A Brief Introduction to MiCA
The Digital Financial Package of the European Council is achieving its objectives. Having concerns to protect investors and financial stability, the Council finally reached an agreement on two regulations namely: The Regulation on Markets in Crypto Assets and The Digital Operational Resilience Act. The first one, MiCA, regulates crypto-assets and crypto-asset service providers in a comprehensive and balanced manner: While it proposes authorization requirements for the issuance of crypto-assets, and the crypto-asset service providers, certain cases are excluded from the scope in order to avoid unnecessary burdens. This article presents a brief outline of what MiCA Proposal (the Regulation or MiCA hereafter)1 offers from a legal perspective.
Roughly one year after the introduction of the digital finance package on 24 September 2020, the European Council reached an agreement on the “Regulation on Markets in Crypto Assets” (MiCA) and the “Digital Operational Resilience Act” (DORA) on 24 November 2021. The Council states that the purpose of MiCA is “to create a regulatory framework for the crypto-assets market that supports innovation and draws on the potential of crypto-assets in a way that preserves financial stability and protects investors”. Following this purpose, MiCA lays down rules to establish a transparent, fair, not misleading crypto-environment with an approach to support innovation and protect users.
Apart from other implications, MiCA takes an important step towards the legal uniformity of crypto-assets definition2. By the Regulation, not only the crypto-assets will achieve a unified recognition, and hence the users and investors reach a more secure playground, but a solid reference will be obtained in terms of the legal meaning of crypto-assets. The recognition of crypto-assets by unified rules will foster innovation, and hence may enable the development of more efficient models to end customers.
It has long been obvious that traditional definitions of financial instruments are insufficient to reflect diverse crypto-asset models. AML/CFT regulations have established more detailed rules to better protect users, smooth operation of payment systems, and the market integrity. Yet, there is a lack of uniform understanding of crypto-assets. How financial law perceives crypto-assets is not exactly the same as how they are treated under criminal law. And more importantly, rather than AML rules, crypto-asset services3 are not regulated as an authorized service. The definitions and authorization mechanisms outlined in MiCA will also cluster the various rules governing crypto-assets4.
It should be highlighted that crypto-assets that are regulated in MiCA are not financial instruments. By that, an electronic value that may qualify as an equity or debt instrument will not be subject to MiCA, even though it may be issued on a distributed ledger
As it is explained below, the Regulation handles the crypto-assets as broadly as possible. The definition, and subsequently the requirements are comprehensive enough to capture various models of crypto-assets. However, due to their particular characteristics, some digital values are excluded from the Regulation. MiCA declares standards for crypto-services, sets out rules for the authorization and the operation of service providers, draws the framework of marketing communication, and provides rules to protect the users and the crypto-environment.
Following a technology-neutral approach, MiCA defines crypto-asset as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. The definition is broad in the sense that it does not only cover digital values, but also digital rights. The definition is therefore broad enough to apply to crowdfunding models5.
MiCA classifies crypto-assets under three categories; asset-referenced tokens, electronic money tokens, and crypto-assets. Crypto-assets that do not qualify as asset-referenced tokens or e-money tokens, will fall under the 3rd category, including utility tokens. Crypto-asset services can be divided into two subclasses. Following the issuance6 of crypto-assets, the first class of services can be bundled under the following classes: (i) trading and exchanging of crypto-assets, and (ii) custody and administration of the crypto-assets. The second class of services -which can be seen as ancillary services- can be summarized as: (i) reception, transmission, or execution of orders and placing of crypto-assets, and (ii) advice and portfolio management of crypto-assets.
In order to issue crypto-assets to the public, the issuer7 -who must be a legal person- shall publish a “fair, clear and not misleading” white paper8 after notifying it to the competent authority, unless the assets are offered to a limited number of people or qualified investors or the value of assets does not exceed 1 million euros within a period of 12 months. In order not to hamper development, a pre-approval is not required before the publication of the white paper. The issuer shall only notify the white paper to the competent authority. After the publication of the white paper, crypto-assets may be traded on authorized platforms. The issuer shall inform the public regularly about the sales of crypto-assets, along with other significant changes.
After the publication, competent authorities shall have supervisory power on the white paper. White papers are especially important as the liability of issuers strongly depends on the information given on the white paper9. One of the most important steps that the Regulation takes towards user protection is the right of withdrawal10. In short, the crypto-asset model must entitle the holders to a right of withdrawal for a certain time, unless the crypto-assets are admitted to a trading platform.
E-money token is defined as “a type of crypto-asset that purports to maintain a stable value by referencing the value of an official currency of a country”11. The first deduction is, e-money tokens are a subcategory of stablecoins, while resembling e-money12. Though being technologically neutral, the current definition of e-money (2009/110/EC) is sometimes insufficient to cover specific models of stablecoins that are prone to act as a medium of exchange. E-money is electronically stored monetary value used in payments, which is issued on the receipt of funds and represents a claim on the issuer. This definition does not directly exclude the e-money models that are based on DLT. However, it shall require that e-money represents a claim on the issuer, and the holder may -at any time- redeem his/her e-money against an official currency at par value. Crypto-asset models that refer to a single currency, but do not entitle holders to such a claim, fall outside the scope of Directive 2009/110/EC. In order to include these deviations, MiCA adopts a broader definition for e-money tokens, which only requires stabilization via referencing to the value of a -single- currency13.
According to Art. 43 of MiCA, e-money tokens shall be deemed as e-money. While broadening the definition, MiCA presents similar requirements to e-money tokens; they shall provide the holder with a claim on the issuer, while being issued at par value and on the receipt of funds, and redeemed at par value by request. In short, MiCA requires that an asset anchoring its value to a currency must satisfy certain requirements of e-money. Hence, the stablecoin models that are referring to euro, but are not issued 1-1 or fail to offer redemption option will be prohibited. E-money tokens shall only be issued by credit institutions or e-money institutions, provided that they publish a related crypto-asset white paper. No pre-approval mechanism is required for the white paper of e-money tokens.
Asset-referenced tokens are defined as “a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing to any other value or right or a combination thereof, including one or several official currencies of a country”. Asset-referenced tokens are also a subcategory of stablecoins14. The stabilization may be done by addressing a value (this can be the value of another crypto-asset) and/or right. According to Art. 15, asset-referenced tokens shall only be issued or traded by credit institutions or authorized issuers. The issuers are subject to minimum capital requirement calculated according to the volume of issuance, which is determined by the reserve amount. The underlying reserve assets15 shall be kept in custody either at a credit institution, a crypto-asset service provider, or an investment firm. The referenced reserves shall be kept liquid and free from market risks, as much as possible. The possible losses (and profits) arising from the investments made with the assets shall be borne by the issuer.
While imposing authorization requirements to issuers16, the Regulation excludes the crypto-asset issuances that do not exceed 5 million euros within a period of 12 months or the offer which solely addresses to qualified investors, provided the crypto-assets are not traded. In these two cases, the issuer -without obtaining authorization- shall notify a crypto-asset white paper to the competent authorities, and publish it.
In contrast to crypto-assets, there is a pre-approval mechanism for the white papers of asset-referenced tokens during the authorization. Any changes to be made on the white paper after its publication shall be notified to the competent authority for approval. Neither the e-money nor the asset-referenced token models shall be designed to grant interest. The issuers must report regularly to competent authorities when the value of assets goes beyond a certain threshold. The holders are entitled to exercise their right to redeem at any time. In this case, the issuer must redeem the assets by paying the corresponding market value or delivering the referenced assets.
Some highlights;The Regulation does not apply to:
- Crypto-assets that are not tradeable and only accepted by the issuer,
- Crypto-assets given for free or as a gift (i.e. loyalty schemes, including validation), as long as they are not traded,
- Utility tokens that present the purchase of an existing good or service.
- It is not required to publish a white paper for the offers of crypto-assets that do not exceed 12 months.
- Limited network exclusion applies to crypto-asset models, as well. But, due to the nature of the crypto-environment, the exclusion will be applied more fastidiously.
- The funding duration in crowdfunding of prospective projects made with utility tokens cannot exceed 12 months.
- Even though crypto-assets do not have a definable issuer, the service providers of these crypto-assets are still subject to MiCA.
2. Due to a lack of a uniform definition, some jurisdictions have already introduced crypto-assets definitions. The German Banking Act (Kreditwesengesetzt) defines crypto-assets (kryptowerte) as a digital representation of a value that can be transferred, stored, or traded electronically, which is not issued or guaranteed by any central bank or a public entity, and does not have the legal status of currency or money, but is accepted by natural/legal persons as a means of exchange/payment, or for investment purposes. The crypto-assets are neither e-money nor a monetary value within the meaning of ZAG. From the perspective of KWG, crypto-assets are treated as financial instruments.
3. Crypto-asset services that are regulated in MiCA shall only be provided by authorized legal persons (crypto service providers) and under certain conditions by credit institutions, investment firms, and e-money institutions. The Regulation does only allow natural persons to issue any type of crypto-assets or act as a service provider. But Member States shall allow for other form entities to issue crypto-assets as long as the same level of protection and supervision is ensured.
4. For example, the Legislative Package, which is a part of the Action Plan for a comprehensive Union policy on preventing money laundering and terrorist financing, published on 20 July 2021, presents amendments to the Regulation (EU) 2015/847. The amendments adopt the definition of crypto-assets in MiCA, and thereby enable tracking of not only funds but also crypto-asset transfers.
5. In some ICO models, tokens given in exchange for funds entitle the owner to the rights in such a way that it is not possible to classify the token under one type of security. However, by not specifying rights that the crypto-asset may offer, this definition may capture the various crowdfunding models as well.
6. Issuance itself is not classified as a crypto-asset service.
7. If the issuer and the offeror are different persons, the offeror shall publish the white paper.
8. The content and the form of the white paper are determined in the Regulation. Similar rules shall also apply to the trading of crypto-assets. But if a white paper has already been published during the issuance, no additional one is required for its trading.
9. The Regulation also refers to civil liability rules in terms of the liability of issuers or service providers. Depending on the conditions and parties, liability rules governing pre-contractual duties or contract of sale, bailment or agency contract may be applied. However, the characteristics of the relationships are more prone to be sui generis.
10. The holder may exercise his right within 14 days after the purchase unless the crypto-asset has already been admitted to a trading platform.
11. This definition and the asset-referenced token definition below are slightly different -and broader- than the definitions included in the Draft Proposal published on 24 September 2020.
13. Note that e-money tokens can only be issued referring to a single currency.
14. By defining asset-referenced tokens and e-money tokens as a form of stablecoins, it won’t be surprising for these instruments to be used as a medium of exchange. However, MiCA sets out restrictions if an asset-referenced token is widely used as a means of exchange, as the result may impose a threat on the financial stability, payment systems, and monetary sovereignty.
15. The holders of asset-referenced tokens do not have a direct claim on the reserve assets. But the reserve assets may be used in case of redemption request or liquidation etc.
16. Note that in order to issue asset-referenced tokens or e-money tokens, authorization is required, while this is not the case for (other) crypto-assets.