Welcome back to our comprehensive exploration of the Markets in Crypto-assets (MiCA) regulation! If you've missed out on our earlier discussion, no worries, you can catch up on Part 1 right here.
We will focus more on asset-referenced tokens as we continue our journey through this vital regulatory framework. This segment will provide an in-depth understanding of more legal nuances associated with these tokens, their issuance, and the responsibilities of issuers, all under the scope of MiCA.
The Revocation of Authorization for Asset-Referenced Tokens Issuers
Under MiCA's framework, the authorization granted to issuers of asset-referenced tokens isn't perpetual and can be withdrawn under certain circumstances. This measure aims to maintain the crypto market's integrity and protect token holders' interests. Let's delve into the situations that can lead to the revocation of this authorization:
Inactivity: If the issuer hasn't conducted any business for six months straight or hasn't utilized its authorization for a year, the competent authority can withdraw the authorization.
Irregular Obtention: The authorization can be rescinded if the issuer acquired its authorization through improper methods, such as by providing false information in the application or the crypto-asset white paper.
Non-compliance: If the issuer no longer meets the conditions under which the authorization was given or if the issuer seriously breaches the provisions of this MiCA.
Redemption Plan: The authorization can be rescinded if the issuer has been subjected to a redemption plan.
Ceasing Operations: If the issuer voluntarily renounces its authorization or decides to cease operations.
Threat to Market Integrity: If the issuer's activities pose a significant risk to market integrity, financial stability, smooth operation of payment systems, or expose the issuer or the sector to severe money laundering and terrorist financing risks.
Moreover, if the European Central Bank (ECB) or the relevant central bank opines that the asset-referenced token poses a significant threat to the smooth operation of payment systems, monetary policy transmission, or monetary sovereignty, the competent authority can withdraw the issuer's authorization. The competent authorities also may limit the amount of asset-referenced tokens to be issued or set a minimum denomination amount for the asset-referenced token.
Indeed, the presence of asset-referenced tokens in financial systems can have significant implications for monetary policy and financial stability. For instance, if a token becomes widely adopted, it could influence the transmission mechanism of monetary policy or affect the functioning of payment systems. Moreover, in extreme cases, it could challenge the sovereignty of monetary policy if it starts replacing the national currency for a large number of transactions. Under the ECB or the relevant central bank opinion, the competent authority must either withdraw the issuer's authorization or impose restrictions to tackle such situations.
It signals a clear message that the era of free crypto-assets circulation ends, and now crypto projects shall co-exist with traditional financial structures on an unequal basis. This significant development shows that the EU is taking crypto-assets very seriously.
Modifying Crypto-Asset White Papers for Asset-Referenced Tokens
Issuers of asset-referenced tokens must notify their competent authority in the home Member State about any planned changes to their business model, which might significantly influence the decision-making of current or potential token holders. Such changes include (non-exclusive list):
Adjustments to governance arrangements, including reporting lines to the management body and risk management framework.
Alterations to the reserve assets and the custody of these assets.
Changes to the rights granted to asset-referenced token holders.
Modifications to the method of issuance and redemption of the asset-referenced tokens.
Updates to the transaction validation protocols for the asset-referenced tokens.
Changes to the functioning of the issuer's proprietary distributed ledger technology (where applicable).
Changes to mechanisms ensuring the liquidity of the asset-referenced tokens, including the liquidity management policy for issuers of significant asset-referenced tokens.
Modifications to arrangements with third-party entities regarding reserve asset management, investment of the reserve, custody of reserve assets, and the distribution of tokens to the public (if applicable).
Changes to the complaints-handling procedures.
Updates to the risk assessment for money laundering and terrorist financing and related policies and procedures.
These planned changes must be notified to the competent authority 30 working days before they are due to take effect.
Once any such change is notified, the issuer must then draft a modified crypto-asset white paper, maintaining the consistency of information order with the original white paper. This draft must then be notified to the competent authority of the issuer's home Member State.
Upon receipt, the authority must electronically acknowledge the receipt within five working days and approve or refuse the modified white paper within 30 working days from the acknowledgment of receipt. During the examination period, the competent authority may request additional information, explanations, or justifications concerning the draft.
Liability of Issuers of Asset-Referenced Tokens for the Information Provided in a Crypto-Asset White Paper
Issuers of asset-referenced tokens are legally responsible for the accuracy and clarity of information provided in their crypto-asset white papers, including any modified versions.
Here are the key points:
If an issuer provides incomplete, unfair, unclear, or misleading information in its crypto-asset white paper, they and their administrative, management, or supervisory body members are liable for any loss incurred due to this infringement. This liability applies to a holder of the asset-referenced tokens who has suffered the loss.
Any attempt to exclude or limit this civil liability through contractual arrangements will be rendered legally ineffective. This rule ensures that issuers cannot evade their responsibilities to provide accurate and clear information.
The burden of proof in such cases rests with the token holder. They must present evidence indicating issuers violation by providing incomplete, unfair, unclear, or misleading information, and that this information influenced the token holder's decision to purchase, sell, or exchange the asset-referenced tokens.
However, issuers and their administrative, management, or supervisory body members are not liable for losses from reliance on a white paper summary, including any translations of it. The exceptions to this are if the summary is misleading, inaccurate, or inconsistent when read alongside the other parts of the crypto-asset white paper or if it does not provide key information that would help prospective holders decide whether to purchase the asset-referenced tokens when read in conjunction with the rest of the white paper.
Lastly, the issuer may also be held accountable under specific national laws in addition to the liabilities stated in MiCA.
Issuers' Obligations and Publication of the Crypto-Asset White Paper
MiCA legislation outlines specific standards of conduct that issuers of asset-referenced tokens must adhere to and sets rules for publishing the crypto-asset white paper.
Obligation to Act Honestly, Fairly, and Professionally:
Issuers are obligated to act honestly, fairly, and professionally. Their communication with current and potential holders of asset-referenced tokens should always be clear, fair, and not misleading.
The best interests of the token holders must be at the heart of the issuers' actions. This means that issuers should prioritize the holders' interests over their own or other competing interests.
All token holders should be treated equally. However, there might be instances where certain holders receive preferential treatment. If that's the case, this must be disclosed in the crypto-asset white paper and, where applicable, in marketing communications.
Publication of the Crypto-Asset White Paper:
Approved crypto-asset white paper and modified versions should be published on the issuer's website.
The crypto-asset white paper must be publicly accessible by the start date of the asset-referenced token's public offer, the asset-referenced token, or the token's admission to trading.
The approved crypto-asset white paper and, where applicable, the modified version should remain available on the issuer's website as long as the public holds the asset-referenced token.
Marketing Communications, Ongoing Information, and Complaints-handling Procedures
Requirements for marketing communications:
These communications must be readily identifiable as marketing material, and their content should be fair, clear, and not misleading.
They must align with the information presented in the crypto-asset white paper.
They should state that a crypto-asset white paper has been published, providing the issuer's website address, telephone number, and email for contact.
A clear statement must be included indicating that token holders can redeem their tokens from the issuer at any time.
Any modifications to marketing communications should be published on the issuer's website.
Marketing communications must be provided to competent authorities upon request. No marketing communication should be disseminated before the publication of the crypto-asset white paper, though this doesn't affect the issuer's ability to conduct market soundings.
For the continuous provision of information to token holders:
Issuers should publicly disclose on their website, clearly, accurately, and transparently, the number of asset-referenced tokens in circulation, and the value and composition of the reserve assets.
They should publish a summary of the audit report related to the reserve of assets and the full, unedited audit report on their website as soon as possible.
Any event that could significantly impact the value of the tokens or the reserve of assets should be disclosed promptly and transparently on the issuer's website.
Regarding the handling of complaints:
Issuers should establish and maintain effective and transparent procedures for addressing complaints from token holders and other interested parties, including consumer associations representing token holders.
If tokens are distributed partially or entirely by third-party entities, issuers should also facilitate handling complaints between token holders and these entities.
Token holders should be able to lodge complaints with the issuers or, where applicable, with third-party entities free of charge.
Issuers and, where applicable, third-party entities should develop a template for filing complaints and keep a record of all received complaints and the actions taken in response.
Issuers should investigate all complaints promptly and fairly and communicate the results of these investigations to token holders within a reasonable period.
Conflicts of Interest
Issuers must set up and maintain policies and procedures to identify, prevent, manage, and disclose conflicts of interest. These conflicts of interest may arise between the issuer and any of the following parties:
Their shareholders or members.
Any direct or indirect shareholder or member with a significant holding in the issuers.
The members of their management body.
Their employees.
The holders of asset-referenced tokens.
Third party entities for operating the reserve of assets, and for the investment of the reserve assets, the custody of the reserve assets and, where applicable, the distribution of the asset-referenced tokens to the public.
Regarding disclosure, issuers must clearly display the general nature and sources of these conflicts of interest on their website and the steps taken to mitigate them. This disclosure should be detailed enough to enable prospective token holders to make an informed decision about purchasing the asset-referenced tokens.
Governance Arrangements
MiCA stipulates the governance arrangements for issuers of asset-referenced tokens, covering a wide range of responsibilities. Key points to note are:
Issuers must have robust governance structures, including a clear organizational structure with well-defined and transparent lines of responsibility. They should also have effective procedures to identify, manage, monitor, and report risks, alongside sound administrative and accounting procedures.
The management body members must have a good reputation and possess appropriate knowledge, skills, and experience. They should not have any criminal records related to money laundering, terrorist financing, or any other offenses that could tarnish their reputation. They should also be able to commit enough time to their duties effectively.
The management body should regularly assess and review the effectiveness of the policy arrangements and procedures.
Shareholders or members with significant holdings in the issuers should also have a good reputation.
Issuers must adopt policies and procedures to ensure compliance with MiCA. These should include policies and procedures on:
Reserve of assets
Custody of the reserve assets
Rights granted to token holders
Issuance and redemption of tokens
Transaction validation protocols
Functioning of the issuer's proprietary distributed ledger technology
Ensuring the liquidity of tokens
Arrangements with third-party entities for operating the reserve of assets
Issuers' consent given to others that might offer or seek admission to trading the tokens
Handling of complaints
Conflicts of interest
The issuer must have appropriate and proportionate systems, resources, and procedures to ensure their services' regular performance and safeguard data availability, authenticity, integrity, and confidentiality. If an issuer discontinues its services and activities, it must submit a plan to the competent authority for approval.
Lastly, issuers must ensure regular audits by independent auditors, with the audit results being communicated to the issuer's management body and made available to the competent authority.
Own Funds Requirements
Issuers of asset-referenced tokens must maintain own funds that are at least equal to the highest of the following:
€350,000.
2% of the average amount of the reserve of assets over the preceding six months.
A quarter of the fixed overheads from the preceding year.
If an issuer offers more than one type of asset-referenced token, the own funds should represent the sum of the average amount of the reserve assets backing each token.
The own funds should consist of the Common Equity Tier 1 items and instruments, as referred to in Regulation (EU) No 575/2013, with full deductions applied.
The competent authority in the issuer's home country may require the issuer to hold up to 20% more own funds than calculated by the rules mentioned earlier if assessments indicate a higher risk. The evaluation of risk can be based on factors such as the issuer's risk management processes, the quality, and volatility of the reserve assets, the rights granted to token holders, investment policy risks, the value and number of transactions settled in the token, the importance of the markets where the token is offered, and the market capitalization of the token.
Issuers must conduct regular stress tests considering severe financial and non-financial stress scenarios. The competent authority may require the issuer to hold between 20% and 40% more own funds depending on the results.
The European Banking Authority (EBA), in cooperation with the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB), is tasked with developing regulatory standards to specify the procedures for adjusting to higher own funds requirements, the criteria for requiring a higher amount of own funds, and the minimum requirements for the design of stress testing programs.
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We've now reached the conclusion of our in-depth exploration of the MiCA regulation concerning asset-referenced tokens. We hope this breakdown has made these complex legal provisions more understandable and accessible.
In case you missed it, here's a link to the first part of our analysis on asset-referenced tokens under MiCA. And stay tuned because we're just getting started! In the next part of our series, we will delve into more intricate details and nuances of MiCA, continuing our journey through this critical regulation.
Understanding regulations like MiCA is essential for anyone involved in the crypto asset industry. However, these texts can be dense and difficult to navigate, which is where we come in. We're here to help you make sense of these regulations and ensure that you understand the implications for your business or investment decisions. We're your reliable partner in navigating the complex landscape of crypto asset legislation.
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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