Welcome back to our deep dive series exploring the diverse landscape of the Markets in Crypto-Assets Regulation (MiCA). Previously, we delved into the complexities of Asset-Referenced Tokens (ARTs), their classifications, and the unique responsibilities issuers bear under MiCA. If you haven't had the chance to read those articles yet, we recommend starting with them to fully understand the context (Part 1, Part 2, Part 3, and Part 4).
Today, we focus on another exciting facet of MiCA – E-money Tokens (EMTs). These instruments are transforming the digital financial landscape by leveraging the potential of blockchain technology while maintaining regulatory compliance. This article aims to demystify the regulations around EMTs and provide a comprehensive understanding of what it entails to issue and manage these digital tokens under MiCA.
Whether you're an issuer looking to delve into this dynamic world or a curious observer eager to grasp the nuances of digital finance regulations, you're in the right place. Let's dive in.
Requirements for the Offer to the Public or Admission to Trading of E-money Tokens (Article 48)
The entity making the offer or seeking to trade an EMT in the EU must be the issuer of this EMT. In addition, the issuer:
Must be authorized as a credit institution or an electronic money institution.
Has to prepare a crypto-asset white paper, notify the competent authority of it, and make it public (below in detail).
If the issuer provides written consent, other entities can also offer or seek to trade its EMT. These entities must comply with Articles 50 (Prohibition of granting interest) and 53 (Marketing communications) of MiCA.
For regulatory purposes, EMTs are treated as electronic money. If an EMT references an official currency of an EU Member State, it is considered as being offered to the public in the Union.
If an issuer intends to offer EMTs to the public or seek their admission to trading, they must notify their competent authority of their intentions 40 working days before the planned date.
Even if exempted under the particular circumstances (below in detail), issuers must prepare a crypto-asset white paper and notify the competent authority.
Deep Dive: E-Money Directive Exemptions
Let's look at the exemption stipulated under Article 9(1) of Directive 2009/110/EC and how it interacts with MiCA's requirements to EMTs.
Article 9(1) of the E-Money Directive gives Member States the discretion to relax certain requirements for institutions dealing with electronic money under specific circumstances:
The total business activities of the institution must generate an average outstanding electronic money amount that doesn't exceed a limit set by the Member State, but in no case should it surpass EUR 5,000,000.
None of the natural persons responsible for managing or operating the business have been convicted of offenses related to money laundering, terrorist financing, or other financial crimes.
What does this mean in the context of MiCA? MiCA Article 48(1) sets forth the requirements (mentioned above here) for any person or entity intending to offer E-money tokens (EMTs) to the public or seeking admission to trading in the EU. However, issuers of EMTs who fall under the exemption as per Article 9(1) of the E-Money Directive are not required to comply with those MiCA's requirements in Article 48.
In simple terms, if an issuer qualifies for the exemption under the E-Money Directive, such issuers do not need to be authorized as a credit institution or electronic money institution, nor are they required to notify and publish a crypto-asset white paper to offer or trade EMTs.
Application of The Electronic Money Directive to EMTs: A Closer Look
MiCA's regulations concerning EMTs do not apply to EMTs exempt under Articles 1(4) and (5) of the Electronic Money Directive. Let's examine these exemptions:
Article 1(4) of the Electronic Money Directive states that the Directive does not apply to the monetary value stored on exempted instruments that can be used to acquire goods or services either within a limited network of service providers or for a limited range of goods or services. This typically includes store gift cards or loyalty points redeemable only within the issuer's network.
Article 1(5) of the Electronic Money Directive specifies that it does not apply to the monetary value used for payment transactions made through telecommunication, digital, or IT devices, where the purchased goods or services are delivered to and used through the same type of device. However, this exemption is valid only when the telecommunication, digital, or IT operator does not act only as an intermediary between the payment service user and the goods or services supplier.
So, if EMTs fall under these exemptions, they're not bound by most of MiCA's regulations regarding ETMs. However, there are two exceptions to this: Paragraph 7 of Article 48 and Article 51, which discuss the content and form of the crypto-asset white paper for e-money tokens, still apply to these EMTs.
Issuance and Redeemability of E-money Tokens
Article 49 of MiCA centers around the issuance and redeemability of e-money tokens (EMTs). It presents certain regulations that deviate from the stipulations in Article 11 of the Electronic Money Directive (Directive 2009/110/EC) exclusively for the issuance and redeemability of EMTs:
Claim Rights: EMT holders are granted a claim right against the issuers of those EMTs.
Issuance At Par Value: Issuers of EMTs must issue these tokens at par value upon receiving funds. Par value, in this context, means that the face value of the EMT must equal the amount paid to acquire it.
Redeemability At Par Value: The issuer must redeem EMTs at any time and at par value upon the holder's request. Redemption refers to exchanging your EMTs for traditional funds, other than electronic money.
Redemption Conditions: The conditions for redemption must be prominently mentioned in the crypto-asset white paper. This makes the redemption process transparent to EMT holders, ensuring they are fully informed about the terms of redeeming their EMTs.
No Redemption Fee: Lastly, redeeming EMTs must not be subject to any fee.
No Interest on E-money Tokens
Looking closely at Article 50 of the Markets in Crypto-Assets (MiCA) regulation, we can better understand the rules relating to granting interest on e-money tokens (EMTs). In contrast to Article 12 of the Electronic Money Directive (Directive 2009/110/EC), this article stipulates specific prohibitions for EMT issuers and crypto-asset service providers.
No Interest from EMT Issuers: In the first place, issuers of EMTs are expressly forbidden from granting interest related to EMTs.
No Interest from Crypto-Asset Service Providers: Similarly, crypto-asset service providers, the entities that offer services related to crypto-assets, including EMTs, are also barred from offering interest when providing these services.
Definition of Interest: For clarity, Article 50 goes a step further to define what would be considered as 'interest'. Under this provision, any remuneration or benefit related to the length of time a holder keeps an EMT is classified as interest. This could include net compensation or discounts that have an effect equivalent to that of interest. It could come directly from the issuer or third parties and might be directly associated with the EMT or from the remuneration or pricing of other products.
The Crypto-Asset White Paper for E-Money Tokens
Article 51 of MiCA regulation highlights the content and structure a crypto-asset white paper for e-money tokens (EMTs) must follow. This document is crucial as it provides potential holders with information about the EMT, the issuer, and the technology behind it. The details required in the white paper include:
Information about the issuer: The issuer's details and its background should be clearly mentioned.
About the EMT: Information regarding the EMT should be provided, including its functionalities and mechanisms.
Public offer details: Clear and comprehensive data about the EMT's public offer and potential trading should be present.
Rights and obligations: The white paper should detail the rights and obligations of holding the EMT.
Underlying technology: It should also explain the technology supporting the EMT.
Risk factors: Details about potential risks associated with the EMT should be given.
Environmental impacts: The white paper should identify any significant adverse environmental impacts related to the consensus mechanism to issue the EMT.
The paper also must identify any other party offering the EMT to the public or seeking its trading, along with the reason for their involvement.
Fairness and clarity are essential in the white paper. All information must be truthful, clear, and not misleading. There should be no material omissions, and the information should be presented concisely.
A prominent statement must appear on the first page, stating that any competent authority in the EU hasn't approved the paper and that the issuer is solely responsible for its content.
In addition, the document should contain explicit warnings that the EMT isn't covered by investor compensation schemes or deposit guarantee schemes under EU directives.
The white paper should also include a statement from the issuer's management body confirming that the document complies with MiCA and that, to their best knowledge, the information presented is complete, fair, and not misleading. A summary written in non-technical language, providing key information about the public offer or trading of the EMT, should be inserted after the management statement. This summary should be understandable, comprehensive, and laid out clearly, with a warning that decisions to purchase should be based on the entire white paper. A table of contents, date of its notification, and details about redemption conditions should also be included in the white paper.
The document should be prepared in the official language of the home Member State or a language customary in the sphere of international finance. If the EMT is also offered in another Member State, the white paper must be prepared in that state's official or financial language.
The white paper must be available in a machine-readable format, and the European Securities and Markets Authority (ESMA), in cooperation with the European Banking Authority (EBA), is tasked with developing standard forms and formats.
Before the public offer or seeking admission to trading, the issuer should publish the white paper on its website and notify its competent authority at least 20 working days before its publication.
It's important to remember that any significant new information or changes capable of affecting the assessment of the EMT should be reflected in a modified white paper, which should be notified to the authorities and published on the issuer's website.
Liability of Issuers of E-Money Tokens
Article 52 of the MiCA regulation addresses the responsibility and potential liability of issuers of e-money tokens (EMTs) concerning the information provided in a crypto-asset white paper. Here's a simplified breakdown:
Issuer Liability: If an EMT issuer violates Article 51, by providing incomplete, unfair, unclear, or misleading information in the crypto-asset white paper or a modified version, both the issuer and the members of its administrative, management, or supervisory body are accountable to the EMT holder for any loss arising from this violation.
Limitations on Liability: Any contractual conditions that seek to exclude or limit this civil liability won't have any legal effect. It implies that an issuer cannot limit or avoid their liability for the information provided in the white paper through any contractual agreements with the token holders.
Evidence: The burden of proof is on the EMT holder. They need to provide evidence indicating that the issuer violated Article 51 by giving incomplete, unfair, unclear, or misleading information and that the holder's decision to buy, sell, or exchange the EMT was influenced by this information.
Summary Information Liability: The issuer and its officials are not liable for losses suffered due to reliance on the information provided in a summary, including any translations, unless the summary is misleading, inaccurate, or inconsistent when read along with the other parts of the white paper or does not provide key information to assist prospective holders when deciding whether to buy the EMT.
National Law: This article does not affect any other civil liability applicable under national law.
Marketing Communications for E-Money Tokens
Article 53 of the MiCA regulation presents rules regarding marketing communications related to e-money tokens (EMTs). It ensures clarity, fairness, and consistency in marketing practices.
Requirements for Marketing Communications: Any marketing communication related to an offer to the public or the trading of EMTs must adhere to specific requirements:
The marketing communication must be identifiable as a promotional activity.
The information contained in the marketing communication must be fair, clear, and not misleading to the public.
The details in the marketing communication must be consistent with the information presented in the crypto-asset white paper, the document outlining the issuer's plan for the digital asset.
The marketing communication must also clearly state that a crypto-asset white paper has been published and provide the issuer's website address, a contact telephone number, and an email address.
Right of Redemption Statement: All marketing communications must include an explicit statement that EMT holders have the right to redeem their tokens against the issuer at any time and at the tokens' face value.
Publication of Marketing Communications: All marketing communications, including any modifications, should be published on the issuer's official website.
Approval by Authorities: Competent authorities are not required to pre-approve marketing communications before publication.
Notification to Authorities: However, issuers must be prepared to provide their marketing communications to competent authorities upon request.
Timing of Dissemination: Marketing communications cannot be disseminated before the publication of the crypto-asset white paper. This restriction ensures potential investors can access the full white paper information before encountering promotional materials. This rule does not prevent issuers from conducting market soundings - gathering information on the interest of potential investors.
Investment of Funds Received in Exchange for E-Money Tokens
Article 54 of MiCA provides guidelines on how issuers of e-money tokens (EMTs) should manage and invest the funds they receive in exchange for their tokens.
Funds Safeguarding: In line with Article 7(1) of Directive 2009/110/EC (the E-Money Directive), all funds received in exchange for EMTs must be safeguarded. This means that these funds must be protected and kept separate from other funds of the EMT issuer, ensuring they're readily available for redemption.
Minimum Deposit Requirement: At least 30% of the received funds must be deposited into separate accounts in credit institutions. This provision ensures a portion of the funds is always readily available and is kept safe in a regulated institution.
Investment of Remaining Funds: The remaining funds (i.e., 70% or less) should be invested in secure, low-risk assets. These assets should be:
Highly liquid, meaning they can easily be sold or exchanged for cash without causing a significant change in their price.
Carry minimal market, credit, and concentration risks, indicating they have a low chance of decreasing in value and do not focus the investments too heavily in one area.
Denominated in the same official currency as the one referenced by the EMT.
Wrapping Up Part One: Navigating E-Money Tokens
We've just concluded the first installment of our guide on understanding e-money tokens under MiCA. The intricacies of this new legislation may be complex, but with each article, we aim to bring clarity and insight into this evolving landscape of digital finance.
At Prokopiev Law Group, we pride ourselves on staying ahead of the curve in digital asset regulation. Our team keenly monitors the latest developments and is prepared to guide you through each step of your digital asset journey.
Do you have questions or need assistance with a specific issue? Don't hesitate to reach out to us. We are eager to support you. Stay tuned for Part Two of our series on e-money tokens, where we'll continue our journey through the MiCA's provisions. Thank you for joining us in this first stage of the journey. Together, we're decoding the future of digital finance.
DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.
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