MiCAR: Initial attempt to green the EU's Crypto-Assets Market

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Introduction

In recent years the rapid growth of crypto-assets has posed numerous challenges to the digital finance sector, including environmental related challenges as crypto-assets are currently facing criticism for their high energy consumption in particular in their mining and transaction processes.

In June 2023, the EU introduced the Markets in Crypto-Assets Regulation (EU) 2023/1114 (MiCAR), creating a directly applicable regulatory framework that inter alia aims to enhance and standardise transparency and disclosure requirements regarding the impact on the climate and environment in connection with the issuance and trading in crypto-assets. This framework is an essential first step to ensure a more sustainable crypto-assets market within the EU.

Crypto-Assets, Distributed Ledger Technology (DLT) and their impact

MiCAR defines crypto-assets as a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology (DLT) or similar technology (Article 1(5) MiCAR). DLT is defined as a technology that enables the operation and use of distributed ledgers (Article 1(1) MiCAR). It is not uncommon that blockchain is used as a synonym for DLT. However, blockchain is just a form of DLT and should not be confused with DLT as MiCAR is not referring to blockchain.

A key component of DLT is the consensus mechanism, which MiCAR defines as the rules and procedures by which an agreement is reached, among DLT network nodes, that a transaction is validated (Article 1(3) MiCAR). There are various forms of consensus mechanisms. Commonly used methods are the “proof of work”(PoW) model and the “proof of stake” (PoS) model.

PoW requires miners to compete in solving complex mathematical problems to validate transactions, also known as the mining process, whereas PoS selects validators based on the amount of cryptocurrency they each hold, eliminating the need for a computer power-intensive mining process. This makes PoS a more environmentally friendly alternative. The type of consensus mechanism chosen can therefore result in significant electricity consumption, with corresponding adverse impacts on the environment.

MiCAR’s approach to sustainability

Sustainability is not the first and foremost objective of MiCAR; its focus is regulating the following, in accordance with Article 1(2) MiCAR:

the transparency and disclosure obligations for the issuance and trading in crypto-assets
the authorisation requirements and ongoing supervision of crypto-asset service providers (CASPs) and issuers of crypto-assets
the orderly business organisation of issuers of crypto-assets as well as CASPs
the investor and consumer protection rules for the issuing trading and custody of crypto-assets
the rules for fighting market abuse at crypto-trading centres.

However, the European legislator is aware of the sustainability challenges that crypto-assets pose and thus requires undertakings engaged in the issuance, offering, and admission to trading of crypto-assets, or those providing services related to crypto-assets within the Union, to disclose information on the principal adverse impacts on the climate, as well as other relevant environmental adverse impacts, of the consensus mechanism used to issue the crypto-asset. This has to be outlined in the so-called crypto-asset white paper in accordance with Article 6(1) lit j MiCAR.
The mandatory publication of crypto-asset white papers is essential for information purposes and applies in relation to the offering of asset-referenced tokens, e-money tokens and other crypto-assets.

CASPs are further obliged to disclose information regarding the principal adverse impacts on the climate, and other environmental adverse impacts of the consensus mechanism used for issuing crypto-assets they service, on their website. This information must be made clearly visible on their website and can be directly obtained from the underlying crypto-asset white papers.

Alignment with existing transparency regulations

MiCAR also aims to align with existing transparency regulations like the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR), as CASPs and other entities may also be subject to these rules.

As a result of this, the definitions and concepts in the MiCAR sustainability disclosure requirements are largely based on the CSRD and SFDR guidelines (e.g. crypto-asset white papers and websites should indicate the use of third parties for reviewing sustainability disclosures, which is in line with the approach taken in the SFDR guidelines). While MiCAR’s requirements are less extensive, they aim to prevent redundant reporting burdens. CASPs and other entities must navigate these overlapping regulations carefully.

Greenwashing in the crypto-assets sector

In this context, one should not turn a blind eye to the risk of greenwashing. Greenwashing involves making sustainability-related statements, declarations, actions, or communications that do not reflect the true sustainability profile of financial products or services, thereby misleading stakeholders and consumers. While MiCAR includes provisions to ensure transparency regarding environmental adverse impacts, the emphasis might lead to greenwashing practices.

In essence, while MiCAR's transparency provisions are a step towards promoting environmental accountability in the crypto sector, there is a risk that they could be manipulated to present a false image of sustainability. Therefore, practitioners should fulfil the requirements with care, in order to avoid the need for additional measures from the EU legislator, such as verification mechanisms and stricter enforcement of disclosure accuracy, to be enacted shortly.

Future regulatory developments

MiCAR will be implemented in stages:

Individual articles have already been applied since 29 June 2023.
The regulations on ART and EMT in Title III and IV are applicable as of 30 June 2024.
Regulations regarding the authorisation and ongoing supervision of CASPs in Title V are applicable from 30 December 2024.
All other provisions of MiCAR (in particular Title II and Title VI) that are not directly applicable in accordance with Article 149 (4) MiCAR will take effect on 30 December 2024.

During the implementation phase of MiCAR, the European Securities and Markets Authority (ESMA), in close cooperation with the European Banking Authority (EBA), will develop technical regulatory, implementation standards and guidelines to provide further detail on the application of MiCAR.

In October 2023, ESMA (in cooperation with EBA) published a package of drafts on regulatory technical standards setting out the content, methodologies and requirements for presentation of information regarding sustainability indicators for adverse impacts on the climate and other environmental adverse impacts. The second package of drafts was published in July 2024 and includes draft technical standards on the sustainability indicators for crypto-asset consensus mechanisms, business continuity measures for CASPs, trade transparency, content and format of orderbooks and record-keeping by CASPs, machine readability of white papers and the register of white papers and public disclosure of inside information. The draft technical standards will be submitted to the European Commission for adoption and the European Commission will decide whether to adopt them within 3 months.