Markets in Crypto-Assets Regulation

WHAT DOES THE MICAR REGULATE?

The regulation applies to all market participants that issue crypto assets (issuers) or provide services related to crypto assets (crypto service providers) in the EU. It standardizes rules of conduct and capital requirements for these, as is also known from other regulated areas, and thus creates a regime on the operation, management and organization of issuers and service providers in the field of crypto assets.

The Commission's draft regulation defines crypto value as "a digital representation of value or rights that can be electronically transmitted and stored using distributed ledger technology [DLT] or similar technology." MiCAR understands DLT to mean a technology that supports the distributed recording of encrypted data (cf. Art. 3(1) MiCAR). This is also how the EU Council version defines it.

The ECON Committee's version, on the other hand, stipulates that the representation is cryptographically secured and takes the form of a coin, token or other digital medium¹. It therefore remains to be seen whether the definition of crypto assets will still be changed during the trilogue negotiations.

With regard to crypto assets, MiCAR distinguishes between asset-referenced tokens, e-money tokens and other, general crypto assets, the latter being the catch-all category.

• Asset-referenced token is defined as a 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 (Art. 3 para. 1 no. 3 MiCAR).
• 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 (Art. 3 para. 1 no. 4 MiCAR).
• General crypto assets include all crypto assets that are neither asset-referenced tokens nor e-money tokens.

This includes currency tokens (cryptocurrencies such as Bitcoin), e-money tokens and asset-referenced tokens (both also called stablecoins) as well as utility tokens (usage tokens, comparable to "digital" vouchers).

For e-money tokens, however, the special feature applies that, in addition to MiCAR, the provisions for e-money within the meaning of the Electronic Money Directive may also apply if the token is to be qualified as e-money at the same time.

Value-referenced tokens and e-money tokens are also considered significant tokens if they reach certain thresholds. Significant tokens require supervision by the European Banking Authority ("EBA") due to their economic importance in legal transactions.

MiCAR does not includeSecurity tokens (tokens similar to securities) are; as financial instruments, these continue to be subject to the regime of MiFID II (or the implementing standards), as well as financial instruments or structured deposits as a whole within the meaning of MiFID II, e-money within the meaning of the Electronic Money Directive, deposits within the meaning of the Deposit Guarantee Directive (DSGD), securitizations within the meaning of the Securitization Regulation.

In addition, common manifestations of non-fungible tokens (NFTs) are not included in the scope of MiCAR. MiCAR is not intended to apply to unique crypto-tokens that are not fungible with other crypto-tokens. Thus, the draft regulation excludes from its scope NFTs in the form of digital art and collectibles, and in the form of services or physical assets.

Likewise, decentralized finance (DeFi) projects are not likely to be covered by the scope of MiCAR, as they lack a central legal entity as issuer. Therefore, the current draft of the ECON Committee also provides that DeFi constellations should not be subject to regulation until the offering of crypto securities is centralized.

PRUDENTIAL REGULATIONS

1. EMITTENTS

The draft regulation provides for a tiered system of requirements for issuers based on the crypto assets to be issued, with the requirements for issuers of asset-referenced tokens being stricter overall than those for issuers of e-money tokens and general crypto assets. However, the following applies in principle to all issuers:

• Issuer must be a legal entity
• Obligation to prepare and publish a so-called white paper (comparable to a securities prospectus) as well as to notify and publish the white paper
• Obligation to comply with certain rules of conduct

For issuers of asset-referenced tokens, the draft also provides for comprehensive conduct obligations and capital requirements.

Issuers of e-money tokens must be licensed as a credit institution (Section 1 (1) of the German Banking Act - "KWG") or an e-money institution (Section 1 (1) sentence 1 no. 1 KWG). Accordingly, the strict conduct and capital requirements of MiCAR do not apply to them, as the issuers are already subject to the licensing requirements of the respective type of institution.

2. CRYPTO SERVICE PROVIDER

The regulations for crypto service providers provide, among other things, for a licensing requirement and ongoing conduct of business obligations, and no differentiation is made here based on crypto values.

For crypto service providers, the draft regulation lists eight manifestations of crypto services that are not exhaustively regulated and that go far beyond the scope of crypto custody business pursuant to Section 1 (1a) sentence 2 no. 6 KWG.

According to Art. 3 (1) No. 9 MiCAR, the following activities fall under the services that are not exhaustively standardized and require a license:

• Custody and management of crypto assets for third parties
• Operation of a trading platform for crypto assets
• Exchanging cryptocurrencies for nominal currencies that are legal tender
• Exchange of crypto assets for other crypto assets
• Execution of orders on crypto assets for third parties
• Crypto securities placement
• Acceptance and transmission of orders for crypto values for third parties
• Advice on crypto stocks
• Portfolio management for crypto stocks.

3. OBSERVATION

The MiCAR contains a separate chapter on the prevention of market abuse in relation to crypto securities, the regulations are similar to those of the Market Abuse Regulation and include, among others, a ban on insider trading and a ban on market abuse.

Responsible for the licensing and supervision of crypto issuers under MiCAR are the national supervisory authorities and the ECB, while issuers of significant tokens are subject to supervision by the EBA. In addition, the European Securities and Markets Authority ("ESMA") is to be responsible for maintaining a crypto service provider registry.

CURRENT REGULATORY REGIME FOR CRYPTOS IN GERMANY

There is currently no separate regulatory regime for crypto assets in Germany. Rather, for each crypto asset it has to be examined individually whether and, if so, under which applicable regulatory regime it falls.

For example, currency tokens as cryptocurrencies in Germany currently fall under the definition of units of account within the meaning of Section 1 (11) sentence 1 no. 7 var. 2 KWG and are therefore classified as financial instruments under the KWG for regulatory purposes. Security Tokens are currently classified in Germany for regulatory purposes as securities "sui generis", which are subject to the securities concept of Art. 4 (1) no. 44 of MiFID II as well as of Sec. 2 (1) WpHG and Sec. 2 no. 1 WpPG. It follows that in the case of a public offering (so-called security token offering), a securities prospectus must generally be prepared in accordance with the provisions of the EU Securities Prospectus Regulation as well as the WpPG or a securities information sheet in accordance with Section 4 WpPG. This will not change after the Regulation enters into force, as such financial instruments are explicitly excluded from the scope of the draft Regulation. Non-fungible tokens (NFT), on the other hand, are not to be classified as financial instruments within the meaning of the KWG or MiFID II, but may also be subject to a prospectus requirement depending on their design. Pure utility tokens are currently not regulated under German supervisory law. In individual cases, hybrid utility tokens may be regulated differently, for example if they also have the function of a means of payment.

OUTLOOK AND EVALUATION

The first comprehensive European regulatory framework for crypto asset markets has the potential to create a unified and secure legal framework for crypto FinTechs in Europe.

It is true that not inconsiderable conditions are attached to the market entry of issuers and crypto service providers. However, it should not be overlooked that correspondingly high market access requirements already exist in individual member states - including Germany in particular. It is important that the supervisory regimes remain close to technical practice and do not block any avenues and development opportunities through overly narrow supervisory regulations. Here, much will also depend on the administrative practice of the supervisory authorities, which would do well to create their own units exclusively for the regulation of crypto assets.

Once again, the EU's choice to regulate this via a regulation is interesting, so that a fully harmonized legal framework for crypto markets is created, which can be seen as an important step towards abolishing so-called gold plating, i.e. the excessive implementation of regulatory requirements by individual member states.

¹ Article 3, paragraph 1, subparagraph 2 of the Final Compromises on behalf of MEP Berger v. March 9, 2022: "‘crypto-asset' means a digital representation of a value or a right for direct investment or finance purposes that uses cryptography for security and is in the form of a coin or a token or any other digital medium of distributed ledgers, and which may be transferred and stored electronically, using distributed ledger technology or similar technology."