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Source: US Global Legal Monitor

(Oct. 6, 2020) On September 24, 2020, the European Commission published a legislative proposal on markets in crypto-assets (MICA), which would regulate crypto-assets that fall outside the scope of current European Union (EU) financial market regulation. In addition, it includes special rules for stablecoins, meaning crypto-assets that are designed to maintain a stable value by referencing one or several assets. If adopted, MICA will replace existing regulatory frameworks applicable to crypto-assets in the EU member states. It builds on advice received from the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA).

The proposal is part of the Commission’s Digital Finance Package, which includes a Digital Finance Strategy, a Retail Payments Strategy, a proposal for a regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT), a proposal for a regulation on digital operational resilience, and a proposal to clarify or amend certain related EU financial services rules.

A European Union (EU) regulation is directly applicable in the EU member states once it enters into force and does not need to be transposed into national law. (Consolidated Version of the Treaty on the Functioning of the European Union (TFEU) art. 288, para. 2.)

Content of the Proposal

Definitions and Scope

MICA covers crypto-assets that do not fall under current EU financial market regulation. Special rules are established for asset-referenced token and e-money token, also referred to as stablecoins. Crypto-assets that qualify as “financial instruments,” “deposits,” or “structured deposits” remain subject to existing financial market law, in particular the Markets in Financial Instruments Directive (MiFID II). Crypto-assets issued by central banks or other public authorities and services related to crypto-assets provided by them are exempt from the scope of MICA. (MICA, art. 2.)

Crypto-assets are defined as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” Asset-referenced token means “a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets.” An e-money token is defined as “a type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender.” (Art. 3, para. 1(2)-(4).) The European Commission is authorized to adopt delegated acts to specify some of the technical elements of the definitions and to adjust them to market and technological developments. (Art. 3, para. 2.)

Obligations of Crypto-Asset Issuers

Issuers of crypto-assets, other than stablecoins, that would like to offer and market their products to the public, or that seek an admission of such crypto-assets  on a trading platform, are obligated to draw up a crypto-asset white paper, inform the competent authority of the white paper and its content 20 working days before publication, and subsequently publish it on their website. In addition, they must be established as a legal entity in the EU. Small offers of crypto-assets, meaning offers below €1 million (about US$1.2 million) in a 12-month period or those targeting fewer than 150 persons per EU member state, and offers targeting institutional investors, are exempt from this requirement, among others. (Arts. 4, 7, 8.)

The white paper must have a summary introduction in non-technical language. The body of the white paper must contain

  • detailed information on the issuer and a presentation of the main participants involved in the project’s design and development;
  • a detailed description of the issuer’s project, the type of crypto-asset, the reasons why the crypto-assets will be offered to the public or why admission to trading is sought, and the planned use of the fiat currency or other crypto-assets collected via the offer to the public;
  • a detailed description of the characteristics of the offer to the public;
  • a detailed description of the rights and obligations attached to the crypto-assets and the procedures and conditions for exercising those rights;
  • information on the underlying technology and standards applied by the issuer of the crypto-assets allowing for the holding, storing, and transfer of those crypto-assets;
  • a detailed description of the risks relating to the issuer of the crypto-assets, the crypto-assets, the offer to the public of the crypto-asset, and the implementation of the project;
  • disclosure items specified in Annex I. (Art. 5.)

The above information must be fair, clear, and not misleading. In addition, issuers must warn of certain risks attached to the crypto-assets, such as that they may lose their value in part or full. (Art. 5, paras. 2, 5.) The white paper must be amended if there are any changes or new facts that are likely to have a significant influence on the purchase decision. Such a modification must be immediately announced on the website. (Art. 11.) Issuers may be held civilly liable for damages for not complying with these requirements. (Art. 14.) National competent authorities must provide for administrative sanctions. (Art. 92.)

Furthermore, crypto-asset issuers must adhere to professional integrity requirements. (Art. 13.) MICA also contains special rules for the authorization as a crypto-asset service provider, their obligations, including prudential and organizational requirements, and their acquisition. Authorized crypto-asset service providers are registered in a publicly available register kept by ESMA. (Arts. 53-75.)

Special Rules for Issuers of Asset-Referenced Token

Issuers of asset-referenced tokens must get authorization from the competent national authority to offer such tokens to the public or to trade on a trading platform. Small issuers or offers targeting qualified investors are exempted from this requirement. EBA, ESMA, the European Central Bank and, where applicable, a central bank of the member state where the issuer is established, must issue within two months after having received the draft decision from the national competent authority and the application file a non-binding opinion on the application. (Arts. 15, 16, 18, 19.)

The issuer must publish a white paper as outlined above; however, additional information must be added, such as a description of the issuer’s governance arrangements, reserve assets, including their custody arrangement and investment policy, the nature and enforceability of rights of holders of the token, and information on the complaint handling procedure. (Arts. 4, 17.)

In addition, issuers must have reserve assets and own funds consisting of the Common Equity tier 1 items equal to an amount of at least the higher of €350,000 (about US$411,000) or 2% of the average amount of the reserve assets. National authorities may require issuers to hold up to 20% more own funds. Reserve assets may only be invested in highly liquid financial instruments with minimal market and credit risk. (Arts. 31-34.)

In addition, there are special rules on the acquisition of such issuers and for their orderly wind-down. (Arts. 37, 38, 42.)

Special Rules for E-Money Token Issuers

Issuers of e-money tokens must get authorization from the competent national authority either as a credit institution or as an electronic money institution to offer such tokens to the public or to trade on a trading platform. They must comply with all requirements applicable to electronic money institutions unless stated otherwise in MICA, and publish a white paper. Small issuers of e-money tokens held by qualified investors are exempt from these requirements. (Arts. 43, 46.)

Enhanced Rules for Significant Stablecoins

Asset-referenced tokens and e-money tokens that are designated by EBA as “significant” are subject to enhanced obligations and supervision by EBA. EBA must classify stablecoins as significant based on an assessment of the following criteria, where at least three are met:

  • the size of the customer base of the promoters of the tokens, the shareholders of the issuer of the tokens or of any of the third-party entities;
  • the value of the tokens issued;
  • the number and value of transactions in those tokens;
  • the size of the reserve assets of the issuer;
  • the significance of the cross-border activities of the issuer of the tokens; or
  • the interconnectedness with the financial system. (Arts. 39, 41, 50, 52, 98.)

MICA contains some minimum thresholds for the assessment of these criteria and empowers the European Commission to adopt delegated acts to specify them further. (Art. 39, para. 6.)

In addition, stablecoin issuers may indicate that they voluntarily wish to classify their token as significant. (Arts, 40, 51.)

EBA must establish, manage, and chair a college of supervisors for each issuer of stablecoins classified as significant. The college may issue non-binding opinions. (Arts. 99-102.) In order to fulfill its supervisory obligations, EBA is granted general investigative powers, may conduct on-site investigations, and may impose fines for infringements of obligations. Fines are made public. (Arts. 105, 106, 113, 115.)

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