Across the world, the blockchain technology is developing at rapid pace having the potential to significantly reshape market infrastructures. The EU has introduced new rules for a harmonized regulatory framework governing blockchain-based products and services. It shall foster innovation and lift barriers to dormant growth potential. The new rules are currently phasing in. This article outlines the legislative package and its impact.
Crypto-assets used to be subject to EU financial regulatory requirements only if they qualify as financial instruments, such as security tokens. Other crypto-assets were, if at all, only subject to the fragmented local laws of the EU Member States resulting in an uneven playing field and obstacles to digitalization and to the success of new technologies in the EU. The new EU regulatory framework covering those crypto-assets primarily consists of the following EU regulations:
The MiCAR addresses crypto assets not qualifying as financial instruments. It lays down uniform requirements for the offer to the public and admission to trading on a trading platform of crypto-assets as well as requirements for crypto-asset service providers. The regulation shall apply from 30 December 2024, with some titles phasing in earlier.
Crypto-assets are digital representations of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology. It can take the form of an asset-referenced token (stable coin), e-money token, or another crypto-asset, such as a utility token.
Utility tokens are a type of crypto-asset only intended to provide access to a good or a service supplied by its issuer. It can only be accepted by the issuer.
Utility tokens are not an asset or a financial instrument. They typically cannot be used for investment purposes.
Issuers of utility tokens are subject to rules known from prospectus regimes, with a view to the publication of a crypto-asset white paper and for admission to trading. Exemptions apply e.g. to utility tokens that only provide access to a good or service that exists or is in operation.
Asset-referenced tokens are a type of crypto-asset that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies (and is not an e-money token).
Asset-referenced tokens can serve as a means of payment or to store/invest value. They can be seen to compete with official currencies.
Issuers of asset-referenced token are also subject to authorization as well as organizational and conduct requirements. Exemptions apply to credit institutions and smaller offers of asset-referenced token. Additional obligations cover significant tokens and issuance restrictions apply to tokens used widely as a means of exchange.
E-money tokens are a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.
E-money tokens are similar in their function to e-money. They are surrogate for currencies and – unlike asset-referenced token – strictly link to an actual currency.
Issuers of e-money tokens need to be authorized as credit or e-money institutions, organizational requirements and conduct rules apply. A crypto-asset white paper needs to be published and additional rules apply for significant e-money tokens.
The value of traditional crypto currencies, such as Bitcoin or Ether, does not depend on currencies, goods, or other crypto assets. The holders of Bitcoin or Ether are not entitled to redeem their crypto currencies. Even though Bitcoin and Ether are crypto-assets, they do not qualify as utility tokens, stable coins, or e-money tokens.
The MiCAR also introduces new rules governing the provision of services in crypto-assets – so-called crypto-asset services. Crypto-asset services mean any of the following services and activities:
- providing custody and administration of crypto-assets on behalf of clients;
- operation of a trading platform for crypto-assets;
- exchange of crypto-assets for funds;
- exchange of crypto-assets for other crypto-assets;
- execution of orders for crypto-assets on behalf of clients;
- placing of crypto-assets;
- reception and transmission of orders for crypto-assets on behalf of clients;
- providing advice on crypto-assets;
- providing portfolio management on crypto-assets;
- providing transfer services for crypto-assets on behalf of clients.
Crypto-asset service providers are subject to authorization requirement. They are obliged to comply with requirements, e.g., governing safekeeping of clients’ crypto-assets and funds, the establishment of a complaint handling procedure, rules on the prevention, identification, management and disclosure of conflicts of interest, and on outsourcing. Minimum capital requirements depend on the nature of the crypto-asset services provided. Special rules address IT security and resilience, in particular emergency planning.
Prevention of Market Abuse
The MiCAR establishes a market abuse regime for crypto-assets outside the scope of the market abuse regulation (MAR). The scope of the MAR is basically limited to financial instruments and hence only covers securities tokens.
Regulation (EU) 2022/858 of 22 May 2022 introduced a Pilot Regime for the approval and operation of DLT market infrastructures, applicable since 23 March 2023. It targets already authorized investment firms, market operators, and central securities depositories (CSD) that plan to (also) use DLT. The scope of the Pilot Regime is rather limited. Authorization under the regime is usually limited to a maximum term of 6 years. During that time, DLT market infrastructures may benefit from certain exemptions to otherwise applicable requirements. For example, the provisions governing transaction reporting and on book-entry form of securities may be disapplied facilitating admission of DLT securities to trading on a trading venue. DLT financial instruments shall only be admitted to trading on a DLT market infrastructure, or be recorded on a DLT market infrastructure, if the DLT financial instruments are:
- shares, the issuer of which has a (tentative) market capitalization of less than EUR 500 million;
- corporate bonds, with an issue size of less than EUR 1 billion;
- UCITS, with the market value of the assets under management of less than EUR 500 million.
The aggregate market value of all the DLT financial instruments that are admitted to trading on a DLT market infrastructure or that are recorded on a DLT market infrastructure shall not exceed EUR 6 billion. Once this threshold is exceeded, the infrastructure needs to transition away from the Pilot Regime.
The DORA aims at establishing uniform rules on digital operational resilience for the financial sector. It establishes requirements on IT security and for risk management, for reporting serious ICT-related incidents, for outsourcing, the testing of digital operational resilience, and for information sharing.
Securities Tokens fall within the scope of EU financial markets regulation, in particular the framework governing financial instruments, such as the MiFID II. Regulation (EU) 2022/858 expressly clarifies that financial instruments are defined technology neutral, hence do not require the security to be embedded in a physical certificate.
Some EU Member States enacted additional rules in parallel to the EU regulatory framework. In June 2021, Germany introduced rules governing electronic securities. These rules also cover crypto securities and introduce a crypto securities register. The operator of such register is subject to authorization requirements. Also, for historic reasons, the provision of services in crypto currencies and the operation of wallets for crypto currencies require an authorization in Germany.