Until recently, there were no or hardly any rules regulating the issuance of crypto-assets, the provision of crypto-asset services and related activities. Yet where securities are concerned, those very same activities are subjected to a host of rules and regulations, and authorisation requirements to boot. For example, there is the EU's Market Abuse Regulation, which formulates rules governing deception, insider dealing and market manipulation, and MiFID II and national regulations imposing authorisation requirements for entities providing (financial) services relating to securities. That is all about to change with the introduction of the Markets in Crypto-Assets Regulation, MiCA for short.
What the Market Abuse Regulation and MiFID II did for securities, MiCA will do - at the European level - for the issuance of crypto-assets and providers of crypto-asset services. MiCA will fully enter into effect on 30 December of this year. As with all European regulations, MiCA has direct effect, meaning it does not have to be transposed into Dutch legislation. However, amendments will be made to the Financial Supervision Act (Wet op het financieel toezicht) and the Economic Offences Act (Wet op de economische delicten) to enable the proper enforcement of MiCA. The relevant legislative proposal for the Crypto-assets Regulation (Implementation) Act (the Bill) was submitted to the Dutch House of Representatives on 25 March last.
In this first of three articles, we will introduce MiCA and discuss the three types of crypto-assets distinguished by MiCA. Part II will address the authorisation of and operating conditions for crypto-asset service providers. Lastly, part III will go into the changes to Dutch legislation brought on by MiCA.
Objectives MiCA
MiCA has several objectives, among them (i) to provide a suitable level of protection for consumers and investors alike and to ensure market integrity, and (ii) to ensure financial stability.
Scope MiCA
Briefly put, MiCA applies to parties that are engaged in the issuance, offer to the public and admission to trading of crypto-assets or that provide services related to crypto-assets in the EU. MiCA essentially serves as a safety net, in that it applies to crypto-assets that are not covered by existing EU financial supervision. Unique crypto-assets that are not fungible with other crypto-assets fall outside the scope of MiCA; it follows that their unregulated status continues.
Definitions
A good understanding of MiCA requires knowledge of the following terms:
Crypto-asset
A 'crypto-asset' means 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. MiCA regulates (and defines) three types of crypto-assets:
- 'electronic money token' or 'e-money token' (EMTs): EMTs are a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency;
- 'asset-referenced tokens' (ARTs): ARTs are a type of crypto-asset that is not an EMT and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies;
ARTs and EMTs are also known as stablecoins.
- crypto-assets other than ARTs or EMTs. These include utility tokens and Bitcoins, for example.
MiCA defines a 'utility token' as a type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer.
ARTs
Title III of MiCA sets out the rules pertaining to ARTs and has been in effect since 30 June 2024. Chapter 1 focuses on the authorisation that is required to be able to offer ARTs to the public and to seek their admission to trading. Exceptions to the authorisation requirement exist. It does not apply to a credit institution that complies with specific requirements set out in MiCA, for example.
Authorisation
Those who are not exempt from the authorisation requirement must submit their application for an authorisation to the Dutch National Bank (DNB). As part of the application procedure, the applicant must prepare and submit a crypto-asset white paper. This white paper is to contain, amongst other data, information about (i) the issuer; (ii) the ART; (iii) the rights and obligations attached to the ART, and (iv) the risks. If an issuer of an ART has provided information that is not complete, fair or clear or that is misleading, the issuer and the member of its administrative, management or supervisory body will be liable to a holder of such ART for any loss incurred due to that infringement.
MiCA also includes rules on the assessment of the application and the grant or refusal of the authorisation to offer ARTs to the public. One reason to refuse authorisation would be when there are objective and demonstrable grounds that the applicant's business model might pose a serious threat to market integrity, financial stability and the smooth operation of payment systems, or exposes the issuer or the sector to serious risks of money laundering and terrorist financing. This may also constitute a reason to withdraw authorisation of an issuer.
Obligations issuers
Chapter 2 of Title III lists obligations of issuers of ARTs. For example, issuers have a duty of care: they must act honestly, fairly and professionally in the best interests of the holders of ARTs. Another obligation relates to marketing communications. Any such communications must be clearly identifiable as such. In addition, marketing communications must contain a clear and unambiguous statement that the holder of the ART have a right of redemption at nominal value against the issuer at any time.
Financial stability
We noted earlier that one of the objectives of MiCA is to ensure financial stability. This finds expression, among other things, in the own funds requirements imposed on the issuers of ARTs by Article 35 of MiCA. One such requirement is the reserve of assets issuers of ARTs must constitute and at all times maintain, which benefits the protection of investors. A further factor ensuring financial stability and protection the investor's exposure is the requirement of legal segregation. What this means is that the reserve of assets must - in the interests of the holders of ARTs - be legally segregated from the issuer's estate and from the reserve of assets of other ARTs, so that creditors have no recourse to the reserve of assets, in particular in the event of insolvency.
Prohibition of granting interest
The legislator considered it expedient to reduce the risk that ARTs are used as a store of value. For this reason, issuers of ARTs and providers of crypto-asset services, when providing crypto-asset services related to ARTs, should not grant interest to holders of ARTs related to the length of time during which such holders are holding those ARTs.
Right of redemption
Holders of ARTs have a right of redemption at all times against the issuers thereof, and in respect of the reserve assets when issuers are not able to meet their obligations as referred to in Chapter 6 of Title III (see below). Upon request by a holder of an ART, an issuer of such token will redeem either by paying an amount in funds, other than electronic money, equivalent to the market value of the assets referenced by the ART held, or by delivering the assets referenced by the ART.
Redemption plan
Chapter 6 of Title III requires issuers to draw up and maintain an operational plan to support the orderly redemption of ARTs. This plan is to be implemented upon a decision by the DNB (see Article I B of the Implementation Decree) that the issuer is unable or likely to be unable to fulfil its obligations, including in the case of insolvency or resolution or in the case of withdrawal of authorisation of the issuer.
The redemption plan must demonstrate the ability of the user of the ART to carry out the redemption of the outstanding ART issued without causing undue economic harm to its holders or to the stability of the markets of the reserve assets. The redemption plan must include contractual arrangements, procedures and systems, including the designation of a temporary administrator in accordance with applicable law, to ensure the equitable treatment of all holders of ARTs and to ensure that holders of ARTs are paid in a timely manner with the proceeds from the sale of the remaining reserve assets. The redemption plan must also ensure that the continuity of any critical activities that are necessary for the orderly redemption and that are performed by issuers or by any third-party entity.
EMTs
Title IV of MiCA sets out the rules pertaining to EMTs and has also been in effect since 30 June 2024. Chapter 1 lists all requirements to be fulfilled by issuers of EMTs.
A person making an offer of EMTs to the public or seeking the admission to trading of EMTs is deemed to be the issuer. EMTs are deemed to be electronic money. It is for this reason that an issuer must be authorised (as a credit institution or as an electronic money institution). In addition, the issuer must have notified a crypto-asset white paper to the DNB and have published that white paper.
Following the same reasoning as regards ARTs, it is prohibited to grant interest in relation to EMTs.
The content and form of the white paper for EMTs is subject to requirements similar to those applying to the white paper for ARTs. In the same manner as well, if an issuer of an EMT has provided information that is not complete, fair or clear or that is misleading, the issuer and the members of its administrative, management or supervisory body will be liable to a holder of such EMT for any loss incurred due to that infringement.
Chapter 1 of Title IV further contains requirements for marketing communications relating to an offer to the public of an EMT, or to the admission to trading of such EMT. For example, the marketing communications must clearly be identifiable as such and the information in them must be consistent with the information in the white paper. In addition, marketing communications must contain a clear and unambiguous statement that the holders of the EMT have a right of redemption at par value against the issuer at any time.
Within the context of protecting consumers and investors, MiCA requires that the funds received by issuers of EMTs in exchange for EMTs are safeguarded in accordance with Article 7(1) of Directive 2009/110/EC. At least 30% of the funds thus received must be deposited in separate accounts in credit institutions. In addition, the remaining funds received must be invested in secure, low-risk assets that qualify as highly liquid financial instruments with minimal market risk, credit risk and concentration risk, in accordance with Article 38(1) MiCA. These secure assets must be denominated in the same official currency as the one referenced by the EMT.
Chapter 6 of Title III (Recovery and redemption plans) applies mutatis mutandis to EMTs, with two exceptions.
Crypto-assets other than ARTs or EMTs
Title II of MiCA concerns offers to the public and the admission to trading of crypto-assets other than ARTs or EMTs. Title II will apply from 30 December 2024. The legal entity in question is under no obligation to seek authorisation, but it must draw up a crypto-asset white paper within the context of making an offer to the public or seeking the admission to trading. Articles 6, 8 and 9 of MiCA determine the criteria that this white paper must fulfil, in what manner the Netherlands Authority for the Financial Markets (AFM) is to be notified, and in what way the white paper is to be published. The legal entity must also comply with the rules relating to marketing communications.
MiCA imposes obligations on offerors and persons seeking admission to trading of crypto-assets other than ARTs or EMTs, including a duty of care towards the holders and prospective holders of the crypto-assets.
Exceptions
In a limited number of cases, these requirements do not apply. One such case is when an offer is made to fewer than 150 natural or legal persons per Member State, where such persons are acting on their own account. In some cases, Title II does not apply in its entirety, one example being where the crypto-asset is offered for free.
Liability
As is the case with ARTs and EMTs, a liability regime applies.
Conclusion and preview
This concludes our description of the key rules imposed by MiCA on offers to the public and applications to be admitted to trading of ARTs, EMTs and crypto-assets other than ARTs or EMTs. Part II of our trilogy on MiCA will follow soon. It will address the authorisation of and operating conditions for crypto-asset service providers.
Until recently, there were no or hardly any rules regulating the issuance of crypto-assets, the provision of crypto-asset services and related activities. Yet where securities are concerned, those very same activities are subjected to a host of rules and regulations, and authorisation requirements to boot. For example, there is the EU's Market Abuse Regulation, which formulates rules governing deception, insider dealing and market manipulation, and MiFID II and national regulations imposing authorisation requirements for entities providing (financial) services relating to securities. That is all about to change with the introduction of the Markets in Crypto-Assets Regulation, MiCA for short.
What the Market Abuse Regulation and MiFID II did for securities, MiCA will do - at the European level - for the issuance of crypto-assets and providers of crypto-asset services. MiCA will fully enter into effect on 30 December of this year. As with all European regulations, MiCA has direct effect, meaning it does not have to be transposed into Dutch legislation. However, amendments will be made to the Financial Supervision Act (Wet op het financieel toezicht) and the Economic Offences Act (Wet op de economische delicten) to enable the proper enforcement of MiCA. The relevant legislative proposal for the Crypto-assets Regulation (Implementation) Act (the Bill) was submitted to the Dutch House of Representatives on 25 March last.
In this first of three articles, we will introduce MiCA and discuss the three types of crypto-assets distinguished by MiCA. Part II will address the authorisation of and operating conditions for crypto-asset service providers. Lastly, part III will go into the changes to Dutch legislation brought on by MiCA.
Objectives MiCA
MiCA has several objectives, among them (i) to provide a suitable level of protection for consumers and investors alike and to ensure market integrity, and (ii) to ensure financial stability.
Scope MiCA
Briefly put, MiCA applies to parties that are engaged in the issuance, offer to the public and admission to trading of crypto-assets or that provide services related to crypto-assets in the EU. MiCA essentially serves as a safety net, in that it applies to crypto-assets that are not covered by existing EU financial supervision. Unique crypto-assets that are not fungible with other crypto-assets fall outside the scope of MiCA; it follows that their unregulated status continues.
Definitions
A good understanding of MiCA requires knowledge of the following terms:
Crypto-asset
A 'crypto-asset' means 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. MiCA regulates (and defines) three types of crypto-assets:
- 'electronic money token' or 'e-money token' (EMTs): EMTs are a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency;
- 'asset-referenced tokens' (ARTs): ARTs are a type of crypto-asset that is not an EMT and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies;
ARTs and EMTs are also known as stablecoins.
- crypto-assets other than ARTs or EMTs. These include utility tokens and Bitcoins, for example.
MiCA defines a 'utility token' as a type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer.
ARTs
Title III of MiCA sets out the rules pertaining to ARTs and has been in effect since 30 June 2024. Chapter 1 focuses on the authorisation that is required to be able to offer ARTs to the public and to seek their admission to trading. Exceptions to the authorisation requirement exist. It does not apply to a credit institution that complies with specific requirements set out in MiCA, for example.
Authorisation
Those who are not exempt from the authorisation requirement must submit their application for an authorisation to the Dutch National Bank (DNB). As part of the application procedure, the applicant must prepare and submit a crypto-asset white paper. This white paper is to contain, amongst other data, information about (i) the issuer; (ii) the ART; (iii) the rights and obligations attached to the ART, and (iv) the risks. If an issuer of an ART has provided information that is not complete, fair or clear or that is misleading, the issuer and the member of its administrative, management or supervisory body will be liable to a holder of such ART for any loss incurred due to that infringement.
MiCA also includes rules on the assessment of the application and the grant or refusal of the authorisation to offer ARTs to the public. One reason to refuse authorisation would be when there are objective and demonstrable grounds that the applicant's business model might pose a serious threat to market integrity, financial stability and the smooth operation of payment systems, or exposes the issuer or the sector to serious risks of money laundering and terrorist financing. This may also constitute a reason to withdraw authorisation of an issuer.
Obligations issuers
Chapter 2 of Title III lists obligations of issuers of ARTs. For example, issuers have a duty of care: they must act honestly, fairly and professionally in the best interests of the holders of ARTs. Another obligation relates to marketing communications. Any such communications must be clearly identifiable as such. In addition, marketing communications must contain a clear and unambiguous statement that the holder of the ART have a right of redemption at nominal value against the issuer at any time.
Financial stability
We noted earlier that one of the objectives of MiCA is to ensure financial stability. This finds expression, among other things, in the own funds requirements imposed on the issuers of ARTs by Article 35 of MiCA. One such requirement is the reserve of assets issuers of ARTs must constitute and at all times maintain, which benefits the protection of investors. A further factor ensuring financial stability and protection the investor's exposure is the requirement of legal segregation. What this means is that the reserve of assets must - in the interests of the holders of ARTs - be legally segregated from the issuer's estate and from the reserve of assets of other ARTs, so that creditors have no recourse to the reserve of assets, in particular in the event of insolvency.
Prohibition of granting interest
The legislator considered it expedient to reduce the risk that ARTs are used as a store of value. For this reason, issuers of ARTs and providers of crypto-asset services, when providing crypto-asset services related to ARTs, should not grant interest to holders of ARTs related to the length of time during which such holders are holding those ARTs.
Right of redemption
Holders of ARTs have a right of redemption at all times against the issuers thereof, and in respect of the reserve assets when issuers are not able to meet their obligations as referred to in Chapter 6 of Title III (see below). Upon request by a holder of an ART, an issuer of such token will redeem either by paying an amount in funds, other than electronic money, equivalent to the market value of the assets referenced by the ART held, or by delivering the assets referenced by the ART.
Redemption plan
Chapter 6 of Title III requires issuers to draw up and maintain an operational plan to support the orderly redemption of ARTs. This plan is to be implemented upon a decision by the DNB (see Article I B of the Implementation Decree) that the issuer is unable or likely to be unable to fulfil its obligations, including in the case of insolvency or resolution or in the case of withdrawal of authorisation of the issuer.
The redemption plan must demonstrate the ability of the user of the ART to carry out the redemption of the outstanding ART issued without causing undue economic harm to its holders or to the stability of the markets of the reserve assets. The redemption plan must include contractual arrangements, procedures and systems, including the designation of a temporary administrator in accordance with applicable law, to ensure the equitable treatment of all holders of ARTs and to ensure that holders of ARTs are paid in a timely manner with the proceeds from the sale of the remaining reserve assets. The redemption plan must also ensure that the continuity of any critical activities that are necessary for the orderly redemption and that are performed by issuers or by any third-party entity.
EMTs
Title IV of MiCA sets out the rules pertaining to EMTs and has also been in effect since 30 June 2024. Chapter 1 lists all requirements to be fulfilled by issuers of EMTs.
A person making an offer of EMTs to the public or seeking the admission to trading of EMTs is deemed to be the issuer. EMTs are deemed to be electronic money. It is for this reason that an issuer must be authorised (as a credit institution or as an electronic money institution). In addition, the issuer must have notified a crypto-asset white paper to the DNB and have published that white paper.
Following the same reasoning as regards ARTs, it is prohibited to grant interest in relation to EMTs.
The content and form of the white paper for EMTs is subject to requirements similar to those applying to the white paper for ARTs. In the same manner as well, if an issuer of an EMT has provided information that is not complete, fair or clear or that is misleading, the issuer and the members of its administrative, management or supervisory body will be liable to a holder of such EMT for any loss incurred due to that infringement.
Chapter 1 of Title IV further contains requirements for marketing communications relating to an offer to the public of an EMT, or to the admission to trading of such EMT. For example, the marketing communications must clearly be identifiable as such and the information in them must be consistent with the information in the white paper. In addition, marketing communications must contain a clear and unambiguous statement that the holders of the EMT have a right of redemption at par value against the issuer at any time.
Within the context of protecting consumers and investors, MiCA requires that the funds received by issuers of EMTs in exchange for EMTs are safeguarded in accordance with Article 7(1) of Directive 2009/110/EC. At least 30% of the funds thus received must be deposited in separate accounts in credit institutions. In addition, the remaining funds received must be invested in secure, low-risk assets that qualify as highly liquid financial instruments with minimal market risk, credit risk and concentration risk, in accordance with Article 38(1) MiCA. These secure assets must be denominated in the same official currency as the one referenced by the EMT.
Chapter 6 of Title III (Recovery and redemption plans) applies mutatis mutandis to EMTs, with two exceptions.
Crypto-assets other than ARTs or EMTs
Title II of MiCA concerns offers to the public and the admission to trading of crypto-assets other than ARTs or EMTs. Title II will apply from 30 December 2024. The legal entity in question is under no obligation to seek authorisation, but it must draw up a crypto-asset white paper within the context of making an offer to the public or seeking the admission to trading. Articles 6, 8 and 9 of MiCA determine the criteria that this white paper must fulfil, in what manner the Netherlands Authority for the Financial Markets (AFM) is to be notified, and in what way the white paper is to be published. The legal entity must also comply with the rules relating to marketing communications.
MiCA imposes obligations on offerors and persons seeking admission to trading of crypto-assets other than ARTs or EMTs, including a duty of care towards the holders and prospective holders of the crypto-assets.
Exceptions
In a limited number of cases, these requirements do not apply. One such case is when an offer is made to fewer than 150 natural or legal persons per Member State, where such persons are acting on their own account. In some cases, Title II does not apply in its entirety, one example being where the crypto-asset is offered for free.
Liability
As is the case with ARTs and EMTs, a liability regime applies.
Conclusion and preview
This concludes our description of the key rules imposed by MiCA on offers to the public and applications to be admitted to trading of ARTs, EMTs and crypto-assets other than ARTs or EMTs. Part II of our trilogy on MiCA will follow soon. It will address the authorisation of and operating conditions for crypto-asset service providers.