore not addressed by MiCAR. In case of crypto-securities and shares in crypto-fonds, national legislation is already existent by means of the eWpG and the act on shares in crypto-fonds (KryptoFAV).

Furthermore, the draft of the revised KWG introduces the eligible crypto custody business as a new financial service. This new financial service refers to the custody of cryptographic instruments and the safe keeping of private cryptographic keys for others. Consequently, there will be the crypto custody business pursuant to MiCAR or KMAG and the eligible crypto custody business pursuant to KWG in the future. For players in crypto-markets, this might lead to the situation where two regulatory applications for permission are required in order to cover the entire field of crypto-assets

3. Elektronic shares

Another important milestone for digital assets in 2024 the German ZuFinG. The ZuFinG exhibits a strong sociopolitical component as it strives for rendering the German financial market and hence Germany itself more attractive by digitalization, debureaucratization and internationalization. This should attract more necessary investments for the future. At the same time, the ZuFinG introduces an important amendment from a regulatory point of view.

Since January 1, 2024, the date when the ZuFinG came into force, registered shares and bearer shares that are restricted to central registers are addressed by the eWpG. German legislature consequently meets the expectation of the market since the introduction of the eWpG in June 2021.

The important aspect in this regard is that electronic securities fall under the German securities custody act. Custody providers for electronic securities can consequently offer their services for a wider range of financial instruments than before as they are covered by the existing regulatory framework. Otherwise, these new instruments could potentially require a new permission for the novel eligible crypto custody business.

Conclusion

The regulation of digital assets is changing. With MiCAR, the European Union has created a strong regulatory framework, which will be complemented by further national legislation. This means that the time of fragmented regulation and the wild crypto west is slowly but surely coming to an end. This makes it all the more important to face the new regulatory requirements in time and to render regulation part of one’s own strategy.

This requires a precise analysis of one’s own business model with regard to digital assets paired with regulatory expertise. This is the only way to work out whether all regulatory requirements that are relevant to the business strategy are being met. Due to the tight time frame for the regulatory changes ahead, there is an urgent need for action here, especially if regulation has played a subordinate role to date.

Do you have specific questions REGARDING MiCAR or other regulations?

Our experts at Horn & Company are available to discuss the implications for your business model. Contact us today to find out more about the upcoming regulatory changes and your opportunities in the digital assets.