After years of legislative discussions and heated debates, the Member States of the European Union (“EU”) will roll-out the Bloc’s flagship Regulation on Markets in Crypto Assets (“MiCAR”) from 30 June 2024 respectively 30 December 2024 onwards.
MiCAR comes with a plethora of obligations for issuers, offers and other services providers for crypto assets (“CASPs”) with regards to utility tokens, asset-referenced tokens as well as e-money tokens. The regulation defines hereby crypto assets as a means of digital representation of a value or or a right that is transferable and stored electronically on a distributed ledger or similar technology based network. MiCAR does not address any specifics of so-called asset or security tokens as defined by the Swiss FINMA ICO guidelines. Such crypto assets shall be regulated under the applicable regulations (e.g. MiFID II). Moreover, crypto assets which are unique and non-fungible (e.g. cinema cards, digital collectibles, in-game assets, etc.) are also out of the scope of MiCAR. This exclusion implies that NFTs are generally not covered by MiCAR.
In the following paragraphs, we would like to share our view on selected topics with a special focus on the perspective of an operational crypto asset network or protocol. Thereby the focus shall be exclusively put on crypto assets other than asset-referenced or e-money tokens.
What is the impact of MiCAR on already circulating crypto assets?
First of all, it needs to be stressed that the new rules under MiCAR do not only apply to new issuances or offerings of crypto assets but might still have relevance for existing crypto assets in circulation.
In this regard, MiCAR introduces in its preamble the term fully-decentralised crypto asset services, i.e. where no intermediaries are involved. It explains that such circumstances should not fall within the scope of MiCAR (see Recital 22). Moreover it clarifies that if a crypto asset does not have an identifiable issuer, such crypto asset should not be covered by most of the MiCAR rules (Titles II, III, IV). However CASPs providing covered services under MiCAR with respect to such crypto assets still need to comply with the rules. Thus, it is of importance to look at these terms more closely.
With regards to this, the European Securities and Markets Authority (“ESMA”) shared their perspective in the Second Consultation Paper, which currently is open for comments until 14 December 2023. ESMA therein defines the term “permissionless distributed ledger technology” as follows:
“permissionless distributed ledger technology’ means a technology that enables the operation and use of distributed ledgers in which no entity controls the distributed ledger or its use or provides core services for the use of such distributed ledger, and DLT network nodes can be set up by any persons complying with the technical requirements and the protocols.” [p. 104 ESMA Second Consultation Paper on MiCA)]
Moreover, ESMA clarifies with reference to Recital 22 of MiCAR that (…) where crypto asset services are provided in a fully decentralised manner without any intermediary” should fall outside the scope of MiCA but also notes that the exact scope of this exemption remains uncertain. ESMA considers that an assessment of each system should be made on a case-by-case basis considering the features of the system. In this context, ESMA considers it useful to clarify how pre-trade transparency should apply to such protocols. This is without prejudice to any possible clarification that can be published in the future regarding the scope of the exemption for fully decentralised systems. [p. 29 ESMA Second Consultation Paper on MiCA)]
It remains to be seen how these reflections are approached in practice and whether there will be further supportive clarifications published by ESMA or the European Banking Authority (“EBA”). In case of doubt, it is recommended that the trading platform which envisages to list such a crypto asset seeks clarity from regulatory authorities prior to commencing any relevant activities. As outlined above, the general compliance requirements (e.g. the publication of a white paper) under MiCAR are still applicable to CASP providing such relevant services.
How is MiCAR relevant for non-EU based crypto assets issuers, offerors or CASPs?
Primarily, MiCAR is a set of regulations focused on the EU single market. Issuers, offers and CASPs need to register themselves in their home EU member state. Once registered, a EU passporting mechanism applies throughout the bloc. For relevant parties registered in non-EU member states the same rules apply as MiCAR regulates services supplied in the EU to EU-based parties. Reverse solicitation exemption should be available but this requires that clients interact with an issuer, offeror or CASP based outside the EU upon their own request. This prohibits any sort of active solicitation or marketing efforts by such parties. However, such an unregulated approach might be difficult to uphold in digital times. Furthermore, MiCAR specifies that such a third state party has to register their activities in the EU Member State where they intend to initially market its activities.
Given the fact that Switzerland is neither a member of the EU nor of the European Economic Area (“EEA”), the country would qualify as a third country state. In the case of Liechtenstein, given its EEA membership, Liechtenstein-based institutions can expect to benefit from EU passporting benefits as well as unrestricted access to the EU single market. It will be interesting to see how this impacts the distribution models of public offers as well as listing activities of crypto assets going forward.
White paper: What are the general rules?
If a legal person makes either a public offer or seeks admission to trading for a qualifying crypto asset on a trading platform in the EU, such person might be obliged to draft and publish a white paper on the crypto asset as well as notify the competent authorities.
There are general exemptions available, if the public offer is made to either less than 150 natural or legal persons, if the public offer does not exceed EUR 1m over a period of 12 months or if the public offer is solely and exclusively marketed to qualified investors.
In general, airdrops should not qualify for the MiCAR’s scope if they’re awarded for free. This should be also the case if the recipients do not have to provide their personal data in return. An interesting case to observe are so called retroactive airdrop programs through which past activities for a certain benefit of an ecosystem are awarded through airdrops (e.g. Optimism’s retroactive public goods funding campaigns).
Another interesting observation is that a utility token which provides access to a good or service that exists or is in operation is carved out from the requirements under the public offer. However, such a public offer of a utility token shall not last any longer than 12 months. In this regard, MiCAR defines a utility token as a crypto asset that exclusively provides access to a good or service supplied by the issuer.
In our view, issuers of utility tokens should largely benefit from this exemption if they can prove that the crypto asset is used on their network for the actual receipt of services. In absence of a payment token categorisation in MiCAR, no further requirements should be due in case of a public offer. However, a white paper might be still required if a project seeks a listing on a trading platform operating within the EU.
The party responsible for drafting and publishing of the white paper needs to inform the competent authorities at least 20 working days before the publication of the white paper. The corresponding party bears an unlimited liability for any losses incurred due to misrepresentations made in the white paper. Any limitation or exclusion of this liability are not permissible and are deprived of their legal effect.
White paper: What to do if a crypto asset is added to a new trading venue or is made publicly available?
As outlined above, the admission to trading of a crypto asset on a trading platform within the EU or exchange triggers MiCAR compliance demands even if the crypto asset is already in circulation.
If a crypto asset is admitted to trading by an operator of a trading platform and so far no white paper has been published in the EU, it’s the responsibility of this operator of the trading platform to comply with MiCAR and to issue such documentation.
If the crypto asset for which the admission to trading on another trading platform in the EU is seeked and another platform in the EU has already provided for a white paper as required under MiCAR, no additional white paper should be necessary.
How does MiCAR impact marketing communications of operating networks and protocols?
Any marketing communications related to a public offer or an admission to trading of a crypto asset covered by MiCAR needs to comply with a set of minimum standards.
The marketing communications need to be clearly identifiable and at all times fair, clear, not misleading as well as consistent with the content published in the white paper. Any marketing communications need also to clearly refer to the location of such a white paper. It is also important to note that no marketing communications can be released prior to the publication of the white paper.
The relevant party needs to keep the white paper up-to-date in case of significant new factors (e.g. new inflation parameters), material mistake (e.g. wrong vesting information) or a material inaccuracy arise during the entire duration of the public offer or the admission to trading.
That being said, such principles need to be obtained and practised across the various communication channels including social media (e.g. X/Twitter, Discord, etc.). It’s mission-critical that projects exercise full control over the flow of information across all channels at all times.
On a different note, MiCAR also introduces the concept of inside information and trading (e.g. insider trading and front-running). With regards to this, any information which is not public with the potential of significant effects on the price of a crypto asset if public qualifies as inside information. Such “inside information” needs to be disclosed as soon as possible to enable fast access as well as the complete, correct and timely assessment of the information by the public. Importantly, such disclosures cannot be leveraged for marketing purposes. Moreover, any such public disclosures need to be available and recorded on the website on for example a disclosure news feed segregated from any marketing communications. It goes without saying that trading on such inside information is prohibited by MiCAR explicitly.
How does MiCAR affect token liquidity enhancement initiatives such as market-making and / or buy-back programs?
Besides the anti-abuse provisions on inside information and trading, MiCAR also encompasses a general anti-abuse provision covering the prohibition of market manipulation.
No person shall carry out transactions or activities resulting or causing false or misleading signals with regards to the supply or demand side of a crypto asset, securing a price level of a crypto asset or entering orders to initiate or exacerbate a trend. This prohibition comes with a general, non-specific exemption for any kind of activities which are carried out for legitimate reasons.
Such market-manipulation schemes seem to encompass commonly established and observed models such as:
- Layering or spoofing;
- Wash trading; or
- Pump and dump
Given the fact that admissions to trading platforms are often accompanied by so-called market-making efforts it remains unclear where to draw the dividing line in this regard. The ESMA refers to the detection of market abuse practices such as wash trades to inflate trading volumes in their Second Consultation Paper [p. 50, Second Consultation Paper on MiCA].
Additionally, it remains unclear – in absence of a specific / explicit safe harbour clause – to what extent buy-back and stabilisation programs as well as burning mechanisms qualify as market abuse practices. In absence of a legitimate reason (possibly given by a DAO vote or a specific event like a protocol hack), there might be the considerable risk of market abuse. It is generally understood that there is a clear need for guidance by ESMA / EBA and further research to be conducted in order to obtain more clarity in this regard.
In any case, it would be warmly appreciated if the ESMA / EBA further clarifies their practice and approach in this regard before 30 June 2024.
A crypto asset is classified as a payment token; how to proceed with regards to MiCAR?
Interestingly, the FINMA coined term payment token (see FINMA ICO Guidelines) does not appear as a separate crypto asset category under MiCAR. Although the e-money crypto asset covers some of the payment tokens, it is strictly restricted to what we commonly refer to as stablecoins as the crypto asset needs to be tied to an established legal tender. That being said, most of the payment tokens under the FINMA guidance will likely qualify as other crypto assets (other than asset-referenced tokens and e-money tokens).
Outlook
With slightly more than six months to go until MiCAR takes first legal effects, it is important for operating networks and protocols to clarify their situation and exposure to avoid any unforeseen impact. Currently, the Second Consultation Paper by ESMA is open for comments until 14 December 2023. A third one follows suit in Q1 2024.
If you are a project interested in assessing your MiCAR exposure, we’re more than happy to talk to you over an initial video call: Calendly
LEGAL DISCLAIMER:
NOTHING IN THIS PUBLICATION REPRESENTS ANY SORT OF FINANCIAL, INVESTMENT, LEGAL, TAX, ACCOUNTING OR REGULATORY ADVICE. THE INFORMATION SHARED IN THIS PUBLICATION SOLELY MIRRORS THE PERSPECTIVES SHARED OF THE AUTHOR AND DOES NOT REPLACE ANY DISCUSSION AND / OR ASSESSMENT WITH YOUR LEGAL, REGULATORY AND TAX COUNSELS.