The crypto industry will shortly witness the applicability of the most extensive regulatory framework to date, being the Markets in Crypto Assets Regulation (‘MiCA’). The European legislation will become applicable on June 30th, 2024, for the dispositions relative to Asset-Referenced Tokens (‘ARTs’) and Electronic-money (or E-money) Tokens (‘EMTs’). The remaining articles, including those related to other types of crypto-assets, will become applicable on December 30th of the same year.
This early application of the dispositions related to ARTs and EMTs can be explained by their potential impact on financial stability and investor protection. For this reason, European legislators considered ARTs and EMTs to be high-risk crypto-assets and have decided to implement specific rules for these assets. This choice outlines the necessity for projects and businesses to obtain a legal opinion that correctly classifies their token under MiCA since the rules they will have to obey differ according to the token’s legal nature.
This article does not aim to describe the legal regime applicable to each type of crypto-asset under MiCA but rather to define which crypto-assets fall under the scope of the Regulation, how they are classified and how they are defined.
Does MiCA Apply to all Crypto-Assets?
To appreciate the scope of MiCA, it is important to remember that while MiCA only applies to crypto-assets strictly as defined under MiCA, meaning that some tokens may not be included within such a definition – such as in the instance when they are non-transferable. Crypto-assets are defined 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”. However, it is critically important to note that just because the definition of a crypto-asset is satisfied, it does not automatically mean that such is regulated under MiCA since Article 2 excludes certain crypto-assets from the scope of the Regulation.
First are excluded crypto-assets that are “unique and not fungible with other crypto-assets”, known as NFTs within the crypto-industry. This definition notably englobes digital art and collectables, as highlighted under Recital 10. However, by adding the requirement of being unique, MiCA further restricts the definition of NFTs under the European landscape. Indeed, Recital 11 states that “The assets or rights represented should also be unique and non-fungible in order for the crypto-asset to be considered unique and non-fungible”. Therefore, if two crypto-assets share a common asset or right, both would fall under the scope of MiCA.
More widely, as posed in Recital 9, the Union legislative acts, including MiCA, are guided by the principles of “same activities, same risks, same rules” and technology neutrality. Thus, crypto-assets regulated under existing EU legislation remain regulated under the relevant framework. Consequently, crypto-assets that qualify as financial instruments, deposits, funds, securitisation positions, non-life or life insurance contracts, pensions products or schemes, and social security schemes are expressly excluded under Article 2 of MiCA.
The scope of this exclusion is particularly wide, specifically regarding financial instruments regulated under the Markets in Financial Instruments Directive II/MiFID II. These include transferable securities, money-market instruments, units of collective investment undertakings, various derivative contracts, and emission allowances. The main issue is that while these instruments are already regulated, many of them are regulated under a directive, mainly under MiFID II. Therefore, according to their interpretation, the Member States of the Union might have transposed MiFID II differently.
This means that each financial instrument's definition might differ from one Member State to another. Moreover, some Member States consider the above list of financial instruments provided under MiFID II non-exhaustive, which means they might consider some assets as financial instruments, even if those are not mentioned under MiFID II. This makes the analysis of the scope of this exception plural since the assessment would likely differ depending on the jurisdiction. The same asset could then qualify as a financial instrument in some Member States, while it would not in others.
This scenario is problematic since MiCA, unlike MiFID II, is a Regulation, a legislative instrument whose dispositions are directly applicable in any Member State of the Union, without the need for Member States to transpose the text of the Regulation into their national laws. For this reason, EU legislators mandated the European Securities and Markets Authority (ESMA) to issue guidelines by December 30th, 2024, on the conditions and criteria for the qualification of crypto-assets as financial instruments.
To this end, ESMA released a consultation paper on the draft guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments on January 29th, 2024 (3rd Consultation Paper).[1] In its paper, the European agency confirmed the necessity of considering the specific features, design, and rights attached to the crypto-asset to assess whether it may qualify as a financial instrument under MiFID II. Furthermore, aiming to bring more harmonisation between Member States on this point, ESMA questioned all interested stakeholders on the opportunity to establish more concrete conditions and criteria for this purpose.
On the other hand, in its 3rd Consultation Paper, ESMA also drew up guidelines on the categorisation of crypto-assets that do not fall under the exceptions mentioned in Article 2 and thus trigger the application of MiCA. This concerns EMTs, ARTs, and other crypto-assets.
What are Electronic Money Tokens?
The first category of crypto-assets to assess is the Electronic Money Tokens category. EMTs are defined under Article 3(1)(7) as “a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency”. To extend this definition, an official currency is defined under Article 3(1)(8) as “an official currency of a country that is issued by a central bank or other monetary authority”. At first sight, this category of crypto-assets does not pose any difficulty, and its scope mostly covers the so-called ‘fiat-pegged stablecoin’. Nevertheless, the above definitions call for several observations.
Firstly, the definition of EMTs includes any crypto-assets purporting to maintain a stable value by reference to an official currency. As outlined in Recital 41, the definition does not differentiate EMTs depending on how they purport to maintain a stable value, meaning EMTs can be collateralised or based on an algorithmic mechanism. Secondly, the definition expressively englobes any crypto-assets that purport to maintain a stable value, not only those that effectively manage to maintain a stable value. Any crypto-assets aiming to maintain a stable value by referencing the value of an official currency regardless of the reserve or stabilisation mechanism fall under the definition of EMTs.
As outlined, the pegging mechanisms must maintain a stable value that references the value of a country's official currency issued by a central bank or other monetary authority. This last detail is relevant, considering that countries are not limited to fiat when choosing their official currency. The example of El Salvador, where Bitcoin has been a legal tender since September 2021, reflects how the scope of EMTs is restricted through the condition of issuance by a central bank or other monetary authority. Therefore, a crypto-asset purporting to maintain a stable value by referencing the value of another crypto-asset falls outside of the definition of EMTs, even if the said crypto-asset is used as legal tender in some countries. Indeed, unless that crypto-asset is issued by a monetary authority, it would not qualify as an official currency.
Additionally, EMTs can easily be confused with another type of asset called electronic money. Electronic money is defined under Article 2(2) of the Directive 2009/110/EC (the E-Money Directive II/EMD II) as “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”.
Following this reasoning, electronic money and EMTs are two different types of assets – the first is regulated under EMD II, while the second is regulated under MiCA. However, things tend to become more complicated when considering the provisions of Title IV of MiCA related to EMTs. The Title starts with Article 48, which states that “E-money tokens shall be deemed to be electronic money” and that “Titles II and III of Directive 2009/110/EC shall apply with respect to e-money tokens unless otherwise stated [in this Title]”. If EMTs are reputed to be electronic money and the dispositions regulating electronic money apply to EMTs, one may argue that EMTs and electronic money are most likely the same thing.
However, it is important to highlight that EMTs and electronic money are similar but not the same. Notably, the modalities of issuance of EMTs differ from the modalities of issuance of electronic money. Moreover, EMTs can also be offered to the public, which is not the case for electronic money.
What are Asset-Referenced Tokens?
The second type of crypto-assets under MiCA’s classification is called Asset-Referenced Tokens. According to Article 3 of MiCA, an ART is “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”. The first point to highlight is that the definition starts by excluding EMTs from the scope of ARTs. ARTs and EMTs share common features, which explains why legislators felt the need to expressively exclude EMTs from the definition of ARTs. Consequently, any tokens that qualify as an EMT cannot qualify as an ART even if they match the rest of the definition of ARTs.
As EMTs, ARTs purport to maintain a stable value. However, ARTs do not aim to achieve this goal by referencing an official currency but rather by referencing another value, a right, or a combination of them, which can include one or more official currencies. Following this definition, ARTs are another type of “stablecoins” introduced by European legislators. However, the ability of ARTs to maintain a stable value by reference to another value or right outlines a different intention behind these assets. As highlighted in Recital 18, if EMTs seem to pursue a similar purpose as electronic money – making or facilitating on-chain payment transactions – ARTs seem to pursue a different purpose.
The Regulation does not expressively define what ‘a value’ is, however, Recital 2 confirms that the definition of crypto-assets refers to the market value of the asset as attributed by market participants. However, the reference to a ‘right’, even if also undefined, enables this category to encompass crypto-assets issued for the purpose of the tokenisation of real-world assets. From this perspective, ARTs may be seen as a catch-all category that englobes all crypto-assets aiming to maintain a stable value without fitting the definition of EMTs. However, ESMA reminded in its 3rd Consultation Paper that if a crypto-asset shares common features with any type of financial instrument – referred to as “hybrid” crypto-assets – this qualification and the application of MiFID II prevail over MiCA’s dispositions. This requires particular attention regarding ARTs since crypto-assets referencing the value of a financial instrument, such as stocks, would fall under this category if the qualification of financial instruments itself can be excluded.
As highlighted under Recital 18, the reason behind this category of crypto-assets is to avoid circumvention and make the Regulation future-proof. EU legislators notably tried to prevent scenarios where crypto-assets would reference the value of an EMT, which itself references the value of an official currency, to escape from the application of the rules related to EMTs. Indeed, such crypto-assets would not fit the definition of EMTs since they do not maintain a stable value by referencing one official currency. However, those crypto-assets would qualify as ARTs and, thus, be subject to rules largely inspired by the regime applicable to EMTs.
On the other hand, the ability of ARTs to maintain a stable value by referencing a right or a value other than the value of an official currency is not the only difference between EMTs and ARTs. ARTs also include crypto-assets that purport to maintain a stable value by referencing a combination of values or rights, which may also include one or more official currencies. Again, this addition to the definition of ARTs extends the scope of this category of crypto-assets to make the Regulation future-proof.
Other Crypto-Assets
The third and last category of crypto-assets under MiCA is constituted of any crypto-assets that fall under the scope of the Regulation but do not qualify as EMT or ART. As a catch-all category, this category is not properly defined. Thus, the first crypto-asset that comes to mind when assessing the scope of this category is Bitcoin, the original crypto-asset with the highest market capitalisation at the time of redaction of this article. ESMA also reminded in its 3rd Consultation Paper that the legislators' intention was notably to regulate the so-called ‘utility tokens’ under this category.
Indeed, ESMA states in its guidelines that “legislators widely follow the functional approach of dividing crypto-assets into three categories (i.e. utility tokens, currency/payment tokens and financial/investment/security tokens) which MiCA partly reflects”. Moreover, besides EMTs and ARTs, utility tokens are the only type of crypto-assets defined under MiCA, even if they only constitute a sub-category under this catch-all category, as underlined under MiCA’s Recital 18. Article 3 defines them as “a type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer”. It must be noted that offers to the public of utility tokens “providing access to a good or service that exists or is in operation” are excluded from the application of MiCA’s Title II under Article 4(3)(c), although not generally excluded from MiCA’s scope.
However, as mentioned above, this third category of crypto-assets is undefined, and its scope is wider than the definition of utility tokens. Besides Bitcoin, the category also encompasses the so-called ‘governance tokens’, which traditionally do not purport to maintain a stable value by reference to any other asset, right, or official currency. However, the existence of governance rights, such as voting rights, highlights once again the necessity of excluding the qualification of financial instruments for a token to fall under the scope of this category.
Following the same approach, hybrid tokens, described by ESMA as crypto-assets that are likely to possess numerous features rather than be singular in their use, may also fall under this third category. The European agency recommends a case-by-case approach based on each crypto-asset's rights, functions, and values. However, as mentioned, it must be emphasised that the qualification as a financial instrument would prevail over any other qualifications under MiCA.
Finally, this category also encompasses crypto-assets that fail to qualify as unique and non-fungible crypto-assets. This last point is of particular importance because the definition adopted under MiCA is more restrictive than the one used in the industry, and therefore, not all crypto-assets considered as NFTs by their issuer would effectively qualify as such under MiCA. To illustrate this point, ESMA also mentioned in point 68 of its 3rd Consultation Paper that “The technical features […] and standards used (e.g. ERC-721 standard, BEP-721 standard) could remain an indicator but should not be of primary importance […] when assessing the fungibility and uniqueness of crypto-asset”. Here again, it is primordial for crypto-asset issuers to obtain a crypto-asset legal classification that properly assesses the features of their crypto-asset and supports the proposed qualification.
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[1] https://www.esma.europa.eu/sites/default/files/2024-01/ESMA75-453128700-52_MiCA_Consultation_Paper_-_Guidelines_on_the_qualification_of_crypto-assets_as_financial_instruments.pdf
