After the Bitcoin storm and the craze around blockchain-based digital collectibles (e.g., digital arts, virtual real estate and other NFTs), the buzz around digital assets is growing. Powered by private initiatives and regulators across the world, digital assets are shaping up to be the next big thing in the financial sector. Unsurprisingly, almost two-thirds (67%) of private banking clients globally are looking for more advice related to digital assets/crypto-trading platforms, according to the 2023 EY Global Wealth Management Research Report. As markets are globally recognizing the potential of this new asset class, the regulatory environment is evolving to support financial entities in their adoption.

Emerging amidst this trajectory is the EU’s Markets in Crypto-Assets (MiCA) regulation, set to reshape the Union’s digital finance environment. The legislation, proposed by the European Commission, ushers a new era of crypto-asset services across the EU. Approved in April 2023 and set to enter into force in two phases (June and December 2024), the regulation provides a comprehensive legal framework for the treatment of various types of crypto-assets: Electronic Money Tokens, Utility Tokens, and Asset-Referenced Tokens (ARTs), among which ARTs seem to be the most promising for the banking industry. While digital by design, ARTs are pegged in value to underlying concrete assets such as a basket of fiat currencies (i.e., stablecoins) or commodities, which allows them to avoid the extreme price volatility expected of pure digital currencies such as Bitcoin or the recent confidence crisis of NFTs. Financial institutions are using these digital tokens to allow for fractional ownerships and more importantly, increased liquidity of “real-world” assets such as gold or real estate. While these use cases are still limited, there is a strong hope in the global market that regulation will open the door to new investment products.

For banks, MiCA presents both compelling opportunities and compliance requirements. Credit institutions will be able to leverage their banking license to provide crypto-asset services if they notify regulators and follow MiCA requirements. They will have the possibility to offer new products and services including the issuing, managing, trading, and safe-keeping of crypto-assets to their clients. As usual, these come with obligations such as tight AML/KYC processes adapted to this asset class, new disclosure requirements, and reporting to ensure consumer protection. For customers, this is a two-fold win, as it provides them with new investment opportunities offered by traditionally trusted providers within a more transparent and safer environment.

While MICA is coming fully live in the next 12 months, banks will have to define a business case in line with their strategy, risk appetite and customer base. In doing so, they must consider the interests of their existing and potential customer base looking for secure, liquid investments. In this period of high uncertainty in the markets, proposing ARTs, underpinned by real-world assets, could attract retail and professional clients, including investment funds, looking for opportunities. Banks will also need to consider the required adaptation to their current operating models, such as staff trainings and recruitment, updates to compliance and IT procedures and policies, and enhancements to their IT architectures.

Looking forward, the key to navigating MiCA successfully lies in early preparations over the coming months. Potentially lengthy transformation efforts may be required to incorporate new crypto-asset products to secure early mover advantages, requiring prompt action and readiness. As regulators draw the blueprints for the digital financial sector's future, it's time for banks to capitalize on this paradigm shift towards a more digitized financial industry.