Classifying the Top 50 Tokens Under MiCA

Much has been said about MiCA’s token taxonomy and its theoretical applicability, which ushers in an interesting and novel token classification system that, for the first time, separates stablecoins into two distinct categories, being asset-referenced tokens (ARTs) and e-money tokens (EMTs).

But let’s take it step by step, and go back to the fundamentals, being: what is a crypto-asset?

MiCA defines it as “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology”. The three main components can be said to be the following:

1. A digital representation of a value or a right;
2. Able to be transferred; and
3. Stored electronically using a DLT.

The second component is of particular importance since it excludes tokens that are non-transferable. The non-transferability would need to be hardcoded, rather than imposed as a contractually-imposed prohibition of sorts. A great example of such would be soulbound tokens[1], non-transferable NFTs that would be clearly excluded from MiCA’s definition of “crypto-assets”.

However, before we turn our backs on the dark, shadowy roads that lead away from MiCA, I’m afraid I must tell you that we’re not yet out of the woods. Even if it is a token that does meet the definition of a crypto-asset, it may still be outside of scope of MiCA.

1. Crypto-Assets that Fall Outside of Scope of MiCA

Article 2 of MiCA gives us two main categories of crypto-assets that are excluded from MiCA’s scope. Well, eleven to be technically precise, but half the list is taken up by pension products that fall under lesser-known Directives, and perhaps of not much relevance for our discourse today. So, back to these two main categories.

1.1 Unique and Non-Fungible Crypto-Assets (UNFCA)

While commonly termed as NFTs by the industry, MiCA takes a bit of a different approach to such, by adding another factor. Apart from each crypto-asset having unique properties which lend themselves to the value of the crypto-asset, the value of such must also be derived from the unique utility granted to each and every holder of the crypto-asset. In short, the value of each UNFCA must be derived from both its unique characteristics and its unique utility granted to the holder, in order for a crypto-asset to be qualified as such. For a much more detailed read about this topic, I invite you to take a look at the BCAS NFT report published earlier this year.

1.2 Financial Instruments and other “TradFi instruments”

This category presents a T-Rex-sized bone of contention, as there is no uniform list of financial instruments homogenously-applicable across the EU. True, the list of financial instruments can be found in Annex I, Section C of MiFID II[2] – but the kicker is that since MiFID II is a Directive, and therefore a minimum harmonisation regulatory instrument, that means that each and every EU Member State has a degree of discretion in its implementation, and can digress (to a certain degree) in defining its own list of financial instruments.

Oftentimes, there would be an instrument that harkens back to legacy laws of the country in question, which would be incorporated into the list of financial instruments recognised as such by that EU Member State. Unfortunately, this means that we do not have absolute certainty, across the EU bloc, on which crypto-assets constitute financial instruments and therefore excluded from MiCA, beyond the list found in MiFID II.

Other notable excluded instruments include deposits (and structured deposits), funds, and securitisation positions. These I have succinctly labelled as “TradFi instruments”, but obviously, you should refer to the respective legislative acts defining them for a more accurate description.

2.  Crypto-Assets that Fall within Scope of MiCA

At last, we can venture into the sunlit fields of MiCA, where we are met with three separate and distinct classes of tokens, each having its own dedicated Title under MiCA.

• E-Money Tokens (EMTs) – Title IV
• Asset-Referenced Tokens (ARTs) – Title III
• Other Crypto-Assets (OCAs) – Title II

You may ask why I decided to shift the gear into reverse and start off from the 4^th Title onto the 2^nd. Worry not – that was intentional. If the token is not a) an EMT, or then b) an ART, then c) it is an OCA.

But let’s not get ahead of ourselves. Before delving into each of the categories above, it must be made absolutely clear that Titles IV, III, and II mostly apply to persons who are either offering such crypto-assets to the public or seeking admission to trading. They neither regulate persons who are simply and solely issuing such crypto-assets without conducting an offer to the public or seeking their admission to trading nor do they specifically regulate the crypto-assets themselves. There is absolutely no such thing as “non-MiCA compliant crypto-assets” – it’s the issuers, if anything, who would need to be MiCA-compliant if they are making an offer to the public or seeking the admission to trading.

The only exception to this relates to EMTs that reference an official currency of the EU, where the issuance of such is deemed to be an offer to the public. Any issuance of any other crypto-asset, which is not accompanied by an offer to the public in the Union, or for which there is no seeking of its admission to trading on a trading platform, tends to be mostly clear of MiCA. For more information on this, you can read through Section 3 of our DeFi under MiCA Handbook.

2.1 E-Money Tokens

EMTs are defined simply as “a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency”. In other words, a crypto-asset which is designed to refer to the value of one official currency, what is colloquially referred to as a fiat currency i.e. issued by a central bank or other monetary authority. Its collateralisation, the manner in which the peg is maintained, and other factors are not relevant to its classification. This is yet another common mistake that is made, where it is wrongly argued that an EMT backed by, say, ETH is not an EMT; a frankly incorrect reasoning based on a wrong interpretation of the law. If anything, the reserve requirements, redemption obligations, and other related obligations are, in fact, just that – obligations imposed on the issuer, should the issuer be within scope of MiCA.

The easiest way to explain it is by using Circle’s EURC, which is an EMT. Let’s imagine that, strictly and solely hypothetically by way of an academic exercise, that Circle undergoes an audit in 2027 where it transpires that they only have 50% of the required reserves to back EURC. Would this mean that EURC stops being an EMT? Of course not. It would mean that Circle are in breach of their regulatory obligations as an authorised issuer, under MiCA, of their EMT – but it would not affect the classification of EURC. This is due to the fact that EURC is designed to maintain a stable value by referencing the value of an official currency, being the Euro – that alone is what matters when it comes to classifying tokens as EMTs or otherwise.

2.2 Asset-Referenced Tokens

ARTs are defined as a “type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies”. First and foremost – an ART cannot simultaneously also be an EMT. Therefore, straight off the bat, if a crypto-asset is referencing the value of one official currency, then it’s an EMT. If, however, it references two official currencies at the same time, it is an ART.

Basically, the ART category of crypto-assets is a catch-all category for stablecoins that are designed to refer their value to any other asset, including crypto-assets, or to any other “value or right” – or combinations thereof. This includes liquid staking tokens and wrapped tokens, most of which are designed to be pegged to the value of another crypto-asset. Interest-bearing stablecoins are designed to have a base value equivalent to the asset being represented, plus the value of the accrued interest/yield. ARTs referencing an index, such as the CPI, may also be structured in such a manner.

At the risk of stating the obvious – the fluctuation in the market price of the asset being referred to is irrelevant. If a crypto-asset references the value of gold, with the price of gold fluctuating in market price, that still makes it an ART. What matters is that it is designed to maintain a stable value, ergo the peg, to the asset, value, or right being referred. In other words, to use the gold-referenced token example – it would be designed to maintain a 1:1 ratio to, say, 1 ounce of pure gold (XAU). XAU’s value will naturally fluctuate according to market demand, but the gold-referenced token will likewise fluctuate in price in the same way since it is referencing the value of XAU, thereby making it an ART.

2.3 Other Crypto-Assets

Last, but definitely not least, we arrive to what is arguably the largest category in terms of the crypto-assets that it captures – humbly named, “Other Crypto-Assets”. This is an umbrella category for all crypto-assets that do not qualify as EMTs or ARTs; in fact, OCAs are the only undefined category of crypto-assets under MiCA. It can capture anything from layer-1 gas tokens to governance tokens and all the way to meme tokens.

3. Cheat-Sheet for Token Classifications

1. Always start off by checking whether:
   1. The token is transferable. If not, then it’s excluded from MiCA’s scope.
   2. The token is a UNFCA. If it is, then it’s excluded from MICA’s scope.
   3. The token is a financial instrument or other TradFi instrument. If it is, then it’s excluded from MiCA’s scope, but regulated under other EU legal acts.

1. If the token in question is termed a stablecoin, it is highly likely that you are looking at an EMT. If it is a flatcoin[3], it is highly likely that you are looking at an ART.
2. Liquid staking and restaking tokens tend to be ARTs since they reference the value of the native layer-1 token of the blockchain network in question.
3. Interest-bearing stablecoins or wrapped LSTs/LRTs may either be classified as an ART or as a unit in a collective investment undertaking – basically, a unit in a fund. This would make it a financial instrument. This may happen if the yield being paid to the holders is generated through the management of pooled tokens on their behalf, with an element of day-to-day control being exercised by parties (other than the depositors) on the management of such pooled tokens. Always check with your friendly neighbourhood lawyer on this, especially if you’re assessing such under the laws of certain common law jurisdictions such as the UK.
4. If a token is not an excluded instrument or a stablecoin, then it is an OCA.
   
   

Without further ado, here’s the manner in which the top 50 crypto-assets by market cap classify under MiCA. Till we meet again!

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[1] https://www.coindesk.com/learn/what-are-soulbound-tokens-the-non-transferrable-nft-explained/

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014L0065 

[3] https://coinmarketcap.com/academy/glossary/flatcoin