Majority of crypto firms ill-prepared to meet MiCA’s ESG requirements

The European Union’s Markets in Crypto-Assets Regulation (MiCA) not only introduced a licensing regime for crypto firms in December, but also ushered in a requirement to comply with a range of other EU rules and regulations. One such requirement — to produce environmental data on crypto assets — is proving tricky for many firms.

“Complying with environmental, social and governance (ESG) disclosure requirements presents a significant challenge because it’s uncharted territory for most crypto firms,” said Nathan Catania, a partner at XReg Consulting. “If you look at requirements such as fund segregation, disclosures and complaint handling, these are well-established practices for many firms. However, ESG disclosures are a completely new area.”

Just a quarter of crypto-asset service providers (CASPs) surveyed by digital assets platform Zumo said they were “already prepared to be compliant” with MiCA’s sustainability requirements. The survey, which was conducted in December just as MiCA was about to go live, found 63% of firms were still exploring their options and 13% had not even begun their compliance journey.

Catania noted that while MiCA mandates ESG disclosures in issuersʼ white papers, it also imposes certain ESG reporting obligations on CASPs and trading venues. “One of the biggest challenges we’re seeing in the industry relates to trading venues. Generally, if a trading venue lists an asset, it must ensure that the asset has a compliant white paper.”

While issuers are responsible for producing these white papers if they request a listing, he said, in practice, trading venues effectively take on that responsibility if they want to list an asset independently of the issuer.

Data challenge

Some 38% of CASPs responding to the Zumo survey said they lacked the internal resources to comply with MiCA’s sustainability requirements, while 50% were looking for a technology solution that could meet their sustainability compliance requirements.

Speaking at a January 29 webinar, Tim Zölitz, CEO of Crypto Risk Metrics, said regulatory technical standards (RTS) produced by the European Securities and Markets Authority (ESMA) set 16 data fields covering energy use, carbon emissions and the use of renewable energy. His firm provides ESG data to Crypto Finance (Deutschland), a MiCA-licensed CASP that is part of Deutsche Börse Group.

Crypto Finance managing director Eric Viohl explained it was a “conscious decision” to use an external data provider. “In addition to the different calculation models for the various blockchain types, we were particularly impressed by the current measurements in an ISO-accredited measuring centre,” he said.

Calculating the energy intensity of a crypto asset is not straightforward as it depends not just on the type of crypto asset, such as proof of work or proof of stake, but also on factors such as where a particular asset is being mined and the computer hardware the miner is using. Crypto Risk Metrics can test, in a controlled laboratory, the energy consumption of various different computing hardware. It also runs crawlers — a type of computer program — to identify how many and where the individual nodes are located, which helps improve the accuracy of energy and environmental calculations.

Not one and done

Calculating sustainability data for crypto assets is not a one-time thing. “The regulator said you only have to disclose the data once per year and only have to update it once per year with one exception,” Zölitz said.

The exception is if there are any material changes within the data. So, in order for firms to know if there are any material changes to the sustainability data, it must be must continuously monitored Zolitz said.