Reshaping Market Infrastructure
Across the world, blockchain technology is developing at a rapid pace and is beginning to reshape market infrastructures. The EU aims at addressing this development through its proposed digital finance package. The package reflects the EU’s ambition for the digital age: it shall foster innovation and lift barriers to dormant growth potential.
EU Digital Finance Package
Crypto assets are currently only subject to EU financial regulation if they qualify as financial instruments, such as securities tokens. Utility tokens, stable coins, and e-money-tokens hence may only be caught by the fragmented local laws of the EU Member States, resulting in an uneven playing field considered an obstacle to digitalization and to the success of new technologies in the EU. The EU commission published the proposal of a legislative package on the digitalization of the financial sector, dealing with crypto assets and market infrastructure. Parts of it are available as draft bills, only, other parts have already been enacted. The package primarily consists of the following regulations:
- Regulation on Markets in Crypto-assets (MiCA) - draft
- Regulation (EU) 2022/2554 on digital operational resilience in the financial sector (DORA)
- Regulation (EU) 2022/858 on a Pilot Regime for market infrastructures based on distributed ledger technology (Pilot Regime)
Crypto assets intended to provide digital access to a good or service, available on DLT, which are only accepted by the issuer of that token.
Utility tokens are not an asset or a financial instrument. They typically cannot be used for investment purposes.
Issuers of utility tokens are obliged to publish a crypto asset white paper and to notify the competent supervisory authority of such paper.
Crypto assets that purport to maintain a stable value by referring to the value of several fiat currencies or commodities.
The aim of these tokens is to be used as a means of payment or to store value.
Issuers of stable coins are also subject to authorization requirements if the coins are offered to the public or traded on a trading venue for crypto assets.
Crypto assets the main purpose of which is to be used as a means of exchange and that purport to maintain a stable value by referring to the value of a fiat currency that is legal tender.
E-money token are similar in their function to e-money. They are surrogate for fiat money 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.
Crypto Asset Services
The MiCA also introduces new rules governing the provision of services in crypto assets – so-called crypto asset services. Crypto-asset services comprise the operation of a trading platform, the exchange of crypto-assets for fiat currency, the execution of orders for crypto-assets on behalf of third parties, the placing of crypto-assets, and the reception and transmission of orders for crypto-assets on behalf of third parties. The provision of advisory services in crypto assets also is a crypto asset service.
Crypto asset service providers are subject to an 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 MiCA 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.
Pilot Regime for DLT Market Infrastructure
Regulation (EU) 2022/858 of 22 May 2022 introduced a Pilot Regime for the approval and operation of DLT market infrastructures, basically applicable as of 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 (Transition Strategy).
Digital Operational Resilience
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. When securities tokens first emerged, this qualification was not entirely clear. Therefore, as part of the Regulation (EU) 2022/858, the rules governing financial instruments are amended to clarify that they apply technology neutral.
Rules in Germany
Some EU Member States already developed national rules on crypto assets or for historic reasons already had technology neutral rules in place that are now construed to address the DLT world. In June 2021, Germany introduced rules governing electronic securities. These rules also cover securities token (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.