Cryptocurrencies used to fall outside of the financial regulations in the EU, therefore the EU has proposed a new regime – Regulation on Markets in Crypto Assets (MiCA) – to ensure a more risk-free market for crypto assets. This article will explain different types of tokens and briefly introduce the framework of crypto tokens in the EU.
Crypto Assets – Types of Tokens According To EU
Coins are built on their own blockchain and are used as mere currencies. For example, Ether (ETH) is a cryptocurrency based on the Ethereum blockchain. Tokens, built on an existing blockchain, are often used for many purposes. For example, as assets used for the execution of contracts that deal with tangible assets in the real world (for example, WePower(WPR) represents electricity). Tokens are usually issued to be given out through an ICO (initial coin offering). Though essentially different, the two terms are often used interchangeably.
There are many different ways of classifying tokens. According to MiCA, types of tokens include:
- Security tokens: tokens that represent ownership over an asset (that function like company bonds or stocks); most tokens issued by ICO are security tokens. Therefore, owners expect to get direct profit from them. Security tokens are subject to greater regulatory scrutiny – they are classified as securities, therefore, are covered by securities laws in the EU. Some examples include SolarStake and L’Osteria.
- Utility tokens: tokens that are intended to provide digital access to a good or service and are only accepted by the issuer of that token. Examples include BAT (Basic Attention Token) and Golem Token.
- E-money tokens (EMT): A type of stable coin (i.e., the digital representation of a fiat currency, where fiat currency means real-life currency such as USD and EUR) that is linked to only one fiat currency (e.g., USDC, Libra Euro).
- Asset-referenced tokens (ART): A type of stable coin that is linked to several fiat currencies, commodities such as gold, or the value of other crypto assets. An example would be Libra Basket Coin.
The EU Regulation on Markets in Crypto Assets (MiCA)
The European Commission (EC) adopted a new Digital Finance Package on 24th September 2020. The regulatory framework also included a legislative proposal – MiCA, to help streamline existing regulations such as the distributed leger technology (DLT) regulation in the EU.
What Crypto Assets Are Covered By The New Regulation?
Every digital representation of value or rights, which may be shared or stored electronically, using distributed ledger technology (DLT) or similar. The MiCA essentially focuses on regulating cryptoassets that are currently out-of-scope from the Markets in Financial Instruments Directive (MiFID) and the Electronic Money Directive (EMD) (e.g., utility and payment tokens). If adopted, the MiCA is expected to commence by 2024, applicable to all member states of the EU.
What Does MiCA Mean to Crypto Asset Service Providers?
First off, as MiCA will be replacing national regulations in EU countries, it means that if the provider’s service is permitted under MiCA by their national supervisory authorities, it can be offered to all member countries in the EU. However, in order to do this, the provider will be subject to a regime similar to MiFID, where essential elements include:
- Get established and licensed in the EU.
- Meet capital requirements.
- Comply with various organisational requirements (e.g., ensuring that management has the necessary skills and experience, having appropriate ICT security measures, record keeping and anti-money laundering).
- Comply with client assets and funds rules – where the service provider’s business holdsits clients’ funds, it should keep all client funds in a central bank or credit institution, identified separately from any funds of its own.
- Provide clear, accurate and non-misleading information to clients
- Establish complaint handling procedures.
- Maintain and operate effective policies to prevent conflicts of interest; and
- Take reasonable steps to avoid operational risks when outsourcing and ensure that service providers remain fully responsible for meeting their obligations under the MiCA.
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What Does MiCA Mean to Crypto Asset Issuers?
All issuers will need to comply with the general requirements, and those who issue stable coins and e-money tokens are subject to more stringent regulations.
Some crucial points of the general requirements:
- issuers need to publish a whitepaper that sets out details of the asset, the offering procedure, and information about the issuer itself in line with specific requirements. The whitepaper must be sent 20 days prior to emission to their national financial supervisory authority.
- Issuers must make sure the marketing of their crypto assets is clear, accurate and non-misleading
- The issuer must act and communicate with asset holders in an honest, professional, and fairway, maintain their systems and security protocols to an appropriate standard
However, the regulations for E-money tokens and asset-referenced tokens reach even further.
For EMT, issuers need to be authorized under the E-Money Directive to avoid any regulatory arbitrage.
For ART, issuers should be mindful of three key requirements:
- To comply with prudential arrangements –the higher of €350,000 or 2% of the average amount of reserve assets, unless otherwise stated by regulators – and keep its reserve assets in custody independent from its own funds
- To have robust, clear, and consistent governance arrangements, organizational structure, lines of responsibility, management, and risk-control processes
- To produce and publish information regarding their practices (e.g., events that might have a significant impact on the value of their crypto assets, conflict of interest policies, complaints handling obligations).
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