MiCAR – the final scope of a long expected (future-proof) framework at Union level for crypto

A.    What and who is covered? 

To describe MiCAR as comprehensive “crypto-regulation” would be going too far. For neither are any provisions established for the technologies underlying crypto projects, nor are there any regulations that require or even prohibit a certain design of crypto-assets. Achieving such a regulatory density was not the motivation of the regulation enactment. Recital 6 offers a more detailed insight: Regulatory action was prompted by crypto assets and related services and activities not previously covered by European legislation in financial services to promote innovative and fair competition. It was necessary to balance the need to provide a high level of investor protection without limiting the global competitiveness of Member States in the financial and technology markets.
The reference to “crypto assets not yet covered” actually refers to the specific characteristics that crypto assets can exhibit. The MiCAR regulations thus tie in “after the fact” with those attributes of crypto assets without influencing their creation process. Future crypto projects may be structured based on potentially relevant regulations. Whether the new regulation will therefore ultimately have a direct effect as a “regulatory design” remains to be seen.

I.    Crypto-asset taxonomy – sub-categories of crypto-assets

To sum it up, MiCAR provides for the following categories, whereas the last one is rather a catch-all clause:

• E-Money-Token (“EMT”)
• Asset-Referenced Token (“ART”),
• Utility Token, and
• Crypto Assets.

Regarding the first two categories, without mentioning the term stablecoin, MiCAR provides for a regulatory regime for crypto-assets, that are usually referred to as stablecoins on the market. A new aspect, however, is that MiCAR distinguishes between the two types of stable-coins EMT and ART, the classification as either of those entails different legal consequences under MiCAR.

Since, according to Recital 6, MiCAR is intended to regulate crypto-assets that are not already subject to European financial services regulation, such assets for which provisions have al-ready been established do not fall within the scope of MiCAR. This is the case regardless of the technology used for their issuance or transfer.
In particular, MiCAR does not apply to financial instruments within the meaning of Art. 4 para. 1 no. 15 MiFID II (Directive 2014/65/EU). Recital 14 clarifies that the demarcation is some-times not easy. For this reason, the European Securities and Markets Authority (“ESMA”) shall draw up corresponding guidelines with criteria and conditions for the classification of crypto-assets as financial instruments.

The following other assets are outside the scope of MiCAR, since are already covered by existing EU legislation:

• deposits (including structured deposits) covered by Directive 2014/49/EU on Deposit Guarantee Schemes;
• funds covered by Directive 2015/2366 on payment services in the internal market (with the exception of E-Money Tokens);
• securitisation positions; and
• certain insurance products such as non-life or life insurance products, reinsurance and retrocession contracts covered by Directive 2009/138/EC on insurance and reinsurance.

1.    First sub-category: E-money token (EMT) 

a)    Characteristics

The notion of EMT is defined as “(7) ‘electronic money token’ or ‘e-money token’ means a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency;” (Article 3, 1, 7 MiCAR).

EMT aims to have an equivalent function to coins and banknotes and can be used for payment purposes (as traditional E-money). Contrary to the ART, there is no reference to any deter-mined assets or currencies. The EMT qualification requires a reference to the value of one official currency (as opposed to ART which requires reference to a set of values or rights). In other words, if a token is referencing to one – and only one – official currency it will be an EMT (subject to some applicable exemptions) if it meets the two other criteria of qualification; namely

(i) the monetary function as MiCAR clearly states in its Recital 18 that EMT surrogate bank-notes and coins for the purpose of making payment operations; and

(ii) the redemption right at any time at the request of the EMT holder .

As for ART, MiCAR implements some broad criteria regarding the significance of a token. The requirement and the supervision will vary for significant EMT. The Commission may take any relevant delegated regulation (within the limit of its powers) to determine whether an ART or an EMT should be classified as significant based on the following criteria:

• a large customer base,
• a high market capitalisation, or
• a large number of transactions.

b)    Relation to other European legislation on financial services

MiCAR excludes from its scope EMTs which can be considered as a deposit such deposit being considered as an operation falling under the banking monopoly (in the same way traditional E-money law excludes deposits – which are, due to their nature, subject to a banking dedicated regulation).
The issuance of an EMT is subject to compliance with some strict rules, including on the nature of the issuer – which can be either a credit institution or an E-money institution .

In addition, MiCAR provides that EMTs “should be deemed to be ‘electronic money’ as that term is defined in Directive 2009/110/EC and their issuers should, unless specified otherwise in this Regulation, comply with the relevant requirements set out in Directive 2009/110/EC for the taking up, pursuit and prudential supervision of the business of electronic money institutions and the requirements on issuance and redeemability of e-money tokens“. Thus, in practice, EMT issuers will be subject to some strict requirements – applicable to all the E-money issuers (in terms of liquidity and protection of the EMT holders).

Complementary to the requirements applicable to all E-money issuers, EMT issuers must also comply with some specific requirements – namely the issuance of a white paper issuance and its submission to the competent authority.

For the sake of completeness, we would like to mention that some exemptions classically applied to E-money issuers will also exist for EMT (regarding limited networks, certain transactions by providers of electronic communications networks and E-money institutions issuing only a limited maximum amount of E-money). However, the white paper requirements (issuance and notification) will always remain applicable (for protecting the EMT holders).

One other point to pay attention to is the articulation between the services on crypto-assets and the potential performance of payment services. Indeed, “depending on the precise features of the services associated to the transfer of e-money tokens, such services could fall under the definition of payment services in Directive (EU) 2015/2366. In such cases, those transfers should be provided by an entity authorised to provide such payment services in accordance with that Directive.” (Recital 93).

This recital will require a more precise analysis and clarification regarding the articulation of these different pieces of regulation.

2.    Second sub-category: asset-referenced token (ART) 

a)    Characteristics

ARTs purport to maintain a stable value by referencing specific assets. According to the definition in Art. 3 para. 6 MiCAR, ART may do so by referencing

• other assets,
• other rights, or
• a combination thereof (which may in turn contain one or more fiat currencies).

A crypto asset which references a single fiat currency cannot qualify as an ART since it would qualify as an EMT. This – per definitionem – excludes the existence of an ART.

Following this rather open definition, ART can be designed in many ways. Current crypto pro-jects that would presumably be classified as ART under MiCAR include:

• Digix, which is pegged to physical gold reserves
• MakerDAO/DAI, in which Ethereum shall stabilize a specific amount of issued token.

It is worth noting that an ART must only purport to maintain a stable value rather than actually being stable. This is why even such crypto assets can qualify as ARTs which reference to crypto themselves – which are usually largely volatile.

It follows from Recital 18 MiCAR that the definition of ART shall be interpreted widely. This is to cover a wide range of crypto assets and prevent circumvention.

b)    Relation to other European legislation on financial services 

It must be determined on a case-by-case basis whether crypto assets that would otherwise be classified as ART are subject to other regulation. Especially where the functions of a crypto-asset go beyond the intention of establishing a stable value – namely where an ART embodies an investment component or payment function – it might not fall under MiCAR although it meets the criteria of an ART.

3.    Third sub-category: Utility Token 

a)    Characteristics

Crypto-assets which neither constitute EMT nor ART may qualify as Utility Token. According to Art. 3 para. 1 no. 9 MiCAR, Utility Token are:
“a (…) crypto-asset that is exclusively intended to provide access to a good or service provided by its issuer”.

The possible areas of application are quite diverse; for example, tickets, vouchers, member-ships, in-game blockchain-based currency for videogames, etc.

MiCAR’s Title II provides for a regime for all crypto-assets which neither qualify as EMT nor ART. In particular, a public offering of such crypto-assets requires to publish a white paper which has been approved by the national competent authority. In terms of Utility-Tokens, how-ever, MiCAR’s Title II distinguishes as follows:

• Utility-Tokens providing access to a good or service that does not yet exist or is in operation are covered by MiCAR’s Title II
• Utility-Tokens providing access to a good or service that exists or is in operation are excluded from MiCAR’s Title II

As a result, a public offer of Utility-Tokens providing access to a good or service that exists or is in operation does not trigger the obligation to publish a white paper.

b)    Relation to other European legislation on financial services

Where a crypto-asset does not meet the requirements of a financial instrument within the meaning of MiFID II or e-money within the meaning of the E-Money-Directive, such crypto-asset – irrespective of whether it is named Utility Token or not – does not fall under European legislation on financial services or e-money In such cases, there’s room for MiCAR to become applicable.

4.    Catch-all-category: other Crypto Assets 

a)    Characteristics

A Crypto Asset is 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”.

That notion allows MiCAR to cover a large diversity of tokens.

The Crypto Asset must be a digital representation of a value or a right. In practice numerous tokens in use represent a large variety of rights (of ownership, of use, of access to a service, etc.) or values (in particular the first generation of tokens are mostly used as an exchange mean). In addition, the Crypto Asset can be transferred or stored thanks to blockchain technology (“distributed ledger technology” “DLT”) or any similar technology. There is therefore a technical criterion linked to the recourse to a determined technology (or an equivalent one).

The notion of Crypto Assets is therefore very broad and a large diversity of tokens can meet the definition.

b)    Relation to other European legislation on financial services

Securities are already regulated by a dedicated, highly sophisticated, regulation (due to their specificities and risks for their holders). Thus, logically, MiCAR excludes from its scope all crypto-assets that qualify as financial instruments (the so-called “security tokens”) but as “deposits, including structured deposits” and “funds, except if they qualified as e-money to-kens”. In the same way other highly regulated products are also excluded from the scope of MiCAR such as securitisation positions, some limited insurance products or pension products up to some social security schemes (Article 2, 4 MiCAR).

5.    Exemptions 

Are not subject to the obligations to (1) issue a white paper and (2) notify the white paper to the competent authority – while remaining subject to some obligations in term of marketing (Article 7) regarding the offerors:

• “(a) an offer to fewer than 150 natural or legal persons per Member State where such persons are acting on their own account;
• (b) over a period of 12 months, starting with the beginning of the offer, the total consideration of an offer to the public of a crypto-asset in the Union does not exceed EUR 1,000,000, or the equivalent amount in another official currency or in crypto-assets;
• (c) an offer of a crypto-asset addressed solely to qualified investors where the crypto-asset can only be held by such qualified investors”

Therefore, these criteria grant an exemption applicable to small tokens issuance.
In addition, the following are totally excluded from the publicity requirements applicable to crypto-assets (which are not EMT or ART):

• “the crypto-asset is offered for free;” : this category may correspond to a token offered to a community or for promotional purposes (from our view, the requalification into an-other category of crypto-assets must be studied);
• “the crypto-asset is automatically created as a reward for the maintenance of the distributed ledger or the validation of transactions;” : this category seems to refer to tokens offered for mining, cloud mining, staking or masternodes activities;
• “the offer concerns a utility token providing access to a good or service that exists or is in operation;” : thus certain Utility Tokens (for details, see above) are excluded. In any case the token issuer must be able to demonstrate that its token can be qualified, in practice – in the light of its specific characteristics – only as a utility token;
• “the holder of the crypto-asset has the right to use it only in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror” : that exemption is very interesting and duplicates in the crypto-assets environment the exemptions existing within the payment / E-money services.

II.    What about NFTs and (the future of) DeFi?

1.    NFTs and the scope of MiCAR 

NFTs (non-fungible tokens) are largely outside the scope of MiCAR. Although this statement is correct in the bottom line, it is – despite all discussions and back-and-forth – still inaccurate in terms of wording. As explained above, the question of whether MiCAR’s applies or not is linked to specific characteristics, including those defining NFTs. Other than for EMTs, ARTs, and Utility Tokens, NFTs are not an own category under MiCAR.
Therefore, if crypto-assets designated as NFT fall under a regulated sub-category, that is, EMT, ART or Utility Token on a case by case basis, they fall within the scope of MiCAR.

MiCAR distinguishes between

• crypto-assets which are unique and not fungible with other crypto-assets,
• crypto-assets which represent services or physical assets that are unique and non-fungible, and
• fractional parts of a unique and non-fungible crypto-asset.

a)    Uniqueness / non-fungibility

Recital 10 clarifies that crypto-assets that are unique and non-fungible, and not NFTs in general, are excluded from MiCAR’s scope.

Non-fungibility means non-exchangeability and indicates that the crypto-assets are not traded or exchanged in an equivalent manner, as it is the case with cryptocurrencies. NFTs obtain their uniqueness on the one hand through the technically unique identifiability through a unique identifier (UID) on the Blockchain, but also through real-world objects they represent – MiCAR mentions art or collectors’ items as examples.

Although unique and non-fungible crypto-assets might be traded on a crypto exchange and be accumulated speculatively, the legislator did not see the need of regulating those. This is due to the fact that such crypto assets cannot be ascertained by means of comparison to an existing market or equivalent asset. The legislator states that such crypto-assets only have a limited financial use and thus less risks to their holders.

b)    Fractional NFTs subject to MiCAR?

MiCAR recognises, however, that technical uniqueness of NFTs is not sufficient for them to fall outside the scope of MiCAR.

In this respect, Recital 11 refers to Fractional NFTs. Fractional NFTs represent parts of an asset whereby such asset is in itself unique and non-fungible. An example of this are fractional NFTs issued in large series or collections – this category may include certain types of NFTs issued under the widely used ERC-1155 standard.

MiCAR encourages national competent authorities to apply a “substance over form” approach and to base the assessment of fungibility and uniqueness on the specific characteristics of the crypto-asset in question, rather that its designation by the issuer.

c)    Further need for regulation

However, the classification of NFT as a financial instrument pursuant to other legislation re-mains unaffected by MiCAR. According to MiCAR, ESMA is obliged to issue guidelines to provide a better understanding of cases where crypto assets that would ordinarily be considered unique and non-fungible with other crypto assets could qualify as financial instruments and thus are subject to other financial services regulations.

Further, the European Commission shall undertake a comprehensive assessment of NFT and to determine whether there is a need for a separate NFT regime.

2.    DeFi and the scope of MiCAR 

Crypto-assets which have no identifiable issuer (such as bitcoin) are expressly excluded from the scope of MICAR. Similarly, MICAR provides that that crypto-asset services which are provided in a fully decentralised manner without any intermediary, are excluded from its scope of application.

However, while the concept of DAO has been deleted from the last versions of MICAR, such regulation specifies when crypto-asset services and/or activities even decentralised are per-formed, or controlled by a group of natural or legal persons (DAO) such DAO should be subject to MICAR requirements. It echoes some Members States initiative such as France which is currently working for adopting a national legislation for recognising legally DAO as de facto company and impose them to comply with certain requirements .

In any case, the Commission will present 18 months after the entry into application of MICAR a report to the European Parliament and the Council which will include “an assessment of the development of decentralised-finance in the markets in crypto-assets and of the appropriate regulatory treatment of decentralised crypto-asset systems without an issuer or crypto-asset service provider, including an assessment of the necessity and feasibility of regulating decentralised finance;”

B.    MiCAR and the sovereignty of the Member States – a French and German perspective on national peculiarities 

I.    Germany 

1.    Status quo 

In the area of crypto-regulation, Germany, with its responsible Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – “BaFin”), is somewhat of a pioneer.

Long before MiCAR was even on the table, BaFin had ruled that Bitcoins constitute units of accounts (Rechnungseinheiten). These are an own German form of financial instruments. They do not constitute financial instruments under MiFID II. Financial services – including those based by MiFID II – regarding units of accounts (Rechnungseinheiten) trigger a licence requirement under German law. BaFin’s opinion thus caused Bitcoins to be financial instruments under German law and thus subject to regulation.

Further, the introduction of “crypto custody business” (Kryptoverwahrgeschäft) in the German Banking Act (Kreditgwesengesetz – “KWG”) as a regulated service for wallet providers had no counterpart at the European or member state level. In this context, Germany had also implemented a new form of financial instrument – the crypto asset (Kryptowert). This means that even if neither MiFID II nor MiCAR applied there would still be German national regulation which could become relevant. At least as long as this will not be harmonized.

Already in Pre-MiCAR-times, in respect of NFTs BaFin has been taking the differentiation be-tween unique and fractional NFTs. BaFin takes the view that where an NFT is a Fractional NFT it may constitute a security (Wertpapier), the public offering of which may trigger a prospectus obligation and services associated with Fractional NFTs may be subject to a licensing requirement.

Utility Tokens have been defined by BaFin as “crypto tokens that allow access to certain ser-vices or products, similar to a ticket or voucher”. In principle, this definition coincides with that of MiCAR, whereby a Utility Token is a crypto-asset exclusively intended to provide access to a good or service provided by its issuer. However, under German regulatory law, there is no distinction – like MiCAR does it – as to whether the Utility Token provides access to a good or service that does no is exist or is in operation or otherwise already exists or is in operation.

In its information leaflet of 2019, BaFin did not classify Utility Tokens as securities within the meaning of the Prospectus Regulation and the German Securities Prospectus Act (Wertpapierprospektgesetz – WpPG) or as investments within the meaning of the German Investment Products Act (Vermögensanlagengesetz – VermAnlG). Also, such tokens would not fulfil the requirements for a financial instrument according to the KWG as well as the German Investment Firm Act (Wertpapierinstitutsgesetz – WpIG), which is why services associated with Utility Tokens do not trigger a licensing requirement. Accordingly, service providers offering services associated with Utility Tokens do not trigger the applicability of German Anti-Money Laundering regulation.

2.    Expected change through MiCAR 

It is expected that MiCAR might cause legislative changes in Germany. At least the German-only crypto assets (Kryptowerte) and the accompanying financial services crypto custody business (Kryptoverwahrgeschäft) might become obsolete or will be adjusted – in order to aim at a harmonization of the law at EU-level.

Further, BaFin had recently stated that they “must start to think increasingly European”. We therefore expect that BaFin will be in close contact with regulators from other member states. This may be a hint that BaFin will take a broader view – seeing the “bigger European picture” – and that it is open for adjusting its administrative practice in the crypto area following a harmonization of the law it enforces in Germany.

II.    France 

1.    Status quo

Under French law, crypto-assets are governed by the provisions of Law n° 2019-486 of 22 May 2019 (known as the PACTE Law).

Thus, a crypto-asset or digital asset are divided in two categories:

• “1° The tokens” “excluding those that meet the characteristics of the financial instruments mentioned” and the “savings bonds”;
• “2° Any digital representation of a value that is not issued or guaranteed by a central bank or public authority, that is not necessarily attached to a legal tender and that does not have the legal status of a currency, but that is accepted by natural or legal persons as a means of exchange and that can be transferred, stored or exchanged electronically.”

Indeed, at the time of the adoption of the PACTE law, two distinct categories are recognized:

• the utility tokens issued in the context of ICOs for the development of new digital plat-forms; this category of tokens gives various rights of access and use over goods and services; and
• the crypto-currencies such as Bitcoin or Ether, which do not give any rights to their holders and whose sole purpose is to serve as an instrument of exchange and payment.

As under MiCAR, security tokens are also subject to specific requirements, due to their nature.

There is no equivalent to an ART or an EMT under French law. On the contrary, the French doctrine tends to consider that the qualification as a digital asset is exclusive to any other qualification – including the E-money qualification.

2.    Expected change through MiCAR 

In the perspective of MiCAR some modifications to the French applicable law have already been adopted – but only regarding the requirements for the local DASP registration. The main debates in France are regarding the transition from the national digital assets services providers status to the new EU MiCAR crypto-assets services providers licence.

To date, the French definition of a “digital asset” has not been modified. But the adoption MiCAR will impose a modification to the French applicable crypto-assets / digital assets taxonomy, in particular the specificities of the ART and the EMT must be taken into consideration. In addition, the French doctrine will need to be amended in order to reflect these new typologies of assets, and also organise the articulation with the other applicable financial regulations.

C.    Conclusion 

MiCAR’s intention to establish a harmonized pan-European regulatory framework for crypto is indeed a good starting point.
The question remains as to how and how far this will work. Given the fact that many crypto-assets already fall under the existing regulatory regimes and the national implementing laws, MiCAR’s scope might, in fact, be quite limited.
It remains to be seen whether there are many crypto-assets left which will be covered by MiCAR or whether these fall outside of its scope since they already fall under existing regula-tion or are even unregulated under MiCAR.