The European Union’s Digital Finance Package
On the 24th of September 2020, the European Commission announced its intention to boost Europe’s competitiveness and innovation in the financial sector by virtue of its ambitious Digital Finance Package. The Digital Finance Package, as set out by the European Commission, envisaged several legislative proposals regarding distributed ledger technology. This was referred to as the DLT Pilot Regime. In particular, the Commission proposed an EU Regulation in regard to crypto assets, ergo the Markets in Crypto Assets Regulation ‘MiCAR’ (2020/0265(COD)).
Crypto Asset Service Providers
MiCAR envisages eight types of services that require prior authorisation when provided in relation to crypto assets. A Crypto Asset Service Provider is defined as a person whose occupation or business relates to the provision of one or more crypto asset services to third parties on a professional basis.
The crypto asset services envisaged by MiCAR are the following:
- Custody and administration on behalf of third parties;
- Operation of a trading platform;
- Exchange of crypto assets to fiat being legal tender;
- Exchange of crypto assets for other crypto assets;
- Execution of orders on behalf of third parties;
- Placing of crypto assets;
- Reception and transmission of orders on behalf of third parties; and
- Provision of advice on crypto assets.
Crypto Asset Service Providers are required to have a registered office in a Member State of the European Union. Furthermore, prior to offering crypto asset services, they need to apply for authorisation with the competent authority of the Member State their registered office is situated in. In this regard, prospective Crypto Asset Service Providers need to, among other things, provide: a description of their governance arrangements, a description of their internal control mechanisms, a description of the procedure for the segregation of client’s crypto assets and funds and a description of their systems and procedure in relation to market abuse detection. Specific requirements apply depending on the service/s the prospective Crypto Asset Service Provider intends on offering.
Crypto Asset Service Providers need to have prudential safeguards in place at all times. MiCAR stipulates that these safeguards must be equal to, or greater than, one of the following amounts:
- The permanent minimum capital requirements indicated in Annex IV, depending on the nature of the crypto asset services provided;
- One quarter of the fixed overheads of the preceding year, reviewed annually.
These safeguards may take one of two forms. The first is the ‘own funds’ safeguard (Common Equity Tier 1) as per Regulation (EU) No 575/2013, ergo the Prudential Requirements Regulation. The second is the insurance policy safeguard covering the territories of the Union where crypto asset services are actively provided or any other comparable guarantee.
Asset-Referenced Tokens and Electronic Money Tokens
MiCAR introduces two new types of token classifications: Asset-Referenced Tokens and Electronic Money Tokens. MiCAR defines these two new token classes as follows:
- ‘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;
- ‘electronic money token’ or ‘e-money token’ means 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;
Electronic Money Tokens
Issuers of Electronic Money Tokens may obtain authorisation in relation to an offer of such tokens, or to the admission of such tokens to trading on an EU authorised trading platform in one of three ways. The first mode of authorisation relates to credit institutions or electronic money institutions. Where such institutions intend on offering an Electronic Money Token to the public in the EU or to admit such token to trading on an EU authorised trading platform, they can do so without abiding to additional onerous requirements.
The second mode of authorisation also relates to electronic money institutions. Where the issuer complies with the requirements applicable to electronic money institutions, such issuer may proceed to offer his Electronic Money Tokens to the public within the EU, or admit such tokens to trading on an EU authorised trading platform.
The third mode of authorisation relates to the publication of a crypto asset whitepaper, notified to the national competent authority and approved by such authority prior to the issuance or admission to trading of any Electronic Money Token within the EU.
Asset Referenced Tokens
Issuers of Asset Referenced Tokens need to apply for prior authorisation with the competent authority of their host Member State before offering any Asset Referenced Token to the public or admitting any such token to trading on an EU authorised trading platform. The authorisation granted by the national competent authority shall be valid for the entire Union and shall allow an issuer to offer and admit to trading, the tokens for which it has been authorised throughout the Union.
As part of the application process, the issuer must provide a whitepaper detailing, among other things, the reserve of assets and the custody arrangements in relation thereto. Specifically, the issuer must include the manner in which these assets are to be segregated. The issuer must also specify if a direct right on the reserve assets will be provided. Where no such right is granted, the issuer must provide a detailed analysis on the mechanisms implemented in relation to ensuring the liquidity of the Asset Referenced Tokens in question.
Issuers of Asset Referenced Token shall, at all times, have in place own funds equal to, or greater than, EUR 350 000 or 2% of the average amount of the reserve assets held in custody, whichever is higher.
Following MiCAR’s entry into force, the provisions regarding Electronic Money Tokens and issuers thereof will become applicable following a 12-month period from its entry into force. The rest of MiCAR’s provisions will become applicable within 18 months of its entry into force.
Crypto Asset Service Providers which provided crypto asset services in accordance with already existing applicable laws, prior to MiCAR’s applicability, may continue to do so until 6 months after such date of applicability, or until they are granted an authorisation pursuant to Article 55, whichever is sooner.
Hence, prospective applicants would be wise to pursue a licence in Malta, since it has adopted an ad-hoc crypto-focused regulatory framework that is overseen by the Malta Financial Services Authority, which framework is evidently the closest one to MiCAR out of all the national frameworks within the EEA. Obtaining a Malta VFA licence would ensure that one is as MiCAR-ready as possible, and would fully benefit from the grandfathering period mentioned above.
Disclaimer: BCAS provides these blog posts for general educational purposes only. The contents of this post are based on the current publicly available version of the Markets in Crypto Assets Regulation as of 20/09/2022. Information on this blog expresses the opinion of the author only. It does not constitute professional legal or financial advice and should not be considered as such. The author or company may update the information on this article at any time without prior notice and do not guarantee the work to be up to date and accurate. To the best of our knowledge, the information provided here is factual at the time of writing.