MiCA: Public offering and issuance of crypto-assets

5 Sep

Offering crypto-assets to the public under MiCA comes with a set of specific rules. The requirements vary depending on the type of crypto-asset in question, whether it’s an “other crypto-asset”, an Asset-Referenced Token (ART) or an Electronic Money Token (EMT). For an overview of the crypto-asset types under MiCA please refer to our general MiCA overview blog.

Earlier in July, the European Banking Authority (EBA) opened a consultation on two draft regulatory technical standards (RTS) and one implementing technical standard (ITS) with respect to ART issuance. This consultation focuses on the requirements for issuers of ARTs and the evaluation of significant investments in these issuers under MiCA. Essentially, the EBA is aiming to set clear rules for how ARTs can enter the EU market and how significant investments in these issuers are managed.

According to MiCA, only EU-based legal entities can offer or trade ARTs and they may only do so once they have the necessary authorisation and an approved white paper. The draft RTS provides details on what needs to be included when seeking this authorisation, touching on areas like the business model, leadership, risk management, financial assets, and the reputation of management and major shareholders.

The draft ITS outlines the standard format for an application letter and explains how applications will be reviewed for completeness. These draft standards don't apply to banks since they only need approval to release a white paper.

Following general financial sector guidelines, MiCA requires a thorough review for those aiming to acquire significant shares in ART issuers, excluding banks. The proposed RTS lists the information required for this review.

This review will focus on:

(a) the reputation of the proposed acquirer

(b) the suitability of any person who will direct the target undertaking

(d) the sound and prudent management of the target undertaking following the acquisition

(e) suspicion that money laundering of terrorist financing is committed or attempted or that it may increase following the acquisition.

Tokens vs Securities

One important caveat to consider before drafting a crypto-asset whitepaper: the elephant in the room whether a proposed token is an “other crypto-asset” or whether it is actually a financial instrument (EU regulatory term roughly equivalent to the US term “security”) and therefore regulated under the TradFi MiFID II rules instead of MiCA.

Unfortunately, issuers will have to wait until the eve of MiCA's go live date (Q4 2024) for ESMA’s consultation on the qualification of crypto-assets as financial instruments. Should EU regulators adopt a stance similar to the US SEC, it is possible that the majority of tokens might be classified as financial instruments. This distinction will play a significant role in shaping the landscape for crypto-issues in the EU and we expect to see extensive lobbying as ESMA shapes its position.

In the meantime, we summarise the current guidelines and requirement types for each of the main crypto-assets under MiCA.

Other crypto-assets

Firms intending to issue crypto-assets that are not ARTs nor EMTs will be required to adhere to a number of new requirements. First, firms will be required to notify the relevant competent authority and publish a crypto-asset white paper. The information to be contained in the white paper is specified under detailed requirements in Article 6.

The white paper will need to contain information such as:

information about the offeror
information about the operator of the trading platform
the business model
offer to the public
information about the crypto-asset in itself
details on the underlying technology (e.g. what chain the token uses)
risk management
impact on the climate and environment-related adverse impacts
marketing communications rules
safeguarding arrangements
conflicts of interest

Additionally, MiCA introduces new liability requirements for the information provided as part of the white paper (Article 15).

Accountability for Misleading Information: if an issuer or a trading platform participant breaches regulations by presenting misleading or incomplete information in their crypto-asset white paper, they, along with their management team, are accountable to the crypto-asset holder for any financial losses resulting from these inaccuracies;
Shared Responsibility for Miscommunication: if a trading platform creates a crypto-asset white paper and its associated promotional materials, and the issuer provides misleading or unclear information to the platform, both parties share responsibility for the errors;
Proof of Misleading Information Impact: the crypto-asset holder needs to provide evidence that they suffered losses due to relying on misleading or unclear information from the issuer or trading platform. This particularly applies if the crypto-asset is not an asset-referenced or e-money token.

Asset-referenced tokens (ARTs) (e.g. stablecoins)

When considering a public offering of ARTs, firms need to be aware of enhanced regulations (Title III, Articles 16 – 47). Beyond the crypto-asset white paper requirements applicable to “other crypto-assets”, businesses aiming to offer ARTs to the public, or looking to admit an ART to trading, need to secure a specific authorisation (Article 16) and must meet stringent "fit and proper" standards (Article 21). Credit institutions regulated under CRR (i.e. banks) issuing ARTs are granted an exemption from this authorisation step, but they must alert the appropriate authorities 90 working days before their initial ART issuance (Article 17). Banks may appear to have an advantage in issuing ARTs, however, uncertainty as to whether the EBA or national regulators will impose additional capital or liquidity requirements on banks venturing into the ARTs space. Given the heightened concerns about liquidity risk following the recent electronic deposit run at SVB, we expect this to be the case.

The businesses issuing ARTs must also hold adequate capital (the higher of €350,000 or 2% of outstanding ARTs; Article 35) and maintain a fully matched reserve of assets, that meets specific composition standards, and is limited to 70% investment assets (the remaining 30% must be held as bank deposits) (Article 36). The regulation also requires the use of a custodian for reserve assets (Article 37). Perhaps the most onerous requirement is found in Article 38: “Issuers of asset-referenced tokens … shall only invest those assets in highly liquid financial instruments with minimal market risk, credit risk and concentration risk. The investments shall be capable of being liquidated rapidly with minimal adverse price effect.” This will require ART issuers to put in place a very conservative treasury management policy which will severely limit the yield available from the reserve assets.

Additionally, businesses should have a contingency plan in place to handle situations that might significantly disrupt operations or fail to meet the asset reserve requirements (Article 46). They must also possess a structured redemption strategy for assets, ensuring the smooth redemption of each ART (Article 47). It's critical to inform the relevant authority about both the contingency and redemption plans.

If the ART is deemed to be “significant”, the EBA will oversee its issuer, which will also need to meet certain liquidity guidelines (Article 43).

An exception to note: ARTs with an average value not exceeding five million Euros over a year, or those exclusive to and held only by qualified investors, aren't bound by these regulations (Article 16(2)).

Electronic money tokens (EMTs)

EMT offering guidelines can be found in Title IV of the MiCA (spanning from Article 48 to 58). Unlike ARTs, companies looking to introduce and offer EMTs must secure authorisation either as a CRR credit institution or an electronic money entity under the E-Money Directive, often referred to as "EMD" (See Article 48(1)). There's no direct pathway for authorisation through MiCA for this and firms must use existing routes.

While the issuance and the option to redeem EMTs fall under the MiCA’s purview and not the EMD (Article 49), MiCA has laid out a firm rule against offering interest related to EMTs (Article 50). This aligns with the current EMD regulations: E-money isn't allowed to bear interest to prevent it from competing with bank deposits. This restriction poses a significant challenge for crypto tokens that depend on "yield" or interest as incentives for individuals to hold the assets. Without such incentives, and given the attractive risk-free return now available from alternatives such as US Treasuries or insurer bank deposits, it will be interesting to see how EMT tokens are offered under MiCA .

Just as with ARTs and various other digital assets, crypto-asset firms which offer EMTs to the public and have such tokens admitted to trading, are required to communicate the details of the offering through a white paper. This communication must adhere to the specific content and form standards set by the responsible authority (Article 51). Non-compliant practices such as sharing incomplete, unclear, or misleading information in the white paper can make both the company and its leadership liable (Article 52).

EMT issuers must allocate a minimum of 30% of the received funds into separate accounts within credit institutions. The remaining funds should be invested into safe, low-risk investments that can be counted as highly liquid financial instruments (Article 54). Much like their ART counterparts, EMT issuers must formulate contingency and redemption policies and inform the competent authority of these plans (Article 55).

A noteworthy point: the European Banking Authority (EBA) will keep a close eye on significant EMT issuers, and will impose additional regulations on them. EMT issuers may voluntarily tag their EMTs as "significant" if they choose to do so.

Navigating the intricate web of MiCA requirements as the new regulation gets embedded into national law of the EU member states is tricky.

The administrative, documentation and procedural requirements of MiCA will be familiar to anyone who has dealt with existing EU financial regulation. However, there are also significant business model questions to be addressed for existing crypto-asset issuers who seek to offer tokens under MiCA.

On the face of it, existing banks have a significant head start, as they avoid the need to apply for authorisation under MiCA which, if the UK’s crypto-asset firm registration experience is anything to go by, could pose a significant hurdle for many crypto-asset firms.

The economics of token issuance will also need to be revisited: the prohibition of interest on EMTs makes this type of token less appealing in a rising interest rate environment and the onerous reserve requirements for ARTs will squeeze the economics of stablecoin issuers.

On the flip side, MiCA provides what many crypto-asset firms have longed for: a clear path to authorisation and a legitimate role in the EU financial services ecosystem.

If you have any questions and would like to discuss how these requirements apply to you, please contact us for a free consultation.

Anna Nicolis