A Guide to Cryptocurrency Assets

Reshaping Market Infrastructures

Around the world, blockchain technology is developing at a rapid pace, and has the potential to significantly reshape market infrastructure. The EU has introduced new rules for a harmonized regulatory framework governing blockchain-based products and services. The framework will foster innovation and lift barriers that prevent growth potential. The new rules are currently being phased in. This article outlines the legislative package and its impact.

EU Digital Finance Package

Crypto-assets used to be subject to EU financial regulatory requirements only if they qualified as financial instruments, such as security tokens. Other crypto-assets were, if at all, only subject to the fragmented local laws of the EU Member States, resulting in an uneven playing field and obstacles to digitalization and to the success of new technologies in the EU. The new EU regulatory framework covering those crypto-assets primarily consists of the following EU regulations:

• Regulation (EU) 2023/1114 on Markets in crypto-assets (MiCA)
• Regulation (EU) 2022/2554 on digital operational resilience in the financial sector (DORA)
• Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (Pilot Regime)

Utility Tokens, Stable Coins and E-Money Tokens

The MiCA addresses crypto assets not qualifying as financial instruments. It lays down uniform requirements for the offer to the public and admission to trading on a trading platform of crypto-assets as well as requirements for crypto-asset service providers. The regulation will apply from 30 December 2024, with some titles phasing in earlier.

Crypto-assets are digital representations of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology. It can take the form of an asset-referenced token (stable coin), e-money token, or another crypto-asset, such as a utility token.

Utility Tokens

Utility tokens are a type of crypto-asset intended to provide access to a good or a service supplied by its issuer. It can only be accepted by the issuer.

Utility tokens are not an asset or a financial instrument. They typically cannot be used for investment purposes.

Issuers of utility tokens are subject to rules known from prospectus regimes, with a view to the publication of a crypto-asset white paper and for admission to trading. Exemptions apply e.g. to utility tokens that only provide access to a good or service that exists or is in operation.

Stable Coins (Asset-Referenced Token)

Asset-referenced tokens are a type of crypto-asset that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies (and is not an e-money token).

Asset-referenced tokens can serve as a means of payment or to store/invest value. They can be seen to compete with official currencies.

Issuers of asset-referenced token are also subject to authorization as well as organizational and conduct requirements. Exemptions apply to credit institutions and smaller offers of asset-referenced token. Additional obligations cover significant tokens and issuance restrictions apply to tokens used widely as a means of exchange.

E-Money Tokens

E-money tokens are a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.

E-money tokens are similar in their function to e-money. They are a surrogate for currencies and – unlike asset-referenced tokens – strictly link to an actual currency.

Issuers of e-money tokens need to be authorized as credit or e-money institutions, organizational requirements and conduct rules apply. A crypto-asset white paper needs to be published and additional rules apply for significant e-money tokens.

Insight

The value of traditional cryptocurrencies, such as Bitcoin or Ether, does not depend on currencies, goods, or other crypto assets. The holders of Bitcoin or Ether are not entitled to redeem their cryptocurrencies. Even though Bitcoin and Ether are crypto-assets, they do not qualify as utility tokens, stable coins, or e-money tokens.

Crypto Asset Services

The MiCA also introduces new rules governing the provision of services in crypto-assets – so-called crypto-asset services. Crypto-asset services mean any of the following services and activities:

• providing custody and administration of crypto-assets on behalf of clients;
• operation of a trading platform for crypto-assets;
• exchange of crypto-assets for funds;
• exchange of crypto-assets for other crypto-assets;
• execution of orders for crypto-assets on behalf of clients;
• placing of crypto-assets;
• reception and transmission of orders for crypto-assets on behalf of clients;
• providing advice on crypto-assets;
• providing portfolio management on crypto-assets;
• providing transfer services for crypto-assets on behalf of clients.

Crypto-asset service providers are subject to an authorization requirement. They must comply with requirements such as governing the safekeeping of clients’ crypto-assets and funds; the establishment of a complaint handling procedure; rules on the prevention, identification, management, and disclosure of conflicts of interest; and rules on outsourcing. Minimum capital requirements depend on the nature of the crypto-asset services provided. Special rules address IT security and resilience, in particular emergency planning.

Prevention of Market Abuse

The MiCA establishes a market abuse regime for crypto-assets outside the scope of the market abuse regulation (MAR). The scope of the MAR is basically limited to financial instruments and hence only covers securities tokens.

Pilot Regime for DLT Market Infrastructure

Regulation (EU) 2022/858 of 22 May 2022 introduced a Pilot Regime for the approval and operation of DLT market infrastructure, applicable since 23 March 2023. It targets already authorized investment firms, market operators, and central securities depositories (CSD) that plan to (also) use DLT. The scope of the Pilot Regime is rather limited. Authorization under the regime is usually limited to a maximum term of 6 years. During that time, DLT market infrastructure may benefit from certain exemptions to otherwise applicable requirements. For example, the provisions governing transaction reporting and on book-entry form of securities may be disapplied facilitating admission of DLT securities to trading on a trading venue. DLT financial instruments shall only be admitted to trading on a DLT market infrastructure, or be recorded on a DLT market infrastructure, if the DLT financial instruments are:

• shares, the issuer of which has a (tentative) market capitalization of less than EUR 500 million;
• corporate bonds, with an issue size of less than EUR 1 billion;
• UCITS, with the market value of the assets under management of less than EUR 500 million.

The aggregate market value of all the DLT financial instruments that are admitted to trading on a DLT market infrastructure or that are recorded on a DLT market infrastructure shall not exceed EUR 6 billion. Once this threshold is exceeded, the infrastructure needs to transition away from the Pilot Regime.

Digital Operational Resilience

The DORA aims at establishing uniform rules on digital operational resilience for the financial sector. It establishes requirements on IT security and for risk management, reporting serious ICT-related incidents, outsourcing, the testing of digital operational resilience, and information sharing.

Securities Token

Securities Tokens fall within the scope of EU financial markets regulation, in particular the framework governing financial instruments, such as the MiFID II. Regulation (EU) 2022/858 expressly clarifies that financial instruments are defined technology neutral, hence do not require the security to be embedded in a physical certificate.

Rules in Germany

Some EU Member States enacted additional rules in parallel to the EU regulatory framework. In June 2021, Germany introduced rules governing electronic securities. These rules also cover crypto securities and introduce a crypto securities register. The operator of such a register is subject to authorization requirements. Also, for historic reasons, the provision of services in cryptocurrencies and the operation of wallets for cryptocurrencies requires authorization in Germany.

Definitions

Asset-referenced token

Type of crypto-asset that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies (i.e., is not an e-money token).

Crypto asset

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. It can take the form of an asset-referenced token (stable coin), e-money token or another crypto-asset, such as a utility token.

Crypto asset service

Any of the following services and activities relating to any crypto-asset:

• providing custody and administration of crypto-assets on behalf of clients;
• operation of a trading platform for crypto-assets;
• exchange of crypto-assets for funds;
• exchange of crypto-assets for other crypto-assets;
• execution of orders for crypto-assets on behalf of clients;
• placing of crypto-assets;
• reception and transmission of orders for crypto-assets on behalf of clients;
• providing advice on crypto-assets;
• providing portfolio management on crypto-assets;
• providing transfer services for crypto-assets on behalf of clients.

Custody and administration of crypto assets on behalf of third parties

Safekeeping or controlling, on behalf of clients, of crypto-assets or of the means of access to such crypto-assets, where applicable in the form of private cryptographic keys.

Digital operational resilience

The ability of a financial entity to build, assure, and review its operational integrity from a technological perspective by ensuring, either directly or indirectly, through the use of services of ICT third-party providers, the full range of ICT-related capabilities needed to address the security of the network and information systems which a financial entity makes use of, and which support the continued provision of financial services and their quality.

E-money token

E-money tokens means a type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency.

Execution of orders for crypto assets on behalf of third parties

Conclusion of agreements, on behalf of clients, to purchase or sell one or more crypto-assets or the subscription on behalf of clients for one or more crypto-assets, and includes the conclusion of contracts to sell crypto-assets at the moment of their offer to the public or admission to trading.

ICT third-party service provider

A party providing digital and data services, including providers of cloud computing services, software, data analytics services, data centers, but excluding providers of hardware components and undertakings authorized under Union law which provide electronic communication services as defined and referred to in point (4) of Article 2 of Directive (EU) 2018/1972.

Inside information

Any information of a precise nature that has not been made public, relating, directly or indirectly, to one or more issuers of crypto assets or to one or more crypto assets, and which, if it was made public, would be likely to have a significant effect on the prices of those crypto assets.

MICA

Regulation (EU) 2023/1114 on Markets in crypto-assets (MiCA).

DORA

Regulation (EU) 2022/2554 on digital operational resilience in the financial sector (DORA).

Pilot Regime

Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (Pilot Regime).

Placing of crypto assets

Marketing, on behalf of or for the account of the offeror or a party related to the offeror, of crypto-assets to purchasers.

Providing advice on crypto assets

Offering or agreeing to provide personalized recommendations to a client, either at the client’s request or on the initiative of the crypto-asset service provider providing the advice, in respect of one or more transactions relating to crypto-assets, or the use of crypto-asset services.

Reception and transmission of orders for crypto assets on behalf of third parties

Reception from a person of an order to purchase or sell one or more crypto-assets or to subscribe for one or more crypto-assets and the transmission of that order to a third party for execution.

Utility token

A utility token is a type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer. They can only be accepted by the issuer.

Bernd Geier is a partner focused on finance, regulatory law, and funds. His practice covers the entire spectrum of regulatory issues (compliance), with a focus on the financial sector, including FinTech. He advises clients on financial market regulation, transaction structuring and optimisation, outsourcing law, as well as on new technologies (cryptocurrencies) and sustainability requirements (ESG)…Read more