Introduction

This is the second part of our MiCA Series that explores the new Regulation on Markets in crypto-assets (MiCA) in which we are focusing on the new regulatory regime that will apply to persons offering regulated crypto-assets to the public in the EU. As a recap, in Part 1 of our Series we have provided a general overview of the new regulatory framework under MiCA, its scope application and the expected timeline.

In recent years, EU residents were increasingly targeted by offerors of crypto-assets from all around the world, each promising participation in cutting edge blockchain based project as well as high investment returns. However, lack of transparency and regulatory oversight combined with large volumes of misleading marketing information in this booming area of fundraising, led to inevitable burst of the ICO bubble end of 2018 which left many investors empty handed.

Looking to prevent similar events from happening in the future, EU lawmakers have introduced a number of disclosure and notification requirements under MiCA that will apply to persons offering regulated crypto-assets to the public, that shall ensure high level of transparency

Requirements on issuers of crypto-assets other than stablecoins

White paper

Prior to offering crypto-assets to the public in the EU, offerors will need to prepare and publish a white-paper (investor information document similar like the securities prospectus) that would clearly describe relevant information about the issuer, the crypto-asset, risks associated with the investment as well as information around the underlying technology.

By mirroring the main principles of the EU Prospectus Regime, MiCA provides for a number of exemptions from obligation for publication of the white-paper for certain types of public offerings of crypto-assets. To that end, issuers will not be required to prepare and publish a white-paper where:

• an offer is made to fewer than 150 natural or legal persons per Member State provided that such persons are acting on their own account;
• over a period of 12 months, the total consideration of an offer to the public of crypto-assets in the Union does not exceed EUR 1 000 000, or the equivalent amount in another currency or in crypto-assets;
• an offer is solely addressed to qualified investors and the crypto-assets can only be held by such qualified investors;
• the crypto-asset is offered for free (offering of crypto-assets in exchange for processing of personal data will not be considered as offering for free);
• the crypto-asset is automatically created as a reward for the maintenance of the distributed ledger or the validation of transactions (e.g. mining process);
• the offer concerns a utility token providing access to existing goods/services (i.e. fundraising for project development through utility tokens will not be possible) ;
• the crypto-asset can be used only in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror (limited network exemption mirrored from PSD2 framework).

White paper shall outline main information about the offering and crypto-assets for investors based on which they shall be in position to make an informed investment decision prior to purchasing related crypto-assets.

In terms of the content, the white paper shall:

• start with a short summary (brief in non-technical language);
• outline main information about the offeror (legal form, contact details etc.);
• describe the project and the main participants;
• outline the terms and conditions of the offer;
• outline information on the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the crypto-asset;
• clearly describe rights attached to the crypto-asset;
• disclose the key risks associated with the crypto-asset;

Further, offerors of crypto assets also need to include a statement in a white paper specifying that a white paper has not been approved by any authority and that the provider is solely responsible for its content.

In addition to the requirements on preparation and publication of the white-paper, offerors of crypto-assets will also need to comply with requirements on marketing communications addressed to investors in the EU. To that end, they will need to ensure that all information contained in marketing communications (information material, advertisements etc.) is fair, clear, not-misleading and in line with the information published in the white paper.

Liability

Where information in the white paper are incomplete or misleading, a holder of crypto-assets may claim damages from the offeror or person that was seeking admission to trading for offered crypto-assets, for any damage caused to them as a result thereof. With the aim of ensuring the perseverance of this rule, MiCA explicitly stipulates that any contractual exclusion of the civil liability of the offeror in this regard, shall be deprived of any legal effect.

Withdrawal right

Retail investors will benefit from a special withdrawal right under the new regime. Namely, upon request of retail investors, issuers will be required to reimburse all payments received from them, using the same means of payment the retail investor used to purchase crypto-assets, not later than 14 days from the day when investor has exercised its withdrawal right.

Notification

Unlike securities prospectus, a white paper under MiCA will not require mandatory approval by the competent national authority prior to publication. Issuers will only be required to sned mandatory notification, in prescribed form, to their NCA at least 20 days prior to publication of the white paper. Nonetheless, the relevant competent authorities will have power to require amendments to the white paper or suspend the offer or trading of the crypto-assets where there is reasonable suspicion that the white paper does not meet minimum content requirements specified under MiCA.

After following the pre-defined notification procedure, issuers located in one EU Member State will also generally be able to offer crypto-assets to investors across the EU without the need of notifying the white paper to other NCAs in other EU Member States.

Bespoke regime for stablecoins

MiCA creates a designated regulatory regime that apply to offerors of, asset referenced and e-money tokens, who will be subject to some additional requirements aimed at ensuring proper regulation and supervision of this evolving sub-field of the crypto-industry.

Asset-referenced tokens

Authorisation

Issuers of asset-referenced tokens will generally need to obtain a special authorization for this activity, unless they can rely on one of the following exemptions:

• Where over a period of 12 months, the average outstanding value of all of asset-referenced tokens never exceeds EUR 5 000 000, or the equivalent amount in another currency, and the issuer is not linked to a network of issuers covered by this exemption; or
• Where the offer of the asset-referenced tokens is solely addressed to qualified investors and the asset-referenced tokens can only be held by such qualified investors.

For the purpose of authorization, prospective issuers of asset-referenced tokens will need to be legal entities incorporated in the EU and will need to meet a number of key prudential and organizational requirements. These include compliance with specific capital requirements (minimum capital in the amount of EUR 350 000, 2% of the daily average amount of the reserve assets over the preceding 6 months or a quarter of the fixed overheads of the preceding year – whichever is higher), as well as compliance with number of organizational, conduct and governance requirements.

Further, they will need to provide the NCA with a legal opinion confirming that the asset-referenced token does not qualify as a crypto-asset excluded from the scope of MiCA or an e-money token.

Once granted by the home NCA, authorization will be valid throughout the EU that shall enable issuers authorized in one EU Member State to offer their asset-referenced tokens to the public or seek admission to trading across the EU, without the need to obtain additional authorization from host NCAs.

Credit institutions looking to issue asset-referenced tokens will not need additional authorization but will be required to prepare a white paper and notify their home NCA at least 90 days before the initial issuance of the token.

Reserve assets

Issuers of asset-referenced tokens will need to comply with specific requirements on safeguarding and maintenance of reserve assets that stabilize the value of the tokens. To that end, issuers will need to constitute and maintain reserve assets that shall be adequately segregated (operationally and legally) from issuer’s own estate and other tokens (such as customer’s assets). Further, those issuers who offer two or more categories of asset-referenced tokens will be required to operate and maintain segregated pools of reserves of assets for each category of asset-referenced tokens. The reserve assets will need to be kept in custody with crypto custodians authorized under MiCA (crypto-assets) authorized investment firms (financial instruments) or credit institutions (all types of reserve assets).

Issuers of asset-referenced tokens that retain right to actively manage reserve assets will be able to invest them only in highly liquid financial instruments with minimal market, credit and concentration risk (i.e. the investments shall be capable of being liquidated rapidly with minimal adverse price effect).

That being said, it appears that in the light of recent scandals that have shaken up crypto-markets worldwide (e.g. Terra Luna collapse) the EU lawmakers have been more than keen to go an extra mile with the aim of providing additional safeguards that would ensure the true “stability” of stablecoins that are offered in the EU under the new regime.

Redemption rights

MiCA requires issuers of asset-referenced tokens to provide a permanent redemption right to their holders, that would entitle them to request from the issuer the redemption of the asset-referenced token at any moment. For the purpose of compliance with this requirement, issuers will generally have the possibility to redeem the issued asset-referenced tokens by either paying an amount of funds other than e-money equivalent to the market value of the assets referenced by the asset-referenced token to the holder, or by delivering the reserve assets that stabilize the value of the token.

This is a quite radical shift from the original MiCA draft published in September 2020 that originally left the possibility open for the issuers of asset-referenced tokens to decide on their own whether they would grant a redemption right to the token holders or not.

Reporting and control mechanism

Issuers of asset-referenced tokens with a value that exceeds EUR 100 million must on a quarterly basis provide their home NCAs with a report outlining: (a) number of token holders (b) the average aggregate value of the token and the size of the reserve of assets (d) the average number and value of transactions per day and (v) the estimated average number and value of transactions per day.

Where quarterly average number of value and transactions per day in an asset-referenced token exceeds 1 million transactions and EUR 200 million within a single currency area, the issuers will have to stop issuing the token and provide the NCA with a plan for the reduction of the aforementioned numbers within 40 working days. This plan will have to be approved by the NCA and any further issuance of the token would only be permitted if the average transactions fall below these thresholds following the implementation of the plan.

E-money tokens

License

Issuance of e-money tokens will be reserved solely for authorized credit institution (under CRD/CRR framework) and e-money institutions (under the Second E-Money Directive EMD2 framework).

The exemptions from the license obligation specified under EMD2 (like limited network exemption) will apply to issuers of e-money tokens as well. However, even in cases where an exemption applies the issuers will still be required to draw up a white paper in order to inform buyers about the characteristics and risks of the e-money tokens. Further, they will also be required to notify the crypto-asset white paper to the competent authority before its publication in accordance with new requirements under MiCA.

Safeguarding requirements

Issuers of e-money tokens will need to ensure that funds received in exchange for e-money tokens from investors are safeguarded in compliance with safeguarding requirements defined under the Second E-Money Directive (Directive 2009/110/EC).

Further, they will need to ensure that at least 30 % of the funds received is always deposited in separate accounts with credit institutions and that the remaining funds are invested in secure, low-risk and highly liquid financial instruments with minimal market risk, credit risk and concentration risk. The aforementioned highly liquid financial instruments must be denominated in the same official currency as the one referenced by the e-money token (e.g. US Treasury Bills for USD based e-money tokens).

Redemption right

Holders of e-money tokens will have a direct claim against the issuers and upon their request, issuers of e-money tokens will be required to redeem the tokens, at any time and at par value, by paying the holders the monetary value of the token in funds, other than electronic money.

Significant stablecoins

Given that certain asset-referenced tokens or e-money tokens could be used by a large number of holders and thereby could raise specific challenges in terms of financial stability, monetary policy transmission or monetary sovereignty their issuers will be subject to more onerous requirements than issuers of less significant stablecoins.

In relation to this sub-category of stablecoins (significant asset-referenced and e-money tokens), additional requirements will be applicable and they will be subject to special supervisory framework within which the European Banking Authority (EBA) will be granted with direct supervisory powers in relation to their issuers.

Issuers of significant asset-referenced tokens will be subject to additional requirements requiring them to establish designated remuneration and liquidity management policy and procedure, assess and monitor the liquidity needs to meet redemption requests by token holders and undertake liquidity stress testing as well as to maintain higher own funds.

E-money institutions that issue significant e-money tokens will be subject to additional requirements requiring them to comply with safeguarding requirements and meet own fund requirements applicable to issuers of significant asset-referenced tokens (instead of requirements under EMD2).

In the third part of our Series we will focus on the new authorization regime for crypto-assets service providers under MiCA.