Summary

• EU legislation now requires sustainability disclosures covering the environmental impacts of cryptoassets.
• Affected are token issuers and cryptoasset service providers that are in the EU or want to provide services into the EU.
• The next key deadline is for cryptoasset service providers: a website disclosure requirement effective from 30 December 2024.
• Zumo is experienced in this area and can help you meet your obligations. To discuss anything raised in this guide, get in touch with us via our contact form.

Introduction

MiCA or, in full, the European Union’s Markets in Crypto-Assets Regulation, has been making waves across the digital asset industry as the world’s first effective crypto bespoke regulatory framework.

In this article, we break down the recently finalised crypto sustainability disclosures that will apply to cryptoassets and the businesses that provide services around them, making the EU the first geography globally to have binding cryptoasset sustainability disclosure requirements.

Questions we tackle include: 

• Who is caught by the new MiCA sustainability disclosure requirements?
• When do the MiCA crypto sustainability disclosure rules come into effect?
• What are the MiCA sustainability disclosure requirements?
• How do they need to be addressed?

Glossary

ART –  asset-referenced token: a cryptoasset that references the value of a commodity, or basket of reference fiat currencies.

EMT – e-money token: a cryptoasset that references the value of a single fiat currency.

Qualifying cryptoasset: any cryptoasset that comes under the scope of MiCA regulation. 

White paper: a rough equivalent of a prospectus, though not given the same official status. Required to offer a qualifying cryptoasset to the public or admitting that asset to trading.

CASP – cryptoasset service provider: a business providing MiCA defined cryptoasset services. May be a financial entity (e.g. credit institution or investment firm) or a non-licensed firm applying for first-time authorisation. Encompasses retail cryptoasset exchange services, and also others (e.g. custody, order execution on behalf of clients, transfer services).

Background

The idea behind MiCA is to provide a uniform EU regulatory framework with bespoke rules governing cryptoasset activities and crypto assets that do not fall under existing financial services legislation.

Officially signed off in June 2023, the text of MiCA included regulator authority to draw up supplementary rules for a wide range of ‘Level 2 and Level 3 measures’ that provide the technical detail for a number of mandates included in the MiCA legislation.

These were to be developed in time for the key MiCA entry into application dates: 30 June 2024 for rules surrounding e-money and asset-referenced tokens (EMTs/ARTs); and 30 December 2024 for all other provisions including any in scope, non-EMT/ART cryptoassets. 

A high-profile issue at the time of the original MiCA debate, one of these ‘additional attention’ topics was the requirement to specify detail on cryptoasset-specific sustainability indicators, and the rules needed to meet the broad MiCA mandate of conveying crypto climate and environment-related impacts to investors in a standardised format.

Led by the European Securities and Markets Authority (ESMA) through its MiCA empowerment, this topic has since gone through its full public consultation and response. With details now in a final format, here is what we know about what MiCA sustainability disclosure requirements mean from both issuer and cryptoasset service provider (CASP) perspective.

Essentials

Who is caught by the new MiCA sustainability disclosure requirements?

MiCA is an EU-specific piece of regulation. It encompasses EU providers and, importantly, any non-EU provider that wishes to provide in-scope services into the EU market.

Within that scope, the new MiCA sustainability disclosure requirements target two groups:

1. Those preparing the ‘white papers’ that are required to offer a MiCA qualifying cryptoasset to the EU public, or have it admitted for public trading. This will generally be the issuer of the asset, but can also [MiCA Art. 5(2)] be the entity admitting the asset for trading where there is no identifiable issuer or white paper available. MiCA clarifies that the embedded sustainability disclosures requirement applies equally to white papers for asset referenced tokens ARTs [MiCA Art. 19(11)], e-money tokens EMTs [MiCA Art. 51(15)] and all other qualifying cryptoassets other than ARTs and EMTs [MiCA Art. 6(12)].
2. MiCA defined cryptoasset service providers, who must display standalone sustainability disclosure information ‘in a prominent place on their website for all the crypto-assets in relation to which they provide services’ (ESMA consultation para 6). This is on top of cryptoasset trading venues’ longer-term obligation to have a white paper (including embedded sustainability disclosures) for every qualifying asset being traded. 

When do the MiCA crypto sustainability disclosure rules come into effect?

Per MiCA drafting, ESMA had a 12-month deadline to submit a draft regulatory standard on sustainability disclosures to the European Commission, due by 30 June 2024. With the publishing of its final post-consultation report, it has now responded to that deadline and submitted its proposal. As explained in ESMA’s final report (p.6), the European Commission will decide whether to adopt the technical standard within 3 months and the according regulation will officially enter into force (p.187) following its final publication in the Official Journal of the European Union.

Practically speaking, the overarching sustainability disclosure requirement is baked into the main MiCA provisions, which come into force in two batches: the already live date of 30 June 2024 for issuers of ARTs and EMTs; and 30 December 2024 for cryptoasset service providers. This means that issuers of ARTs and EMTs should already have aimed to address sustainability disclosure requirements to the fullest extent possible in their white papers; whereas CASPs will need to be prepared to fulfil website disclosure requirements (and any applicable white paper requirements) from 30 December 2024. 

What are the MiCA sustainability disclosure requirements and how do they need to be addressed?

Fundamentally, the new requirements require calculation and disclosure of a range of crypto-asset specific sustainability indicators that depend (a) on the annual energy consumption of the particular asset and (b) the type of cryptoasset service provision.

At the least, the obligation is for 1 mandatory key indicator (a KWh calculation of the annual energy consumption attributable to the asset in question, based on the distributed ledger on which it transacts). 

At the most, it also includes 5 mandatory supplementary indicators designed to provide a further picture of renewable energy consumption and energy intensity.

A substantial further array of carbon, water, waste and natural resources-related indicators has been made optional for all participants in the final version. The full reporting template can be found in the Annex of the final report (pp. 189-196).

Whether an asset qualifies for ‘basic’ or ‘enhanced’ disclosures depends on whether total annual energy consumption is above a threshold amount of 500,000kWh and whether the CASP is classified as undertaking direct trading activity, as illustrated in the table below (‘Revised draft RTS’ column).

Common to all caught under the requirements (p. 185, Art. 6) is the need to provide a legal entity identifier as well as accompanying information on the consensus mechanism employed and sources (e.g. white papers or third parties) of any disclosures made. Information (p.183, Art. 3) is to be made publicly available, free of charge, in a downloadable file. Further, disclosures should employ clear writing, be reviewed and updated at least annually, and be made available in a language customary in the sphere of international finance.

Nuance

What is the overlap between the white paper requirement and the website disclosure requirement? 

ESMA underlines [final report, p. 179 (5)] the need for CASPs to make sustainability disclosures available on their website for all the crypto-assets for which they provide services ‘no matter whether the information has already been made available in a crypto-asset white paper’. The website disclosure is therefore a CASP-specific requirement that sits alongside and on top of the requirement to include the same sustainability information embedded within cryptoasset white papers where these are admitted to trading.

Practically, therefore, trading venue CASPs will have two places on their website dealing with sustainability indicators: a white paper with the sustainability disclosures embedded within it for each asset they have admitted to trading; and a separate website disclosure ‘facilitating their clients’ access to the information as well as the comparisons between the disclosures relating to individual crypto-assets’ [final report, p. 179 (5)] that replicates only the sustainability disclosures part. 

Non trading venue CASPs, for instance custodians, may only have a website disclosure. Asset issuers, meanwhile, have only the requirement to prepare and publish on their website a white paper for any asset they are offering to the public; and will also generally be responsible for the white paper displayed by a CASP to admit an asset to trading. 

In theory, standalone CASP website disclosures should mirror the information provided in the corresponding asset white paper [final report, p. 11 (21)]; with the white paper prepared by the asset issuer. In practice, this places significant reliance on white paper availability and data preparation by issuers. 

What if an asset is already trading – are there transitional arrangements?

Importantly, if a MiCA-qualifying cryptoasset is already trading on a CASP platform prior to 30 December 2024, and is not an EMT or ART, transitional measures [MiCA Art. 143(2b)] give an extended deadline of 31 December 2027 to fulfil the white paper requirement for assets admitted to trading.

ESMA’s final report specifically references this transition period, but reminds CASPs that this does not change the website sustainability disclosure requirement regardless of white paper availability [final report, p. 12 (22)]: ‘Past the transitional period…ESMA expects that there will be few cases of a CASP falling under the scope of Article 5 of the draft RTS without there being an existing white paper under Article 4 of the draft RTS. In such a case however, the CASP would need to disclose on their website information on sustainability impacts as required by Article 5 of the draft RTS, despite the absence of a white paper.’ In the immediate term, the fundamental position is that CASP website disclosure requirements will apply from 30 December 2024 despite the CASP grace period to 31 December 2027 in respect of the white paper requirement for assets admitted to trading [final report, p.10 (10,11)]: ‘MiCA does not foresee a delayed application of requirements on sustainability disclosures … As a result … ESMA also expects market participants to comply with the requirements on sustainability disclosures in line with the application deadline set out in MiCA.’

Practically, therefore, the most time-pressing aspects of the MiCA sustainability disclosures from a CASP perspective are the website disclosures required for every qualifying asset; and from a issuer perspective, the need to embed sustainability disclosures in white papers for ARTs and EMTs (which do not benefit from the same grace period as non-ART/EMT cryptoassets), and which has been effective since 30 June.

What is the scope of the MiCA CASP definition, and how does it relate to the sustainability disclosure requirements?

In principle, a MiCA-defined cryptoasset service provider may be a financial entity (credit institution; central securities depository; investment firm, electronic money institution, UCITS/alternative investment manager or market operator: MiCA Art. 60) as well as the non-licensed firms applying for first-time authorisation. Generally, authorised financial services status may exempt an entity from the need for MiCA licensing as a CASP, but will still leave it subject to the relevant CASP provisions of MiCA.

As far as the sustainability disclosures are concerned, disclosures therefore apply to all CASPs equally where those cryptoasset services are caught by the MiCA definition, and the determining factor becomes the nature of cryptoasset service offered.

MiCA qualifying services are defined at [MiCA Art. 3 (16)] and cover not only direct retail cryptoasset exchange services, but also custody, order execution on behalf of clients, transmission of orders, advice on crypto-assets, transfer services and portfolio management.

The upshot is that the CASP definition is quite broad and may capture a variety of financial institutions as well as the ‘crypto-native’ CASPs. Determining exposure relies on identifying the extent to which your business conducts MiCA-relevant cryptoasset services.

From a sustainability disclosures perspective, as explained in the table earlier in this article, the extent of disclosures obligation is directly related to the type of cryptoasset service offered. Those directly operating cryptoasset trading platforms or exchanges [MiCA Art. 3 (16), b-d)] are subject to the ‘enhanced’ indicators (1+5 supplementary) whereas those offering non-trading or indirect cryptoasset services [MiCA Art. 3 (16), a; e-j)] are required only to disclose 1 mandatory indicator.

What counts as a MiCA qualifying asset that will require sustainability disclosures?

On the other side of the coin, there is the question of whether the cryptoassets offered by a qualifying CASP, or prospective issuer, constitute a MiCA-qualifying cryptoasset that will require MiCA-related sustainability disclosures in the first place.

Broadly, the in-scope cryptoassets under MiCA are the three categories we have referenced in this article: e-money tokens (EMTs), which reference the value of one fiat currency; asset-referenced tokens (ARTs), which reference the value of a commodity, or basket of reference fiat currencies; and non-EMT/ART cryptoassets, which very broadly is any fungible cryptoasset that does not meet the definition of a financial instrument.

The notable exclusions from MiCA obligations are therefore any security-style cryptoassets that qualify as financial instruments under MiFID II or other financial services regulation; and also non-fungible tokens (NFTs). ESMA has provided a flowchart to aid in this determination, which is available here.

Where cryptoassets are excluded from the scope of MiCA regulation, for instance as cryptoasset securities, MiCA-related sustainability disclosures rules will not apply; instead, such assets will be under the scope of the other financial services legislation applicable to the asset in MiCA’s place. 

Discussion

A few key points stand out from the detail of the finalised MiCA sustainability disclosure proposals. 

First is the likely short-term gap between theory and practice in the implementation of these new requirements.

In theory, the data for sustainability disclosures should come from issuers and crypto projects themselves, helped along if needs be by the trading venues where those assets are offered and traded.

In practice, many of even the largest already trading cryptoassets lack readily identifiable issuers or those likely to come forward and proactively prepare such disclosures of their own accord, and overall the fundamental data work has not yet been done to make electricity / climate data consistently available for hundreds if not thousands of different blockchain networks. 

This leaves the de facto burden on the ‘regulatory hook points’ – CASPs and, particularly, the trading venues where those assets are available for exchange. But here also, CASPs find themselves in a sticky situation. As we have already observed, website disclosures for all qualifying cryptoassets are due at the end of December 2024 – yet the white papers that would naturally contain the information for those website disclosures have a grace period, for already listed assets, to the end of 2027.

Practically speaking, this provides little urgency for any issuers behind those already trading assets to be compiling disclosure information before the end 2027 deadline bites, while CASPs are left on the hook for website disclosures from the end of the year.

This makes a theoretically simple requirement a significant short-term headache. Whereas, in time, CASPs will be able to draw on a searchable EU registry of white papers to conveniently extract information, or collaborate and re-use the work of other CASPs, in the immediate term they are faced with an end of year deadline and no obvious place to obtain the data they are supposed to disclose. 

This calls for urgent collaboration from the industry to find solutions – with asset issuers, where available, potentially using asset listings as a point of leverage; with other CASPs; and with the handful of third-party data providers who are working to give access to MiCA-ready disclosures data.  

The process also raises a question of standardisation. In principle, all disclosures for a similar asset should be identical across CASPs. In practice, this requires wide-scale coordination among industry participants to make sure that disclosures (which may be no more than best-effort estimates) match from venue to venue. In itself, this is no small task. It is interesting to see that ESMA envisages this will happen through its ‘call for voluntary cooperation between CASPs’ [final report, p.12 (22)], which leaves full liability for information with those disclosing, with no regulator-side approval or vetting process. In practice, we believe that it will be very difficult to ensure any consistency in reporting until such time as all providers are drawing on a single source and enough time has passed for a common repository of such material to be available. 

While such teething problems are almost sure to be resolved with time, the longer-term and perhaps more significant consideration beyond standardisation is one of differentiation.

It is notable that all providers are currently obliged to follow the same sustainability disclosures template without deviation, and one that sees them repeating the same network-level information. Over time, we believe that the emphasis of attention will naturally stretch beyond pure disclosure, and lead to an increasing emphasis on the voluntary mitigating actions that provide a consumer-differentiating factor at an individual provider level. Sustainability disclosures are restricted in practical effect if they are identical across providers; in time, it is those who demonstrate they have taken action to address the problem, at least at their own organisation’s level, that will be able to tell a story that goes beyond this.

Last but not least, there is a potentially interesting divide in the MiCA scope in how we are to approach the question of blockchain-based assets in general. Because, as we have seen, financial instrument or security-style cryptoassets are explicitly excluded from MiCA, whereas other cryptoassets fall within MiCA provisions, we potentially have different regulatory regimes applying to assets that are, technologically, quite similar.

An example would be two Ethereum-based assets: one of which is a MiCA token and falls under MiCA rules (e.g. a USD-backed stablecoin); and one of which is a tokenised financial instrument and falls under alternative financial services legislation (e.g. a tokenised bond).  

Seen through the lens of sustainability disclosures, this results in a somewhat odd divide: granular sustainability disclosures for the MiCA cryptoassets, and another separate set of requirements for other assets that are still cryptoassets, but cryptoassets that represent traditional financial instruments.

Final verdict

Details aside, recent developments are a fascinating early insight into how an entire industry introduces detailed sustainability disclosures from scratch – even before such measures have been implemented elsewhere – and potentially gives a first indicator of the path other industries (including other electricity-intensive industries) may follow.

Seen in this light, it is a topic environmental practitioners, and those with an interest in the digital asset industry at large, will want to follow with interest.

How Zumo can help

Clearly, there is a large amount of detail and nuance behind the new MiCA sustainability requirements for cryptoassets.

If you are a token issuer or a cryptoasset service provider looking to get to grips with your MiCA sustainability disclosure obligations, Zumo can help you:

• Get access to the sustainability data you need to prepare white papers or publish website disclosures.
• Ensure that any disclosures you make are in proper format and compliant with MiCA regulation.
• Explore options to enhance your disclosures with proactive mitigation action at your own organisation’s level as part of our crypto-bespoke Oxygen solution.

Get in touch with us to discuss your needs and how we can help.

Further reading

MiCA overview

Full MiCA text

Sustainability disclosures final report