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Markets in Crypto Assets Regulation (EU): FAQ

by | Apr 6, 2024 | Uncategorised

Last update: 6 April 2024

With the Markets in Crypto Assets Regulation (“MiCAR”) about to take legal effect in the European Union (“EU”) in a couple months, we are glad to present our FAQ focused on imminent and relevant questions we have identified while reading our clients for this new era! 

Feel free to navigate through the various categories as outlined below to search for specific answers. If you have any further questions, don’t hesitate to contact us using our contact form. We are eager to answer your questions and assist you further. 

Get a cup of your favourite beverage and enjoy the reading!

1. When does MiCAR enter into force?

The MiCAR enters into force on 30 December 2024, except for Titles III and IV, which will enter into force on 30 June 2024. Therefore, for issuers of asset-referenced tokens (“ART“) and e-money tokens (“ETM“) MiCAR will already be applicable from 30 June 2024. Due to the grandfathering / transitional provisions anchored in the MiCAR, these providers are allowed to continue providing their services in conformity with national provisions for 18 months until 1 July 2026.

2. What is regulated and who is affected?

MiCAR applies to all entities wanting to issue or provide services for crypto assets in the EU (in line with the definition of crypto asset service as outlined below in question 7). MiCAR aims to establish consistent rules for transparency, disclosure, and supervision of crypto securities issuance, public offering and admission to trading. The issuance of ARTs and EMTs is specifically covered and subject to regulation. Moreover, further well-established aspects such as the proliferation of investor protection and market integrity standards are addressed at hand of a comprehensive set of anti-abuse provisions.

Once MiCAR takes legal effect, there will be three regulatory classifications in which a crypto asset may fall under EU law: 

  • A financial instrument subject to MiFID II,
  • A crypto asset covered under MiCAR, or 
  • An unregulated asset (e.g. possibly NFTs). 

3. What Types of crypto assets are regulated under MiCAR?

According to MiCAR, a crypto asset means a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology.

MiCAR distinguishes between the following crypto assets:

  • Asset-referenced token (ART): Means a type of crypto asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.
  • Electronic money token (e-money token, EMT): Means a type of crypto asset that purports to maintain a stable value by referencing the value of one official currency.
  • Utility token: Means a type of crypto asset that is only intended to provide access to a good or a service supplied by its issuer.

4. What crypto assets are not covered by MiCAR?

Crypto assets which fall under financial instruments in accordance with MiFID II are not covered by MiCAR.  Also, non-fungible tokens (“NFT”) fall outside the scope of MiCAR. 

5. How does MiCAR regulate the offering / issuance of crypto assets?

When it comes to offering and issuance, MiCAR sets out different regulations for ART, EMT and other crypto assets. 

5.1 Offering of other crypto assets:

Issuers of crypto assets that are not ART or EMT must be a legal entity and draw up, publish, and notify authorities of a white paper (Article 5-8 MiCAR). 

These regulations shall not apply if the crypto assets are free offers, the crypto asset is automatically created as a reward for the maintenance of the distributed ledger or the validation of transactions, the offer concerns a utility token providing access to a good or service that exists or is in operation or if the holder of the crypto asset has the right to use it only in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror (Article 4(3) MiCAR).

In addition, if the offer is addressed to fewer than 150 natural or legal persons per EU Member State, if the total consideration of an offer to the public of a crypto asset in the European Union does not exceed EUR 1,000,000 in a 12 month period or if an offer is addressed exclusively to qualified investors and can only be held by them, there is an exemption of the obligation to draft and publish a white paper (Article 4(2) MiCAR).

No exceptions apply if the offeror seeks admission to trading.

5.2 Issuance of ART:

Issuers must have their registered office in the EU (Article 16(1), first subparagraph, point (a) MiCAR). The application must be submitted to the respective competent national supervisory authority. 

An authorisation application for the issuance of the ART shall meet the following non-exhaustive requirements (Article 18 MiCAR):

  • The address of the applicant issuer and the legal entity identifier of the applicant issuer.
  • A business plan, including a description of the business model. 
  • A legal opinion confirming that ART is neither a crypto asset not covered by MiCAR nor an EMT.
  • Proof of own funds equal to an amount of at least the largest of the following (Article 35(1) MiCAR): 
    • EUR 350,000;
    • 2% of the average amount of the ART reference values to be held in reserve; or
    • A quarter of the fixed overhead costs of the preceding years.
  • A detailed description of the business organisation, especially
    • risk and liquidity management, 
    • internal control mechanisms, 
    • be professionally suitable and reliable business managers with sufficiently good repute and sufficient knowledge, 
    • experience and skills as well as sufficient time to effectively perform their duties for the issuer, 
    • contingency plan,
    • and measures to identify and deal with conflicts of interest.
  •  Crypto-specific processes such as
    • maintaining a reserve of ART reference values, 
    • validation of transactions with ART and 
    • functioning distributed ledger technology (such as blockchain).
  •  Ownership control: indication of all owners of qualifying shareholdings, including evidence of their reliability.

If the issue value of the ART is higher than EUR 100 million, the issuer faces stricter rules, including quarterly reporting (Article 22 MiCAR).

For ART a white paper requirement applies. The relevant competent authority must be notified of the crypto-asset white paper, followed by publication of the white paper. This represents no deviation to the standard approach for the white paper for other crypto asset categories under MiCAR.

Furthermore, ART can be classified as significant. The issuers of significant ART have some additional obligations. ART are significant if they meet at least three of the following criteria (Article 43 MiCAR):

  • The number of holders of the ART is larger than 10 million;
  • The value of the ART issued, its market capitalisation or the size of the reserve of assets of the issuer of the asset-referenced token is higher than EUR 5 000 000 000; 
  • The average number and average aggregate value of transactions in that asset-referenced token per day during the relevant period, is higher than 2,5 million transactions and EUR 500 000 000 respectively; 
  • The issuer of the asset-referenced token is a provider of core platform services designated as a gatekeeper in accordance with Regulation (EU) 2022/1925; 
  • The significance of the activities of the issuer of the asset-referenced token on an international scale, including the use of the asset-referenced token for payments and remittances; 
  • The interconnectedness of the asset-referenced token or its issuers with the financial system; 
  • The fact that the same issuer issues at least one additional asset-referenced token or e-money token, and provides at least one crypto-asset service.

Issuers of significant ART are subject to additional requirements such as:

  • Adopt a remuneration policy that promotes sound and effective risk management; 
  • A duty on issuers to ensure that these ARTs can be held in custody by different crypto-asset service providers authorised for providing custody and administration of crypto-assets on behalf of clients; 
  • A duty to assess and monitor the liquidity needs to meet potential redemption requests. Thus, issuers of significant ARTs must establish, maintain and implement a liquidity management policy and procedures; 
  • Conduct liquidity stress testing on a regular basis;
  • Increase of the average amount of reserve assets to 3%.

5.3 Issuance of EMT:

The issuer of EMT must be authorised either as a credit institution (credit institution means an undertaking the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account) or as an electronic money institution (electronic money institution means a legal person that has been granted authorisation under Title II of Directive 2009/110/EC to issue electronic money) and shall notify a crypto asset white paper to the competent authority and publish that crypto asset white paper in accordance with Article 51 (Article 48(1) MiCAR).

Issuers of EMT shall, at least 40 working days before the date on which they intend to offer to the public those EMT or seek their admission to trading, notify their competent authority of that intention (Article 48(6) MiCAR). 

The recovery plan shall be notified to the competent authority within six months of the date of the offer to the public or admission to trading (Article 55 MiCAR). 

In Addition, EMT are categorised as significant based on the same criteria as ART and carry the same obligations for the issuer (see above).

Issuers of EMT must meet organisational requirements similar to ART issuers. These requirements stem from their status as e-money institutions or credit institutions, necessitating the provision of detailed information to competent authorities regarding their operations, governance, risk management, and data protection measures.

Upon request by a holder of an EMT, the issuer of that EMT shall redeem it, at any time and at par value, by paying in funds, other than electronic money, the monetary value of the EMT held to the holder of the EMT (Article 49(4) MiCAR).

Furthermore, 30% of the funds received by issuers of EMT in exchange for EMT and safeguarded in accordance with Article 7(1) of Directive 2009/110/EC shall always be deposited in separate accounts in credit institutions. The remaining funds received shall be invested in secure, low-risk assets that qualify as highly liquid financial instruments with minimal market risk, credit risk and concentration risk, in accordance with Article 38(1) MiCAR, and are denominated in the same official currency as the one referenced by the EMT (Article 54 MiCAR).

6. What needs to be detailed in the white paper

MiCAR contains specific rules with regards to the scope, form and level of details to be covered and / or disclosed in the white paper. Depending on the characterisation of the crypto asset, there are different rules applicable to the responsible party.

6.1 Crypto assets other than ART and EMT (utility token):

According with Article 6 MiCAR, the white paper must comply with a predefined set of requirements: 

  • It must start with a statement emphasising that the white paper has not been approved by any EU competent authority and a statement from the management body of the offeror confirming that the white paper complies with the requirements and is fair, clear and not misleading.
  • The white paper shall contain a summary which shall provide key information about the offer to the public of the crypto asset or the intended admission to trading.
  • It should provide information about the offerer, the issuer (if different from the offeror and identifiable) and the operator of the trading platform.
  • The white paper shall comprise Information about the crypto asset project, the underlying technology and the rights and obligations attached to the crypto asset.
  • It shall contain Information about the offer to the public or its admission to trading, information on the risks and on the principal adverse impacts on the climate. 

All of the information provided shall be fair, clear and not misleading and shall not contain any assertions as regards the future value of the crypto asset. 

The white paper shall contain a clear and unambiguous statement including a warning to the potential loss of value, transferability and liquidity.

6.2 ART and EMT:

The requirements regarding the white paper for ART and EMT are similar to white papers to be drafted up for other crypto assets such as utility tokens.

Nevertheless they need to contain specific information adapted to EMT or ART. 

The white paper for ART needs to fulfil the following requirements (Article 19 MiCAR):

  • The white paper should provide information about the ART, the offer to the public, the issuer and the reserve of assets.
  • It shall comprise information about the rights and obligations attached to the ART, the crypto-asset project, the underlying technology, the risks and the principal adverse impact on the climate.
  • The white paper shall contain a clear and unambiguous statement including a warning to the potential loss of value, transferability and liquidity.
  • The white paper shall contain a statement from the management body of the issuer confirming that the white paper complies with the requirements and is fair, clear and not misleading.
  • The crypto-asset white paper shall contain a summary, inserted after the statement referred to in Paragraph 5, which shall in brief and non-technical language provide key information about the offer to the public of the ART or the intended admission to trading of the ART.
  • The crypto-asset white paper shall contain the date of its notification and a table of contents. The summary shall state that the holders of asset-referenced tokens have a right of redemption at any time, and the conditions for such redemption.
  • The crypto-asset white paper shall be drawn up in an official language of the home Member State, or in a language customary in the sphere of international finance.
  • The crypto-asset white paper shall be made available in a machine-readable format.

A crypto-asset white paper for EMT must include (Article 51 MiCAR):

  • Information about the issuer and the public offering or admission to trading, details about the EMT.
  • Rights and obligations associated with the EMT.
  • Information on the underlying technology, on the risks and the impact on climate and the environment related to the consensus mechanism.
  • The identity of the person other than the issuer that offers the EMT to the public and reasons for their involvement.
  • The information shall be fair, clear and not misleading.
  • A statement emphasising that the white paper has not been approved by any EU competent authority.
  • A warning that the EMT isn’t covered by investor compensation schemes under Directive 97/9/EC and by the deposit guarantee schemes under Directive 2014/49/EU. 
  • A statement from the management body of the issuer confirming that the white paper complies with the requirements and is fair, clear and not misleading.
  • A summary, which shall in brief and non-technical language provide key information about the offer to the public of the EMT or the intended admission to trading of the EMT.
  • The date of its notification and a table of contents.
  • The crypto-asset white paper shall be drawn up in an official language of the home Member State or in a language customary in the sphere of international finance.
  • The crypto-asset white paper shall be made available in a machine-readable format.
  • Before offering the EMT to the public in the Union or seeking an admission to trading of the EMT, the issuer of such EMT shall publish a crypto-asset white paper on its website.

7. What are the requirements for the authorisation of crypto asset service providers (CASP)? 

According to Article 3(1), point (16) MiCAR, crypto asset service means any of the following services and activities relating to any crypto asset: 

  • providing custody and administration of crypto assets on behalf of clients; 
  • operation of a trading platform for crypto assets; 
  • exchange of crypto assets for funds; 
  • exchange of crypto assets for other crypto assets;
  • execution of orders for crypto assets on behalf of clients; 
  • placing of crypto assets; 
  • reception and transmission of orders for crypto assets on behalf of clients; 
  • providing advice on crypto assets; 
  • providing portfolio management on crypto assets; 
  • providing transfer services for crypto assets on behalf of clients;

Legal persons or other undertakings that intend to provide crypto asset services shall submit their application for an authorisation as a CASP to the competent authority of their home Member State (Article 62(1) MiCAR). The application shall contain the information mentioned in Article 62(2) MiCAR. 

Only authorised CASP under Article 63 MiCAR and financial institutions allowed to provide such services according to Article 60 MiCAR can offer crypto asset services in the EU (Article 59(1) MiCAR). A CASP authorised in accordance with Article 63 shall have a registered office in a EU Member State where they carry out at least part of their crypto asset services. They shall have their place of effective management in the EU and at least one of the directors shall be resident in the EU (Article 59(2) MiCAR).

Non-legal / natural persons shall only provide crypto asset services if their legal form ensures a level of protection for third parties’ interests equivalent to that afforded by legal persons and if they are subject to equivalent prudential supervision (Article 59(3) MiCAR).

Entities such as credit institutions, investment firms and e-money institutions (Article 60(1), (2), (3) MiCAR), wishing to add crypto asset services to their existing services portfolio, benefit from the notification procedure. If these entities want to extend their authorisation onto MiCAR services, they have to submit a notification in accordance with Article 60(7) MiCAR to the competent authority at least 40 working days before providing those services for the first time.

8. Is MiCAR applicable for non-EU countries (reverse solicitation)?

In the consultation paper published by the ESMA, it was emphasised that the provision of crypto asset services or activities by a third-country firm is strictly limited under MiCAR to cases where such service is initiated at the own exclusive initiative of a client (reverse solicitation exemption). 

A CASP located outside of the EU (e.g. Switzerland) who wish to expand into the EU market have the option to apply for a MiCAR licence. However, it is important to note that the processing time for a licence might absorb a substantial amount of time. 

Alternatively, companies from outside the EU might collaborate with EU-based firms offering crypto services. Through an outsourcing agreement, the foreign company could become part of the business organisation of the EU crypto service provider. The supervised CASP is then responsible under supervisory law, while the company from the third country merely acts as a service provider for the authorised company. It’s crucial to make it clear to customers that the supervised company is ultimately accountable for the crypto services provided.

Another option for CASP from non-EU countries could be purchasing a European company already holding a MiCAR licence. Depending on the nature of the crypto services envisioned, certain financial institutions with a local EU licence could also be potential acquisition targets. In addition, MiCAR allows credit institutions to offer crypto services alongside their primary operations. Acquiring such companies also requires a significant amount of time, although typically less than obtaining a licence outright.

 

Disclaimer: This content under this FAQ page is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. threek advisory GmbH makes no representations or warranties of any kind, express or implied about the completeness, accuracy, reliability, suitability or related graphics contained on the website for any purpose. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. threek advisory GmbH will not be liable for any false, inaccurate, inappropriate or incomplete information presented on the website.