In today’s second part of this trilogy of articles, the future regulatory framework under MiCA is presented. First, an overview of the regulations of the law as a whole is given, before the ICO-relevant regulations are discussed.
In the last and third part, we will then give an outlook on the development of ICOs under MiCA.
II. future regulation under MiCA
The Blockchain was created on the idea of decentralisation and independence from state regulation. Blockchain-based products, however, are nowadays increasingly integrated into existing financial systems, so that without its regulation, the very existence of these systems may be fundamentally endangered in the future. As the last few months with their numerous bankruptcies of major crypto-companies have[1] it is only a matter of time before the risks of a lack of regulation are realised and endanger many livelihoods, especially of consumers. Therefore, there is probably no more appropriate time than the present to enact MiCA.
The EU Regulation MiCA (“Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937”) will now establish an EU-wide framework for crypto assets. The regulation will be adopted on April 20, 2023 and enter into force 18 months later.
- General
MiCA deals with the subject matter, scope and definition in Title I, all tokens that are not value-referenced or e-money tokens in Title II, and value-referenced and e-money tokens in Titles III-IV. Titles V-IX then cover the authorisation and conditions of operation of a crypto service provider, the competent authorities, EBA (European Banking Authority) and ESMA (European Securities and Markets Authority), delegated and implementing acts and the transitional and final provisions.
Theaim of this regulation is to further promote the innovation and competitive potential of digital finance while minimising risks for consumers, investors and financial and monetary policy.
It is important to mention that according to Art. 2 para. 2 a) MiCA, the regulation does not apply to financial instruments as defined in Art. 4 para. 1 No. 15 MiFID II (Directive 2014/65/EU). This applies in particular to security tokens that have been qualified as such by BaFin.[2]
The same applies to NFTs (non-fungible tokens). These are not completely excluded from the scope of the regulation. However, as long as they are unique and fungible, i.e. exchangeable, the requirements applicable to the preparation and publication of a crypto value white paper do not apply to them in accordance with grounds para. 15 and Art. 4 para. 2 c) MiCA.
Further exceptions apply to authorised credit institutions and investment firms[3] and for rewards in proof-of-work or proof-of-stake consensus mechanisms.[4]
- ICO-relevant regulations
According to 1.4.2. of the legislative financial statement, a specific objective of the regulation is to expand the sources of financing for companies by increasing the issuance of new cryptocurrencies in the context of ICOs (Initial Coin Offering) and tokenised assets in the context of STOs (Security Token Offering). This is to be achieved by creating legal clarity and legal certainty for the same.
The most important instrument for this are the Whitepaper regulations. Pursuant to Art. 4 para. 1 MiCA, issuers are prohibited from offering crypto[5] offer crypto securities to the public or offer admission to trading on a trading platform for crypto securities if they have not prepared, notified and published a crypto securities white paper. The whitepaper must contain the information required in Art. 5 para. 1 MiCA, such as a detailed description of the project, the issuer and the actors involved as well as information on the underlying technologies and risks. Furthermore, according to Art. 5 para. 2, the information must be fair, clear and not misleading. In addition, according to Art. 5 para. 4 MiCA, the whitepaper must not contain any statements about the future value of the crypto assets if the future value cannot be guaranteed by the issuer. These regulations require the issuer to disclose certain information and update it on an ongoing basis as needed. For consumer convenience, the white paper must also contain a summary of the material information in concise and non-technical language.
The issuer is liable for the information published in the white paper pursuant to Art. 14 para. 1 MiCA. The Obligation to provide evidence for incomplete, unfair, ambiguous or misleading information that violates Art. 5 MiCA lies with the holder of the crypto securities pursuant to Art. 14 para. 2 MiCA.
White papers are therefore similar in idea to a prospectus in an IPO. However, in contrast to this, white papers do not have to be approved by the competent authority according to Art. 7 para. 1 MiCA. Only the issuer is responsible and liable. Only a notification of the competent authority at least 20 working days before publication of the white paper is required according to Art. 7 para. 2 MiCA.
In addition to the regulations on white papers Marketing communications on a public offering of crypto securities or their admission to trading on a trading platform of the issuers are also regulated in Art. 6 MiCA.
After the EU has so far been a regulatory patchwork in the crypto area, the crypto equivalent of the existing EU-Passporting[6] is introduced. According to Art. 15 para. 5 MiCA, issuers’ admissions to trading on a trading platform granted by the competent authority of the home member state are valid for the entire Union. The procedure for crypto passporting is similar to that of the existing EU passporting.
In addition, consumers now have a right of withdrawal from issuers pursuant to Art. 12 para. 1 MiCA Right of withdrawal within 14 days. According to this, consumers can revoke their consent to the purchase within this period without costs and without giving reasons and get their payments including any fees back without delay, but at the latest after 14 days.
Finally, TITLE VI, Artt. 76 et seq. MiCA also contains a Prohibition on insider trading and market abuse for actions in connection with crypto securities. According to this, the disclosure of insider information, insider trading and market manipulation are prohibited, similar to the already existing regulations in the capital market sector.
The regulation is not a toothless tiger either. The EBA, i.e. the European Banking Authority, is granted a number of powers in Artt. 112 et seq. MiCA a series of Measures (including fines and periodic penalty payments) to effectively enforce compliance with the regulation.
European authorities such as ESMA expect[7]that service providers outside the EU, and thus outside the scope of MiCA, will continue to play the dominant role in the crypto market. Cooperation with third countries is therefore also stipulated in Art. 90 MiCA.
Footnotes:
[1] Examples: FTX, Celsius Network, Voyager Digital, BlockFi, 3AC (Three Arrows Capital).
[2] see p. 6 of the second BaFin information letter on prospectus and permission requirements in connection with the issue of so-called crypto-tokens, GZ: WA 51-Wp 7100-2019/0011 and IF 1-AZB 1505-2019/0003.
[3] Ex: Reasons para. 54 MiCA, Art. 2 paras. 4, 6 MiCA.
[4] see Art. 4 para. 2 b) MiCA.
[5] (meant here and in the following are crypto assets that are not value-referenced tokens or e-money tokens)
[6] Outgoing passport from the perspective of a company domiciled in Germany pursuant to Art. 24a KWG, Art. 38 ZAG, Artt. 70-72 WpIG, see https://www.bafin.de/DE/Aufsicht/BankenFinanzdienstleister/Passporting/passporting_node.html.
[7] Opening Statement of ESMA before the Economic and Monetary Affairs Committee of 30.11.2022, ESMA50-164-6905.