The Markets in Crypto-Assets (MiCA) regulation is poised to bring far-reaching changes to the European Union's crypto-asset markets. This comprehensive framework aims to create a harmonized environment for issuing, offering, and providing services related to crypto-assets across the Union. In this article, we delve into one particular category of crypto-assets under MiCA—Asset-Referenced Tokens (ARTs)—and analyze the key regulatory provisions and their implications for issuers and service providers.
Authorization for Asset-Referenced Tokens
Only issuers of an asset-referenced token may bring it to market or seek its listing for trading within the EU. They must satisfy one of two conditions:
First, they could be a legally recognized entity or another type of enterprise that has been established in the EU and holds authorization in line with Article 21 from their home Member State's competent authority.
Alternatively, they could be a credit institution that adheres to the provisions of Article 17 of MiCA.
The text of Article 16 also carves out a notable exception. With the token issuer's written consent, other individuals or entities can offer the asset-referenced token to the public or attempt to get it listed for trading. But they must ensure compliance with Articles 27 (Obligation to act honestly, fairly and professionally), 29 (Marketing communications requirements), and 40 (Prohibition of granting interest) of MiCA.
MiCA takes an inclusive approach, granting 'other undertakings' the ability to issue asset-referenced tokens. However, depending on their legal form, they must offer a similar level of protection to third-party interests as legal entities and be subject to a similar level of prudential supervision.
An issuer may not seek authorization if the average outstanding value of the token issued by an issuer doesn't surpass EUR 5 million (or an equivalent amount in another official currency) over 12 months, and the issuer is not connected to a network of other exempt issuers. Additionally, if the asset-referenced token is exclusively offered to, and can only be held by, qualified investors. However, even in these cases, issuers must still produce a crypto-asset white paper in compliance with Article 19 and submit it to the competent authority in their home Member State.
An essential point to note is that the authorization granted to a person under this Article is recognized throughout the Union, allowing the issuer to offer their asset-referenced token across all Member States.
Applying for Authorization of Asset-Referenced Tokens
Article 18 of MiCA is the go-to guide for legal entities or other undertakings intending to introduce asset-referenced tokens to the public or seek their admission for trading. It starts by detailing the requirement for entities to submit an authorization application, as stipulated in Article 16, to their home Member State's competent authority. The application should include the following information:
Applicant issuer's address and legal entity identifier.
Applicant issuer's articles of association, if applicable.
A program of operations outlining the intended business model.
A legal opinion confirming that the asset-referenced token is neither a crypto-asset excluded from the scope of the regulation nor an e-money token.
A comprehensive description of the applicant issuer's governance arrangements.
If applicable, the internal control mechanisms and procedures, particularly those concerning money laundering and terrorist financing prevention, in cooperation with specific crypto-asset service providers.
Identify the applicant issuer's management body members, with proof of their good repute and appropriate management skills.
Proof of good repute of any direct or indirect shareholder or member with a qualifying holding in the applicant issuer.
A crypto-asset white paper as per Article 19.
Policies and procedures related to the issuer's operations.
Description of contractual arrangements with third-party entities.
Applicant issuer's business continuity policy.
The internal control mechanisms and risk management procedures.
Systems and procedures to ensure data availability, authenticity, integrity, and confidentiality.
Applicant issuer's complaints-handling procedures.
If applicable, a list of host Member States where the asset-referenced token is intended to be offered or for trading admission.
If an issuer has already been authorized for one asset-referenced token, they need not re-submit information for another token. However, they must confirm that the non-resubmitted information remains up-to-date.
To support the application, the issuer must provide proof of absence of criminal records or penalties related to commercial law, insolvency law, financial services law, anti-money laundering, counter-terrorist financing, fraud, or professional liability for all members of the management body and shareholders with qualifying holdings.
Further, the European Banking Authority (EBA), in collaboration with the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB), is tasked with developing regulatory technical standards to specify the information required in the application, as well as implementing technical standards to standardize forms, templates, and procedures for uniformity across the Union.
White Paper
Article 19 of MiCA provides clear guidelines on the content and form of a crypto-asset white paper when it comes to asset-referenced tokens. Here's a simplified breakdown of what it entails:
A crypto-asset white paper must contain detailed information about the following:
The issuer of the asset-referenced token.
The asset-referenced token itself.
The public offering or trading of the asset-referenced token.
The rights and obligations attached to the asset-referenced token.
The underlying technology used.
The risks associated with the asset-referenced token.
The reserve of assets.
Any adverse impacts on the climate or environment caused by the consensus mechanism used to issue the token.
If someone other than the issuer is offering the token or seeking its admission to trading, their identity and the reasons for their involvement.
All this information must be fair, clear, not misleading, and should not contain any material omissions. It should also be presented in a concise and comprehensible manner.
The white paper must explicitly state that the asset-referenced token may lose value, may not always be transferable, may lack liquidity, and is not covered by investor compensation or deposit guarantee schemes under certain EU directives.
It should also include a confirmation from the issuer's management body that the white paper complies with the legal requirements and is accurate to the best of their knowledge.
The white paper should have a summary that briefly explains key information in non-technical language to help prospective holders make informed decisions. It must also carry warnings about relying solely on the summary and the nature of the offer.
It should also mention the date of its notification and include a table of contents. It should be made available in an official language of the home Member State or in a language customary in international finance. In case the token is also offered in another Member State, it must be made available in the official language of that state too. The white paper should be available in a machine-readable format.
ESMA (European Securities and Markets Authority), in cooperation with EBA (European Banking Authority), will develop standard forms, formats, and templates for the white paper. ESMA will also develop regulatory technical standards on the content, methodologies, and presentation of information about sustainability indicators concerning adverse impacts on the climate and other environment-related adverse impacts. This is to take into account the different types of consensus mechanisms used, their incentive structures, the use of energy and natural resources, waste production, and greenhouse gas emissions.
Granting or Refusing Authorization
Article 21 of MiCA outlines the process for granting or refusing authorization to an applicant issuer. Here's a summary of its key points:
The competent authorities must make a fully reasoned decision to grant or deny authorization to an applicant issuer within 25 working days of receiving opinions EBA and ESMA, if applicable (as specified in Article 20(5)). They must notify the applicant issuer of this decision within five working days.
If the applicant issuer is authorized, their crypto-asset white paper is automatically approved.
The competent authorities must refuse authorization if there are objective and demonstrable grounds for the following:
The applicant issuer's management body may threaten its effective, sound, and prudent management, its business continuity, or the consideration of its clients' interests and market integrity.
The management body members do not meet the criteria specified in Article 34(2).
Shareholders and members with qualifying holdings do not meet the good reputation criteria set out in Article 34(4).
The applicant issuer fails to meet or is likely to fail to meet any of the requirements under MiCA.
The applicant issuer's business model seriously threatens market integrity, financial stability, and smooth operation of payment systems or exposes the issuer or the sector to significant risks of money laundering and terrorist financing.
The competent authorities must also refuse authorization if the European Central Bank (ECB) or the applicable central bank gives a negative opinion based on the "risk posed to the smooth operation of payment systems, monetary policy transmission, or monetary sovereignty."
Reporting Requirements
If an organization issues tokens worth more than 100 million Euros, it must report certain information every three months to the relevant authority. This information includes:
How many people hold the token.
The value of the tokens issued and the size of the reserve assets.
The daily average of transactions, both in terms of number and total value during the quarter.
An estimate of the daily average of transactions that are related to the token being used as an exchange medium within a single currency area.
In this context, "transaction" means any change in who has the right to the asset-referenced token resulting from the transfer of the token from one digital ledger account to another. Transactions that involve exchanging the token for funds or other crypto-assets with the issuing organization or a crypto-asset service provider aren't considered as use of the token as a medium of exchange unless there's evidence that the token is being used to settle transactions in other crypto-assets.
If an organization issues tokens worth less than 100 million Euros, the relevant authority can still require it to comply with these reporting requirements.
Service providers dealing with asset-referenced tokens must give the issuer the information they need to prepare the report. This includes information on transactions that occur outside the digital ledger.
The ECB and other central banks may provide their own estimates of the average daily number and total value of transactions related to the use of the token as an exchange medium within a single currency area.
The European Banking Authority (EBA), working closely with the ECB, will create draft regulatory technical standards. These standards will detail how to estimate the average daily number and total value of transactions that use the token as an exchange medium within a single currency area. The EBA will also develop draft implementing technical standards. These will set out standard forms, formats, and templates for the reporting and information provision.
Restrictions
Article 23 of MiCA introduces restrictions on the issuance of asset-referenced tokens that are widely used as a means of exchange.
If the average daily number and value of transactions for an asset-referenced token within a single currency area exceed 1 million transactions and 200 million Euros respectively, over a quarterly period, the issuer must take action. Specifically, they must:
Cease issuing that particular asset-referenced token.
Within 40 working days of reaching the threshold, submit a plan to the competent authority outlining how they will keep the average daily number and value of transactions below the specified limits.
The competent authority determines whether the threshold has been reached by using the highest figures from either the information provided by the issuer, their own estimates, or estimates provided by the European Central Bank (ECB) or another applicable central bank.
In cases where multiple issuers issue the same asset-referenced token, the competent authority assesses whether the threshold is reached by aggregating data from all issuers.
The plan submitted by the issuer to the competent authority must be approved. If necessary, the competent authority can require changes to the plan, such as setting a minimum denomination amount, to ensure a timely decrease in the token's use as a means of exchange.
The competent authority will only allow the issuer to resume issuing the asset-referenced token when there is evidence that the average daily number and value of transactions within a single currency area is below 1 million transactions and 200 million Euros, respectively, over a quarterly period.
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This concludes Part 1 of our asset-referenced tokens analysis under the Markets in Crypto-Assets (MiCA) regulation. We've broken down some complex legal provisions into more digestible information, but the journey continues. In the upcoming Part 2, we'll continue to delve deeper into more details to help you better understand this comprehensive legal framework.
Remember, staying informed is key in navigating the dynamic landscape of crypto-assets. So, please tune in for our next installment to keep yourself ahead of the curve in this rapidly evolving field. Until then, continue exploring, learning, and growing in the world of digital assets!
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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