MiCA's Full Effect Drops: Take the Next Step into EU Financial Digitalization

December 30 not only marks the upcoming new year, but also brings the second part of the EU’s MiCA Regulation into effect. Consequently, 2025 will greet industries with requirements around CASP licensing and market abuse prevention, aimed at strengthening and legitimizing the European crypto-asset market. As Bitcoin has breached the USD 100,000 cap, investors and financial institutions (FIs) are once again turning their attention to crypto-related products, making MiCA's timing ideal.

In June 2024, the European Union began implementing part of the Markets in Crypto-Assets (MiCA) Regulation, initially focusing on Asset-Referenced Tokens (ARTs) and Electronic Money Tokens (EMTs) as key types of crypto-assets (CAs) within its scope. This slowly laid the groundwork for the EU market to determine which types of crypto-assets and services could be regulated and offered in the single market, allowing firms to develop innovative business models and service offerings. As of now, we are approaching the second key regulatory date of December 30, 2024, when the remainder of the MiCA regulation will come into effect.

This milestone introduces several new requirements, impacting the crypto-asset service provider (CASP) licensing regime and implementing market abuse prevention mechanisms. In parallel, the European Banking Authority (EBA) has published various draft regulatory standards (RTS) to complement the regulation and assist stakeholders in translating the regulation into practices (such as own funds requirements, liquidity requirements and management policies, or stress testing).

These developments aim to provide the market with greater assurance and build trust in the usage of crypto-assets, aligning with the regulated traditional financial markets. It also provides FIs with clear guidelines and expectations on how they can approach these technologies, offer new types of digitalized financial services, and demonstrate effective compliance in these innovative areas. With a clear framework in place, FIs could now expect that their peers will also begin to investigate such crypto-asset services and integrate them into their current product offerings.

Tokenizition and Stablecoins 

One of the most attractive aspects of CAs is the usage of tokenization to enable various digital benefits. Tokenization can broadly be defined as the process of issuing a unique digital representation of an asset. In the context of MiCA, tokenization is often used to create digital representations of money, but it can also be extended to other types of assets, such as some popular tokens being based on gold commodities.

Tokenization offers several benefits, including seamless and faster payment processing, simplified integrations with digital wallets and mobile payment solutions, all supported by advanced and highly secure digital platforms.

In recent years, cryptocurrencies have been at the center of attention, with their values experiencing roller-coaster changes. The recent launch of the first crypto-ETFs and the rise of Bitcoin since the American elections are the latest examples. However, such cases are not seen as attractive for many market participants who are looking for more stable products. Thus, for practical day-to-day usage, the market more favorably looks upon what are referred to as “stablecoins”. Stablecoins are crypto-assets designed to peg their value to real-life assets. Examples include the aforementioned tokenization of gold, as well as tokenization of “fiat currencies” (traditional money such as the Euro, British Pound, or US Dollar).

Asset-referenced tokens (ARTs) are tokens that derive their value from a mix of assets, such as fiat currencies, commodities, or even other crypto-assets. For example, the tokenization of commodities such as gold and other precious metals would be classified as an ART under MiCA. Meanwhile, EMTs are pegged to a single fiat currency and are focused solely on digitalizing fiat currencies. They function as digital cash, maintaining parity with the price value of the fiat currency at all times. EMTs are functionally similar to traditional electronic money and are subject to the same issuance and redemption requirements as outlined in the Electronic Money Directive 2 (EMD2), to be replaced by the upcoming Payment Services Regulation and Directive 3 (PSR / PSD3).

Digitalization of Payments with Stablecoins 

Stablecoins have the potential to transform the payments landscape by offering reliable and efficient alternatives to traditional financial systems. Their inherent stability, combined with the digitally enabled platforms they operate on, provides users with fast, secure, and transparent transaction functionalities.

As transactions are recorded on transparent, immutable ledgers, users and the CASPs can effectively see transaction details and ensure that transactions are properly verified and validated. This transparency helps reduce fraud, increase trust between parties, and trace and identify the movement of funds in case of fraud investigations. These digital ledger networks are also highly secure and resistant to tampering, providing added assurance to the reliability of stablecoins.

The integration of “smart contracts” offers interesting possibilities for managing transactions. These smart contracts may be deployed as self-executing digital agreements between transacting parties, with the contract terms encoded. Such contracts automatically execute and enforce terms once the predefined conditions agreed upon by the parties are met. When used with stablecoins, this can result in highly streamlined and automated payment processes, minimizing human errors and late payment risks, and enhancing the predictability of future funds movements.

For example, a smart contract could be programmed to release payments to a business’ supplier once goods are delivered. The smart contract would execute as per its coded instructions and trigger the payment as soon as the system recognizes proof of delivery. A similar scenario can also be applied in B2C cases, where a consumer may enter into a smart contract that would automatically process their payment to an online retailer once the consumer confirms receipt of their purchased goods.

Financial Digitalization Beyond MiCA 

MiCA serves as a strong entry point for the EU in encouraging innovation and increasing digitalization in the financial sector. MiCA is a pioneering regulation and the only one of its kind that serves as an extensive regulatory framework for CAs, as opposed to the general guidelines seen in other regions. MiCA is generally favorably viewed within the existing crypto communities as well as by other international jurisdictions as a reference point. Beyond regulating CAs, however, MiCA may also act as a catalyst for further digital innovations in the financial sector, given upcoming developments and initiatives across the EU.

FIs can consider several other EU measures that demonstrate the single market’s strong commitment to fostering innovation in digital currencies. One prominent example is Central Bank Digital Currencies (CBDCs) such as the EU’s Digital Euro. CBDCs are essentially CAs issued and managed directly by central banks, being effectively similar to “official” or government-issued EMTs. The ongoing work on the Digital Euro is a CBDC initiative by the European Central Bank, which will be rolled out across the EU market upon completion and availability. This venture is designed to be complementary to and co-exist with physical cash, rather than replace it, but still ensures to offer EU citizens CBDCs to expand their payment options around 2028.

In parallel, the Electronic Identification, Authentication, and Trust Services (eIDAS) regulation plays a crucial role in ensuring secure digital identities and trust mechanisms within the EU. Under eIDAS, the EU market is establishing robust digital identification frameworks to simplify access to digital IDs for all EU citizens. These digital IDs can be used for authentication, making payments, sharing details to receive private and public sector services, and more. Additionally, the EU has mandated that all EU citizens will receive completely free EU Digital Identity Wallets for the usage of their digital credentials, strongly encouraging the transition to and adoption of such digital tools.

All combined, we are about to witness a strong push towards digitalization in the payment industry. Thus, as of December 30, FIs will be subject to obtaining authorization as a CASP through the formal licensing process with their national competent authority (NCA), in order to offer crypto-asset services on the market. The CASP licensing regime does not require all already licensed firms to undergo a full new application process, such as established credit institutions, investment firms, and payment institutions. Nonetheless, they must notify their NCAs of their intention to provide CA services and comply with MiCA. These measures include implementing strict operational and compliance controls, robust customer due diligence processes, transaction monitoring systems, maintaining healthy liquidity, and particularly ensuring strong controls around anti-money laundering (AML) and counter-terrorist financing (CTF).

FIs should assess the possibilities of stablecoins and other benefits of CAs from a strategic lens to determine whether these offerings are aligned with their digital roadmaps and are strategically attractive. Considering the imminent enforcement of the regulation, FIs have limited time to secure positions as early entrants to the market to distinguish themselves from their peers. Given the nature of these new technologies underlying CAs, it would also be prudent to begin considering governance and compliance from the outset of these digital transformation programs to ensure timely adherence.

This article was compiled by Romain Swertvaeger and Clément Robert, with valuable contributions from Shreyam Jalan, EY Luxembourg Senior Banking Consultant.