The proposal of the Regulation of the European Parliament and of the Council 2020/65, (MICA) aims to provide a uniform regulation for the crypto-asset markets of all countries of the Union, to the extent that no harmonised regulation currently exists and the degree of development of specific legislation with regards to cryptoassets differs according to the Member State.

Although it is not a definitive text, its explanation recalls that one of the European Union’s priorities is that the regulatory framework of the financial services is favourable to innovation and does not entail obstacles for the application of new technologies. However, as we will see, the procedure and prolixity of documentation and information required to obtain the authorisation does not respond to this declaration of intent, so that it will not be too difficult for neighbour countries who are not members of the European Union to create a more simple and competitive framework to attract cryptoasset issuance projects.

In short, the EU aims to subject the issuance and trafficking of digital assets with blockchain technology to the control of the financial authority of each country, whether the tokens are asset-referenced, tokens of electronic money or other cryptoassets. Said authority will in turn be monitored by the financial institutions of the European Union: the EBA (European Banking Authority), the European Securities and Market Authority (ESMA) and the European Central Bank (ECB). Given the novelty and nature of the technology, the issuance of ICO’s (Initial Coin Offering) has been taking place in accordance with a non-existent or primary legal framework; in the latter case, the authorities of several Member States decided to subject the ICO’s to the regulations of the public offers of shares, which in our opinion was a misguided but desperate way of retaining the increasing pace of offers. However, this solution does not fit with the dynamic character of the launching of ICO’s, resulting in the imposition of a specific, but also the simplest possible, regulation, to prevent administrative obstacles from hindering the development of the market of digital assets.

This review only addresses the requirements that the aforementioned Regulation aims to impose on the issuance of asset-referenced tokens (“FFRA”), as well as obligations which the issuer will have.

a) Authorisation: the offer of tokens to the public and their trading on FFRA trading platforms in the European Union remains subject to the authorisation of the competent authority of the Member State. Said authorisation is limited to legal entities established in the European Union. It will not be applicable when the average annual amount of tokens in circulation does not exceed Euro 5 million and the offer is directed towards qualified investors who are the only ones able to acquire Nor does the authorisation regime apply if the issuer is a credit institution as defined in article 8 of Directive 2013/36. Said exceptions do not exempt issuers from creating the White paper of cryptoassets, mentioned in article 17 of the Regulation, and submitting it for approval before the competent authority of the Member State of origin. The EBA and the ESMA will create the technical norms which will regulate the procedure of approval of the White paper.

b) Authorisation application: it shall be filed before the competent Authority of the State of origin, this State of origin being understood as that in which the issuer has its registered office. The application must be accompanied by information and documents listed in article 16 of the Regulation. In particular, the applicant must provide proof that the people involved in the management of the issuer do not have a criminal record in their country of residence in the fields of commercial, financial, insolvency or money laundering offences. Furthermore, the members of the management body of the issuer shall accredit their qualification and experience on a collective level, for the management of the issuer; the proposal of the Regulation highlights what seems to be evident, that is, that said people “must dedicate sufficient time to the carrying out of their functions”. The details of the content of the applications, forms and procedures shall be specified by the EBA in collaboration with ESMA, no later than a year after the Regulation enters into force.

c) White paper: in any case, the issuer must subject to the approval of the competent authority of the Member Sate a White paper containing detailed information about the governance system of the issuer, the reserve of assets and their custody, the enforceability of the rights of the subscribers regarding the reserve assets or the issuer, liquidity mechanisms of the tokens etc. The White paper may be amended, in which case, the issuer must notify said amendment to the competent authority of the Member State of origin; the procedure shall be obligatory when changes occur after the authorisation which affect essential issues, such as the governance system of the issuer, the reserve assets, validation protocols of operations or the reimbursement of the tokens or their liquidity.

d) Assessment procedure of the application: once the information required in the application has been duly presented (including the White paper), the authorities of the Member State must make a decision either conceding or dismissing the application within a period of 3 months, or, within that period, require additional information from the applicant. Once this period is over, the authority of the Member State shall transmit the application file and the draft decision to the EBA, the ESMA and the European Central Bank (ECB). Once received, these three bodies shall have 2 months to issue a non-binding opinion on the application, which they will transmit to the competent authority of the Member State, so that the latter issues its decision within a period of 1 month.

The wide-ranging discretionary power of the competent authority to reject the application is remarkable: the proposal of the Regulation provides as grounds that the “model may pose a serious threat to financial stability, the transmission of the monetary policy, or monetary sovereignty”, or, the understanding that the issuer “does not fulfil, or it is probable that they will not fulfil, any of the requirements” demanded. The accumulation of adjectives and the margin of discretion conferred seems disproportionate, while suggesting the difficulty of not falling into political arbitrariness or comparative wrongs, which in turn will lead to litigation.

e) Register of the authorisation and revocation: the AEVM shall include in its register of cryptoassets and cryptoasset service providers the authorised issuers, as well as the White papers, indicating the details of the issuer.

The competent authority (of the Member State) also has the power to revoke the authorisation, both for non-compliance of the conditions under which it was issued and for mere non-use during 6 consecutive months, as well as situations of insolvency or regulatory non-compliance.

f) Obligations of the issuer: rather naively, article 23 demands that the issuers act with “honesty, impartiality and professionalism”, as if said attributes should not be assumed to be held already by any operator working in the business sphere. It also demands them to communicate in an impartial, clear and non-deceiving way with the owners of the tokens.

The White paper and the advertising communications relating to the public offer of tokens must be published on the website of the issuer while the tokens are in public hands.

    • Duty regarding information: at least once a month, the issuer must publish on their website the amount of tokens in circulation, their value and the composition of the reserve of assets. They must also publish every relevant fact which significantly affects or may affect the tokens or reserve of assets.
    • Complaints: the issuers must have a channel and procedure for complaints of owners of tokens, which shall be in accordance with the guidelines, requirements and templates which shall be provided in due course (but no later than 1 year after the Regulation comes into force) by EBA in collaboration with ESMA.
    • Governance system of the issuer: the proposal of the Regulation indicates that the issuer will have “Robust systems of governance, a clear organisational structure, with well-defined, transparent and coherent lines of responsibility”, although, and again, the ambiguity of the terms and the abundance of adjectives invites an interpretive doubt. In the event that a natural person is the direct or indirect owner of more than 20% of the company capital or of the voting rights in the issuer or exercises a control over said issuer, they must have “good repute and competence”. The proposal does not define what good repute means, nor what “competence” should be understood as. Could it be a person without an academic or technical degree in the field? Would a person be honourable if they have been convicted for blood crimes, but not financial or commercial ones?

g) Guarantees of the issuer:

1) Own funds: the issuer must have at all times an amount of own funds which is the same – at least – as the highest amount of the following:

      • Euro 350,000
      • 2% of the average amount of reserve assets, which shall be the average amount of the assets at the end of each calendar day, calculated over the last 6 months.

These funds will consist of ordinary tier 1 capital elements and instruments (according to articles 26 to 30 of the EU regulation 575/2013). The competent authority shall be able to decide to increase or decrease the amount by 20% in certain cases, depending on the risk that they consider to exist in each case.

2) Reserve of assets: in addition to the guarantee of soundness or solvency which the own funds provide, the proposal of article 32 of the Regulation demands that the issuer has reserve assets. If the issuer issues tokens of more than one category, they shall have to have a reserve fund for each category. Said assets must be kept separately from the issuers own assets and remain free of charges; neither shall they be pledged as a financial guarantee. The reserve assets must be easily accessible in order to meet the reimbursement requests of the token owners.

These assets shall be held by an authorised cryptoassets service provider, in the case that these are cryptoassets; or by a credit institution when they are another type of reserve assets. The credit institutions shall hold in trust fiat currencies in a special account of the credit institution itself; for other types of financial instruments, they must be in a special account of this entity; for cryptoassets, the service provider must keep them in custody through private cryptographic keys. And for other types of assets, the credit institutions shall verify the property of the issuer on the basis of the information and documentation provided by the issuer or through external evidence, and must keep a specific register.

The reserve assets may be invested, as long as this is in the form of highly-liquid and low-risk instruments, the benefits being for the issuer (these instruments shall be defined by the EBA at a later date and no later than 12 months after the Regulation comes into force).

Interest: the proposal of the Regulation prohibits the accrual of interests or profit related to the time in which the owner of the tokens has them in their power.

Finally, in the case of significant token issues, a list of additional obligations is foreseen, said issues being understood as those with a large client base, value, stock market capitalisation, importance of cross-border activities etc., which exceed certain thresholds in the opinion of EBA and depending on the criteria, such as, for example, a client base greater than 2 million, capitalisation greater than Euro 1,000 million, daily operations greater than 500,000 or Euro 100 million, reserve assets greater than Euro 1,000 million, or the use of tokens in more than 7 Member States.

Regarding the liquidation of the issuer, the proposal of the Regulation requires them to have an “adequate plan” for the orderly liquidation of their operations, including contractual agreements, procedures for the sale of assets and the delivery to their owners etc. That said, it leaves open several questions which must be clarified in light of general legislation, such as the issue of the fair assessment of the refunds of tokens for fiat money, or if the refund can be made with another type of asset; or how to define the effects of liquidation on tokens already offered or delivered in a financial guarantee to third parties, to name but a few doubts.

 

 

Eduardo Vilá

Vilá Abogados

 

For more information, please contact:

va@vila.es

 

4th of June 2021