Marketing Crypto-Assets in and Into Europe: MiCAR, the EU’s New Uniform Crypto Code

The EU Markets in Crypto-Assets Regulation (MiCAR) was published in the Official Journal of the European Union on 9 June 2023. MiCAR is a major step toward an EU-wide uniform code governing crypto-assets, such as BTC, ETH, and stablecoins.

Although MiCAR will come into force on 29 June 2023 there is a period of time before its provisions come into effect:

• the provisions governing certain stablecoins will apply from 30 June 2024; and
• the provisions governing the remaining crypto-assets will apply from 30 December 2024.

There is, therefore, one year and eighteen months, respectively, to achieve compliance with MICAR.

As we discuss below, provisions of MiCAR will apply to the activities of non-EU entities, including those in the US and the UK.

What is MiCAR?

As an EU regulation and unlike an EU directive, MiCAR will bind EU businesses directly without the need for individual EU member states to implement laws to put it into effect. Individual EU member state authorities will be responsible for enforcing MiCAR in their respective territories.

MiCAR addresses the following:

• the issuance and marketing/offering of crypto-assets, to which MiCAR applies, covered in this Alert;
• the performance of activities/offering of services connected with crypto-assets, such as the custody and administration of crypto-assets on behalf of third parties, the operation of a trading platform for crypto-assets, and the exchange of crypto-assets for fiat currency or other crypto-assets, to be covered in another Alert; and
• the prevention of market abuse involving crypto-assets, also to be covered in another Alert.

MiCAR will be relevant not only to those involved in carrying on these activities but also to those who acquire businesses involved in carrying on these activities. This will be covered in another Alert, but see our Alert on the current position in the UK, Buying A U.K. Crypto Business: The New Regulatory Hurdles | Insights & Resources | Goodwin Procter (goodwinlaw.com).

What types of crypto-assets does MiCAR apply to?

MiCAR defines a “crypto-asset” as “a digital representation of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technology”. However, the Commission is given power to introduce secondary legislation to “specify technical elements of the definitions [in MiCAR]… and to adjust those definitions to market developments and technical developments”, so the question of whether certain assets fall within the definition should be kept under review.

The recitals to the regulation indicate that the definition of crypto-assets will be interpreted “as widely as possible to capture all types of crypto-assets which currently fall outside the scope of [European] Union legislation on financial services” as well as stating that the definition will be aligned with the existing definition of “virtual assets” set out in the recommendations of the Financial Action Task Force.

Despite the broad definition of “crypto-assets”, the obligations imposed by MiCAR do not apply to certain types of crypto-assets, including central bank digital currencies and “unique” non-fungible tokens (NFTs). The qualification that only “unique” NFTs are excluded is intended to allow artists and companies to utilise technology to create individual NFTs without being subject to disproportionate regulatory burdens whilst still capturing those who create larger collections of NFTs.

MiCAR goes on to establish three distinct categories of crypto-assets that will each be subject to different regulatory obligations, namely:

• Asset-Referenced Tokens (ARTs): tokens that aim to maintain a stable value by referencing (i) several currencies that are legal tender; (ii) one or several commodities; (iii) one or several crypto-assets; or (iv) a basket of such assets; 
• E-Money Tokens (EMTs): tokens that are intended primarily as a means of payment that aim to stabilise their value by referencing only one fiat currency; and
• Crypto-assets other than ARTs and EMTs.

MiCAR recognises utility tokens as a subset of crypto-assets, other than ARTs and EMTs, and defines them as a type of crypto-asset that is intended to provide digital access to a good or service, available on distributed ledger technology, and accepted only by the issuer of that token.

What about security tokens?

Any crypto-asset that is capable of being classified as a share, bond, or other transferable security within the meaning of the Markets in Financial Instruments Directive (MiFID) is currently subject to the laws and regulations on offering and marketing securities under EU laws, such as the Prospectus Regulation, and individual member state laws on marketing. A crypto-asset that is capable of being classified as a financial instrument, other than a transferable security, such as a derivative or a contract of insurance, is currently subject to other laws, such as MiFID and the Insurance Distribution Directive. MiCAR does not change this and makes it clear that its provisions will not apply to security tokens.

Do the MiCAR marketing rules apply to marketing by a non-EU person to EU persons from outside the EU?

Yes. The marketing rules set out in MiCAR apply to any offer of crypto-assets within the EU, regardless of the location of the person making the offer. In addition, there is no applicable third-country regime, and so any non-EU person offering crypto-assets within the EU must comply with the full requirements imposed by MiCAR, including the obligation for crypto-asset service providers to have a registered office in a member state. Note that where the marketing relates to an EMT that references an EU currency, it will always be deemed to be offered to the public in the EU.

Do the MiCAR marketing rules apply where an EU person asks a non-EU person to provide marketing materials to the EU person (reverse solicitation)?

Where an EU person, of their own initiative, requests that a non-EU person provide marketing materials (or other regulated crypto-asset services), then the activity will not be deemed to be provided in the EU, and MiCAR will not apply. However, “own initiative” is construed very restrictively. For example, if the non-EU person solicits any clients or potential clients in the EU or promotes or advertises any crypto-asset services or activities in the EU, then the exemption will not apply. Companies should therefore be very cautious about relying on this exemption.

What are the basic requirements for marketing crypto-assets other than ARTs and EMTs?

The majority of issuers who wish to market crypto-assets in the EU will be required to issue a “white paper”, which serves a similar purpose to a prospectus. Exemptions to this requirement apply where:

• the crypto-assets are offered free. Note that this is not limited to monetary charges but also includes nonmonetary benefits, for example the provision of personal data;  
• the crypto-assets are automatically created through mining as a reward for the maintenance of the distributed ledger technology or the validation of transactions;
• the crypto-assets are offered to fewer than 150 people per member state.
• the total consideration of an offer to the public over 12 months does not exceed €1 million (or the equivalent amount in another currency or crypto-asset); or 
• the offer to the public is solely addressed to qualified investors, and the crypto-assets can be held only by qualified investors.

The white paper must include prescribed minimum information about the issuer, the crypto-assets, the underlying technology, and the risks involved. Importantly, it will also need to include information about the environmental and climate-related impacts of the consensus mechanism used to issue the crypto-asset.

Unlike a prospectus, there is no requirement for a competent authority to approve the white paper (or any related marketing communications). Instead, the white paper should be notified to the competent authority at least 20 working days before publication. The competent authority then has the power to require that issuers include additional information in the white paper if it is necessary for consumer protection or financial stability.

Further marketing communications must be clearly identifiable as such and should make reference to the white paper (including the address of the website of the issuer). The information contained in marketing communications must be fair, clear, not misleading, and consistent with the information in the white paper.

Does MiCAR place any duties and liabilities on the issuers of crypto-assets other than ARTs and EMTs?

Issuers are subject to a general obligation to act honestly, fairly, professionally, and in the best interests of the holders of the crypto-assets. They must also identify, disclose, and manage any conflicts of interest that may arise. The holders of crypto-assets should be treated equally, unless preferential treatment is disclosed in the white paper and marketing communications. The European Banking Authority (EBA) has also been tasked with developing secondary legislation prescribing the minimum systems and security access protocols that issuers will be required to maintain.

When communicating with holders of crypto-assets, issuers are under an obligation to communicate in a fair, clear, and not misleading manner. If a holder of a crypto-asset is able to prove that an issuer provided information that is not complete, fair, or clear, or is misleading, then the issuer will be liable for damages caused due to the infringement.

How do the duties and liabilities on the issuers of ARTs and EMTs differ from those for the issuers of other crypto-assets?

Both ARTs and EMTs are forms of “stablecoin” that hold themselves out as being more reliable than standard utility or exchange tokens. The EU sees this as presenting an increased risk to the consumer, who may be less cautious when investing in these tokens. As a result, these tokens will be subject to increased regulatory requirements under MiCAR to provide additional protection to consumers.

Asset-Referenced Tokens
A major requirement placed on issuers of ARTs is the requirement for all issuers to maintain a reserve of assets. The management bodies of the issuers are responsible for prudent management of these assets and must ensure that the creation or destruction of tokens is matched by an increase or decrease in the reserve of assets. An independent audit of these reserve assets must be undertaken at least every six months. MiCAR also includes requirements for the selection of credit institutions holding the reserve assets.

Issuers of ARTs are subject to ongoing disclosure requirements, including:

• at least every month, disclosing on their website the amount of ARTs in circulation and the value/composition of the reserve assets. As soon as possible after completion, the issuer should also disclose the outcome of the audit of the reserve assets;
• disclosing on their website any event that is likely to have a significant effect on the value of the ART or reserve assets; and
• notifying the competent authority of any changes to their management body.

Issuers of ARTs also have to establish and maintain policies and procedures relating to:

• complaint handling
• conflicts of interest
• the reserve of assets and custody of these assets
• the rights granted to holders of ARTs, including the rights token holders are granted in relation to the reserve assets
• the mechanism by which tokens are issued, created, and destroyed, and the protocols for validating transactions
• liquidity management, including mechanisms to ensure liquidity
• operational risk management
• business continuity

The EBA will develop regulatory technical standards specifying the minimum requirements for these policies and procedures.

Issuers of ARTs are also subject to “own funds” requirements equal to the higher of €350,000 or 2% of the average amount of reserve assets. However, depending on the perceived risk level of the specific tokens, this requirement may be either increased or decreased by up to 20% by the competent authorities of the issuer’s home member state. The criteria for this will be the subject of secondary legislation developed by the EBA.

Issuers of ARTs must be regularly audited by independent auditors, and the results of these audits must be communicated to the competent authority and the management body of the issuer.

E-Money Tokens
E-money tokens must be redeemable at par and amount to a claim on the issuer. Any conditions or fees applied to redemption should be prominently stated in the white paper, and any fees should be proportionate and commensurate with the actual costs incurred by the issuer.

What enhanced duties and liabilities are placed on the issuers of “significant” ARTs and EMTs?

An ART or EMT will be deemed to be significant if it meets the thresholds prescribed by the EBA in relation to any three of the following criteria:

• the size of the customer base of the promoters of the ARTs, the shareholders of the issuer of ARTs, or the third-party entities operating the reserve of assets
• the value of the ARTs issued or, where applicable, their market capitalisation
• the number and value of transactions in those ARTs
• the size of the reserve of assets of the issuer of the ARTs
• the significance of the cross-border activities of the issuer of the ARTs 
• the interconnectedness with the financial system

Issuers of significant ARTs or EMTs must comply with the following additional requirements:

• issuers must adopt, implement, and maintain a remuneration policy promoting sound and effective risk management;
• issuers must ensure that tokens can be held in custody by different crypto-asset service providers on a fair, reasonable, and nondiscriminatory basis;
• issuers must establish, maintain, and implement a liquidity management policy and procedures;
• the relevant “own funds” requirement is increased to 3% of the average amount of reserve assets, up from 2% for nonsignificant ARTs and EMTs; and
• issuers must put in place a plan to support an orderly wind-down of activities.

It is also important to note that where an ART or EMT is deemed to be significant, its lead regulator will be the EBA rather than the member state competent authority.

How do the requirements for marketing ARTs and EMTs differ from those for other crypto-assets?

As discussed above, MiCAR imposes a more stringent regulatory regime on the issuers of ARTs and EMTs than on the issuers of other crypto-assets. This includes additional restrictions placed on the marketing of ARTs and EMTs in addition to the requirements that will be applied to other crypto-assets.

Asset-Referenced Tokens
Most issuers of ARTs are not permitted to offer tokens to the public or seek admission of the tokens to trading unless they have been authorised to do so by the competent authority of their home member state (note that authorisation requires a legal entity to be established in the EU). Authorisation by the home member state allows the issuer to offer the tokens throughout the EU (passporting). Exceptions to the authorisation requirement apply where one of the following is true:

• over a period of 12 months, the average outstanding amount of ARTs does not exceed €5 million, or the equivalent amount in another currency;
• the offer to the public is solely addressed to qualified investors, and the ARTs can be held only by qualified investors; or
• the issuer is an authorised credit institution.

However, even if exempt from the requirement to be authorised, issuers of ARTs must always produce and notify the competent authority of a white paper. In addition, if the issuer is exempt as a result of being an authorised credit institution, the white paper will be subject to an approval process that will be set out in secondary legislation. White papers relating to ARTs must contain additional specified information, for example detailed descriptions of the nature of the reserve assets and details of the custody arrangements and investment policy for these reserve assets.

If the ART does not provide a direct claim or redemption right to all holders of the ARTs, any marketing communications should include a clear and unambiguous statement to that effect.

E-Money Tokens
Most EMTs may be offered to the public or admitted to trading on a trading platform for crypto-assets only if the issuer is authorised as a credit institution or as an electronic money institution in the EU. An exception to this applies where one of the following is true:

• over a period of 12 months, the average outstanding amount of EMTs does not exceed €5 million, or the equivalent amount in another currency; or
• the offer to the public is solely addressed to qualified investors, and the EMTs can be held only by qualified investors.

Even where exempt from the requirement to be authorised, issuers of EMTs must always produce and notify the competent authority of a white paper containing prescribed information about the tokens. Importantly, this includes a statement that the holders of the EMTs have a redemption right at any time and at par value on the issuer.

Are the MiCAR market abuse provisions relevant to the marketing of crypto-assets?

Yes. Where the crypto-assets are admitted to trading on an authorised EU trading platform, the MiCAR provisions prohibiting market manipulation will apply. These include a prohibition on disseminating information through the media, including the internet, or by any other means that gives, or is likely to give, false or misleading signals as to the supply of, demand for, or price of a crypto-asset. This prohibition would capture false statements made in a white paper or any other communication connected with the offering and marketing of a crypto-asset admitted to trading on an authorised EU trading platform.

Is the position on marketing crypto-assets into the UK the same as that under MiCAR?

No, it is not. The UK recently finalised its own rules, which come into force on 8 October 2023. We discussed this in our recent Alert Marketing Cryptoassets and Services in and Into The UK: A Near-Final Regulatory Regime | Insights & Resources | Goodwin Procter (goodwinlaw.com).

To discuss the contents of this alert, please contact the authors or your usual Goodwin contact.