It can be said that the pace at which MiCA was drafted and promulgated was perhaps both motivated and further spurred by various notable and well-known incidents either emanating from the crypto-assets industry, or related there to. This fire of haste has led to a veritable Frankenstein of a Regulation; it is undeniably the most extensive and prescriptive regulatory framework on crypto-assets to date, but it can likewise be said that it contains some inconsistencies, at times even provisions that are conflicting with other EU legislative instruments. One of the most contentious Titles in my opinion is Title IV, the one covering electronic money tokens (EMTs).
My main bone of contention lies with Article 48(2), which states that “E-money tokens shall be deemed to be electronic money”. It can perhaps be said that this statement was a shortcut towards closing the gap between e-money and EMTs pre-MiCA, as explained in Recital 19, but it is also a statement that can be shot down in numerous ways – to be precise, at least eleven different ones as laid out below.
Before indulging the reader further, it is prudent to first cover the preliminary building blocks, starting off with the official definition of electronic money as per Directive 2009/110/EC (the E-Money Directive II/EMD II), which defines it as follows:
‘electronic money’ means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer; [emphasis added by author]
Point 5 of Article 4, being the Payment Services Directive II (PSD2), defines payment transactions as:
An act, initiated by the payer or on his behalf or by the payee, of placing, transferring or withdrawing funds, irrespective of any underlying obligations between the payer and the payee; [emphasis added by author]
In turn, funds are defined under the PSD2 as:
Banknotes and coins, scriptural money or electronic money as defined in point (2) of Article 2 of Directive 2009/110/EC;
Electronic money therefore is a subset of funds, the latter being a category which also includes banknotes, coins, and scriptural money; fiat money, in short. This precursor will be vital to understanding the rationales laid out below.
1. EMTs are regulated by MiCA, not the EMD II or the PSD II
Article 1 of MiCA lays outs its scope:
This Regulation lays down uniform requirements for the offer to the public and admission to trading on a trading platform of crypto-assets other than asset-referenced tokens and e-money tokens, of asset-referenced tokens and of e-money tokens, as well as requirements for crypto-asset service providers. [emphasis added by author]
Sub-article 2 point (b) further states that MiCA lays out “requirements for the authorisation and supervision of crypto-asset service providers, issuers of asset-referenced tokens and issuers of e-money tokens, as well as for their operation, organisation and governance”.
It is amply clear that the legislative instrument regulating EMTs is MiCA, with e-money being separately regulated under the EMD II. However, MiCA does make reference to the EMD II at various intervals, and incorporates it by extension in articles such as Articles 48(3), 48(4), 49(1), and 50(1). It is only through such express references that certain parts of the EMD II apply to EMTs, but reference to another legislative instrument does not, ipso jure, make that other legislative instrument the key or mother legal act.
2. The EMD II only applies limitedly to EMTs
EMD II’s limited applicability to EMTs is confirmed by the legislator, as throughout Title IV, there are multiple express derogations wherein the legislator takes special care to highlight the carve-outs, ergo the differences, between EMTs and e-money. All these derogations serve as exceptions to Article 48(3) of MiCA, which states that “Titles II and III of Directive 2009/110/EC [EMD II] shall apply with respect to e-money tokens unless otherwise stated in this Title.”
Titles II and III of the EMD II cover the Requirements For The Taking Up, Pursuit And Prudential Supervision Of The Business Of Electronic Money Institutions and the Issuance And Redeemability Of Electronic Money respectively. The legislator has removed the applicability of certain articles under Title III of the EMD II, namely Article 11 of the EMD II (Issuance and Redeemability), and Article 12 (Prohibition of Interest); however, it has omitted from similarly carving out Article 10 of the EMD II, and this presents the first grave conflict between EMTs and electronic money.
3. EMTs can be issued by anyone, e-money only by EMIs
Article 10 of the EMD II explicitly states that natural or legal persons who are not electronic money issuers (EMIs) are prohibited from issuing e-money. However, there is no such prohibition under MiCA; one is required to be an EMI or credit institution only when conducting a public offer of EMTs, or seeking their admission to trading, as stated under Article 48(1). MiCA does not expressly prescribe the requirements for the form of the person issuing an EMT.
To further prove this point, it even allows for non-identifiable issuers to issue EMTs and be exempted from the requirements of Title IV, as evidenced by Recital 22 which states:
Where crypto-assets have no identifiable issuer, they should not fall within the scope of Title II, III or IV of this Regulation.
Indeed, it would be unreasonable, unrealistic, and against the enshrined principle of proportionality under the TFEU to prohibit natural persons sitting in the comfort of their homes from writing a piece of code, the purpose of which is to issue a crypto-asset referencing the value of an official currency.
This is the first irrefutable piece of evidence that EMTs and e-money are fundamentally different.
4. EMTs remain EMTs regardless of whether they are issued by an EMI/CI or otherwise
In continuance of Point 3 above, the criterion for a crypto-asset to be classified as an EMT is a simple one; it must meet the definition of an EMT, defined as:
A type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency
Whether it is issued by a bank or by a natural person is immaterial to its classification. This is fundamentally important to note. Imagine this scenario: an algorithmically-adjusted crypto-asset issued by a non-identifiable issuer as an ERC-20 compatible token on Ethereum, with over-collateralised reserves held in ETH only, referencing the value of the US Dollar. Would such a crypto-asset be an EMT? The definition of EMTs is certainly being met and satisfied in full. Would such an EMT be in breach of MiCA? Certainly not; even if the issuer were identifiable, they would still not be in breach as long as a) there is no public offer or seeking admission to trading, or b) the crypto-asset is not referencing the value of an official currency of an EU Member State (since in such a case, the issuance itself would be deemed as an offer to the public).
Therefore, unlike e-money, EMTs as a category encapsulates various forms of crypto-assets, ranging widely from technical perspectives, as long as the sole criterion of referring one official currency is met. One can even have a reward-bearing EMT, ergo the granting of interest; if such is granted by a non-identifiable issuer or by a person who is not the issuer or a CASP providing services in relation thereto, then this is allowed by MiCA, and the EMT will remain an EMT.
5. EMTs can be offered to the public, e-money cannot
Article 48 lays down the requirements for persons offering EMTs to the public or seeking their admission to trading, with one of the main requirements being the drafting, notification and publication of a whitepaper in accordance with Article 51. An offer to the public is defined under MiCA as:
A communication to persons in any form, and by any means, presenting sufficient information on the terms of the offer and the crypto-assets to be offered so as to enable prospective holders to decide whether to purchase those crypto-assets
On the contrary, e-money cannot be offered to the public; it can only be issued by an EMI upon the receipt of funds. This is due to the technical form of EMTs which is significantly different to that of e-money, as further explained in Point 6 below.
6. Transfers of EMTs are permissionless, transfers of e-money are permissioned
The definition of e-money stipulates that the sole purpose of e-money transfers is to execute payment transactions, with payment transactions being primarily regulated under the PSD II. The PSD II lays down multiple requirements pertaining to the authorisation and execution of payment transactions, and inter alia allows for payment service providers to refuse the execution of a payment order under Chapter 3.
On the contrary, EMTs can be transferred in a permissionless manner if they are issued on a permissionless blockchain, and generally speaking, the recipient cannot block or refuse an incoming transfer of EMTs. EMT transfers can occur in a peer-to-peer manner, while transfers of e-money can only occur between entities licensed accordingly and authorised to handle such transfers. Another key and fundamental difference between e-money and EMTs.
7. EMTs can be used as both a means of exchange and a means of payment, e-money can only be used as a means of payment
The manner in which e-money is defined and issued strictly limits its use to payment transactions; the only exchange that happens is when funds are received in exchange for the issuance of e-money. On the contrary, EMTs can be used both as a means of payment, but also as a means of exchange. This is evidenced by Article 58(3) of MiCA, which extends certain restrictions applicable to asset-referenced tokens (ARTs) to EMTs. Namely, it prohibits issuers of EMTs from surpassing the use of its EMT as a means of exchange within a single currency area, if such use exceeds the combined thresholds of 1 million transactions and EUR 200,000,000 in transactional value over an estimated quarterly average.
This means that, like ARTs, EMTs can be used as a means of exchange, and this indeed can be seen as one of the key advantages and utilities of EMTs over e-money. The proliferation of EMTs in decentralised finance (arguably even resulting in its explosion), along with EMTs replacing BTC as the preferred asset for trading pairs, are testament to this.
It is worth noting that while EMTs can be used as a means of payment, such transactions do not meet the definition of a ‘payment transaction’ under the PSD II, because a payment transaction can only consist of “placing, transferring or withdrawing funds”.
8. E-money are funds, EMTs are not
At the beginning of this article, the definition of funds was presented, and there is a glaring omission of EMTs within such definition. This is an important omission; it can generally be stated that ‘funds’ tend to be official currencies as defined under MiCA, being an official currency of a country that is issued by a central bank or other monetary authority. All denominations of funds, being “banknotes and coins, scriptural money or electronic money”, are restricted in terms of their issuance, since they can only issued by a central bank, or other monetary authority, or authorised institution as the case may be. On the other hand, as explained under Point 3 of this article, EMTs can be issued by any person, with the only restriction under MiCA being the issuance of an EMT by an identifiable issuer referencing an official currency of an EU Member State, which is treated ipso jure as an offer to the public in the EU.
I will highlight this difference through a factual example using the definition of ARTs & EMTs under MiCA. For clarity’s sake, including the definition of ARTs below:
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.
A crypto-asset which references the value of one official currency classifies as an EMT, and the likelihood of a crypto-asset referencing funds being classified as an EMT is high. However, a crypto-asset referencing the value of one EMT generally tends to be an ART! This is due to the fact that an EMT is not ‘funds’ or an ‘official currency’ – it is a crypto-asset.
9. E-money can be seen as cash, while EMTs are not cash
Strictly speaking, cash is defined as banknotes and coins by the European Central Bank (ECB). However, the term ‘funds’ includes banknotes and coins, and extends to scriptural money and e-money. Therefore, it is safe to assimilate e-money to cash. Why is this relevant? Let’s take a look at derivative instruments and contracts under MiFID, specifically the manner in which such instruments can be settled.
Annex I, Section C of MiFID II lists the financial instruments regulated by the Directive, inter alia listing derivatives such as options, futures and swaps. It also states that such instruments may only be settled physically or in cash. This means that settling such instruments in e-money, for instance, is treated as cash settlement.
On the other hand, settlement of these instruments/contracts in EMTs is not treated as cash settlement. As an example, an options contract with BTC as the underlying asset settled in USDC neither constitutes physical settlement nor cash settlement. Indeed, such a contract settled in USDC arguably does not even constitute a financial instrument, as the settlement is neither physical nor in cash. This has been noted by the European Securities and Markets Authority (ESMA) in its second MiCA consultation package, where under point 208, it stated the following:
There appears however to be some residual use cases of derivative contracts on crypto assets that may not qualify as financial instruments (e.g., because not settled in cash) which would consequently need to be recorded by CASPs and by CASPs operating a trading platform.
If the legislator were to classify EMTs as funds, it would mean that they would also classify as cash by extension, meaning that they must be accepted as a means of settlement where cash settlement is allowed or required, almost or effectively making EMTs legal tender. This would arguably be at odds with the vision of the ECB, which is set to roll out the Digital Euro and would likely not be seeking to have other instruments in competition within the Eurozone.
10. EMTs and e-money are similar, but not the same
It is safe to say that EMTs and e-money share commonalities to the point that they can be seen as similar – but it is crucial to stop short of stating that they are the same. Interestingly, the legislator seems to be of the same frame of mind throughout MiCA’s preamble, where under various recitals there are references to EMTs and e-money being similar, but never the same.
This is perhaps clearest under Recital 18, which states:
The first type consists of crypto-assets that aim to stabilise their value by referencing only one official currency. The function of such crypto-assets is very similar to the function of electronic money as defined in Directive 2009/110/EC. Like electronic money, such crypto-assets are electronic surrogates for coins and banknotes and are likely to be used for making payments. Those crypto-assets should be defined in this Regulation as ‘e-money tokens’. [emphasis added by author]
The legislator could not have worded it any better. Indeed, EMTs are similar to e-money, but EMTs are and should remain defined as a crypto-asset that references the value of one official currency. Going beyond that will likely have grave knock-on consequences, such as impacting other legislative instruments in unforeseeable ways.
11. The Transfer of Funds Regulation separates EMTs from funds
The re-cast TFR, which will become applicable on the 30th of December 2024, lays down the information that must accompany transfers of funds and crypto-assets. Rightly so, the TFR is divided into two parts – one relating to funds, and one relating to crypto-assets. This is due to the fact that funds and crypto-assets are technically vastly different to one another, and the requirements imposed vis-à-vis information accompanying transfers of funds are not always compatible with those for transfers of crypto-assets.
This distinction is expressly confirmed by the legislator under Article 2(4), which states that:
Electronic money tokens, as defined in Article 3(1), point (7), of Regulation (EU) 2023/1114, shall be treated as crypto-assets under this Regulation.
It is therefore incongruent to treat EMTs as funds in one instance, while treating them as crypto-assets in another, especially since as explained under Point 4 of this article, EMTs come in various forms and shapes.
By now, it can reasonably be said that crypto-assets represent a novel and hitherto unseen class of assets & instruments, that spurred EU legislators into creating a new and extensive framework to regulate their issuances and persons providing services in relation thereto. The maxim of ‘same activity, same risk, same regulation’ cannot be applied to an asset or instrument which falls outside the scope of existing regulatory frameworks; how can the activity be the same, when one is talking about a fundamentally different asset, at the very least from a technological & foundational perspective? I would even go as far as to state that ‘same activity, same risk, same regulation’ is a hasty shortcut that risks rendering regulatory efforts moot. EMTs are but one of the sub-categories of a permissionless asset that transcend traditional channel and infrastructures for transactions, and this alone makes them fundamentally different to e-money. In conclusion, therefore, EMTs are neither electronic money, much less funds.
Last updated 30 January 2024, Point 8 amended