Over the years, commentators and the conference circuit have continually reaffirmed the case that distributed ledger technology (DLT) would only be adopted at scale when all key aspects of a digital asset’s life cycle – issuance, settlement, distribution, corporate actions and ongoing management, reside natively on blockchain rails. This transition from traditional to digital rails would subsequently unleash the full benefits of DLT: fractionalisation of ownership, atomic settlement, self-executing flows (through smart contracts) and the use of tokenised assets as collateral in financings and derivatives transactions. However, many friction points remain in achieving this transition. Infrastructure build, interoperability, liquidity and distribution have all been key components for developing greater adoption of DLT and so, too, has the need for regulatory clarity, not just for digital securities but for all forms of crypto assets. Clear legal perimeters ought to build confidence to participate in these markets. For the EU, this was delivered through the Markets in Crypto Asset Regulation (MiCAR), the first fully comprehensive framework of crypto regulations, widely regarded as an enabler for the industry to thrive.
What is MiCAR?
In response to the accelerating adoption of crypto and digital assets globally, the European Union introduced MiCAR, the EU’s first unified law for crypto assets not already covered by existing financial regulation. Regulated financial instruments remain subject to existing securities regulations such as MiFID II, and do not fall under MiCAR. MiCAR was created to close gaps, protect investors, prevent market abuse and still allow innovation across all EU countries. MiCAR applies to anyone offering crypto assets to the public, admitting them to trading or providing services such as exchange and custody. These entities must apply for and receive a crypto asset service provider (CASP) licence in order to operate in the EU. For token issuers/offerors, token classification is a key requirement under Article 8(4). They must determine whether their token is an asset-referenced token (ART), an e-money token (EMT), a third type of “other” crypto asset (a Third Category Token) or is exempt from MiCAR altogether. They must also publish a MiCAR-compliant white paper which includes project details, token economics, risks, governance, use of proceeds and even environmental disclosures. In the case of Third Category Tokens, these white papers must be notified to National Competent Authorities (NCAs) and published online in a structured, machine-readable format. The timeframe for implementation of the new regime was staggered from the date of the rules coming into effect in December 2024 until 1st July 2026 when the window closed.
So, how is it going?
Many would agree that crypto firms wishing to tap the European market have found it incredibly challenging to achieve compliance under the current regulatory framework. Some players such as Tether have, in fact, exited the EU market altogether whilst other participants have simply fallen away due to compliance burden and cost, and many non-compliant tokens are being de-listed by exchanges. Of the roughly 1,200 crypto firms previously on the national register which would have required a CASP licence, only 330 CASP licenses are currently listed with ESMA. From the thousands of tokens issued in the EU market, the registry shows about 970 issuers/offerors who have notified their respective NCAs with white papers for their tokens, which they have categorised as Third Category. There are only a handful of white papers for EMTs (about 40) and virtually zero white papers for ARTs. If we look closely at the submission of notifications, specifically those tokens categorised as Third Category, cracks begin to show, with a data set which is largely unstructured and of varying standards. In part, this is due to the broad church of tokens falling within this category. Another reason is the flexibility given to the interpretation of the rules by the NCAs, exchanges and the issuers/offerors themselves. Seeking a licence or submitting a white paper in one jurisdiction to get access to the entire EU block has had its critics where a relevant NCA is seen to implement a lower bar through its interpretation of MICAR and the associated regulations. This sits in contrast to other NCAs which have implemented additional due diligence requirements beyond MiCAR in their relevant jurisdiction. When accessing the EU market, there is clear jurisdictional arbitrage at play.
Classification and white paper mechanics as well as legacy token compliance remain acute pain points in the market today. For existing tokens trading before Dec 2024, a clear obligation to formally classify the token only kicks in from 31st Dec 2027, leaving a verification blind spot and multi-year gap where classification remains self-certified and unverified for older tokens. White paper mechanics for ESG and sustainability disclosures, as well as requiring the paper in machine readable format, have all required significant rework of existing documents for legacy compliant tokens. The EU Commission has stepped in on occasion, such as providing further clarification including guidance that crypto-assets without an identifiable issuer fall outside Title II white paper obligations entirely. This question has been one the market has struggled with for many months and yet, even with this guidance, it remains uncertain on a legal basis whereby determining what is “unidentifiable” may be contested. Other issues identified have been regulatory gaps for DeFi, staking, lending/ borrowing, prediction markets, perpetual futures, NFTs, tokenised deposits and the legal treatment of tokens including custody, collateral, insolvency and enforceability which lack EU harmonisation.
The good news is that many of these issues will be addressed directly in the current consultation on the functioning of the MiCAR framework which launched in May 2026 and is closing at the end of September: under Article 140/142, the European Commission must report on the regulation’s application and market developments. It will assess if the current regulations and guidance are fit for purpose as the market evolves. It is also considering if what is in place today is sufficient, not only in terms of the framework to achieve compliance but also to ensure the regulations are doing what they need to in order to achieve their objectives (most notably for the protection of investors whilst also enabling EU competitiveness). The review includes a public consultation on the main building blocks and a consultation for technical and legal stakeholders, issuers, service providers, FI, tech providers and EU authorities. The feedback to the consultation will inform the commissions future policy work on crypto assets. At Reed Smith, we understand the challenges many participants face whilst trying to access the EU market and comply with MiCAR which has led to the build of our Aquarius solution*. Aquarius is an automated toolkit setting the standard to comply with MiCAR and directly addressing the pain points outlined above. Aquarius is legally sound; user friendly and clients can be confident with an evergreen level of compliance as regulations evolve. The tool enables participants to access the market more quickly and enables regulators and exchanges to feel confident that issuers and offerors, legacy and new, are compliant with the regulations.
So where does this lead us?
Europe has been seen as a first mover, providing much needed regularity clarity for crypto in the EU market. In doing so, have we achieved meaningful accelerated adoption? To some extent, perhaps. Real capital has moved in the form of centralised crypto services, custody and stablecoins. But this still isn’t enough for full scale. The pain points that come with implementation of the existing rules for classification, white paper generation and verification of legacy offerings remain, whilst products including DeFi, staking, borrowing/lending prediction markets, perpetual futures, NFTs and tokenised deposits still lie outside of scope. For smaller players, the compliance costs of MiCAR make participation prohibitive and for many legacy issuers/offerors, the lift to comply is a heavy one. Many have taken steps which they feel is enough for the moment, uncertain if they are, in fact, compliant. The obligation to notify rather than approve removes the provision of a quality check for submissions. The result is a drop of unstructured data to the NCAs via non-compliant white papers. With the final implementation window having closed in July 2026, and enforcement feeling quite far off, perhaps the only practical tool for implementation is the threat of de-listing exchange by exchange. That threat is now being actioned. The current formal consultation by the European Commission, mentioned above, is going some way to addressing these issues and is an opportunity for a reset. Protecting investors whilst enabling EU competitiveness remains key, but so too is market confidence delivered through clarity of regulation. A combination of additional guidance to inform the interpretation of the rules as well as bringing some additional activities within scope versus a full overhaul of MiCAR might well be the way forward for growth and increased activity in the market. The issue of scaling remains difficult where the legal treatment of tokens including custody, collateral, insolvency and enforceability lack EU harmonisation.
Finally….
Going first is hard, and shaping the pathway for EU crypto regulation goes way beyond the borders of Europe. Others are learning from the journey so far and focusing on their own rules whilst avoiding the missteps and voids of MiCAR. But the point is that MiCAR can and will continue to evolve. Today it sits as a common regulatory foundation which can be shaped and tweaked as the crypto market unfolds into maturity. The destination may well be delivering a final robust regulatory framework for crypto assets where Europe can lead and a market scale, but we aren’t quite there yet! And when we arrive, perhaps the journey winds towards regulatory convergence, which enables scale across borders.
*about Aquarius:
Aquarius enables faster access to markets and super-compliance globally providing both automated and lawyer-led legal services for the crypto-asset industry. These services include token categorisation, white paper generation, ESG support, LEI and DTI generation, token due diligence, legal consultancy, legal opinions, and bespoke legal advice. Aquarius presently assists users to comply with the EU’s Market in Crypto-Asset Regulation (MiCAR) and it will be expanded to cover other key jurisdictions, such as the UK, Hong Kong, Singapore, the UAE and the USA, as they implement corresponding legal frameworks.