- J Huang and S Pettigrove
EU offers path to regulated token offerings
On 10 October 2022, the European Parliament Committee on Economic and Monetary Affairs endorsed the full text of the Markets in Crypto Assets Regulation (MiCA), which was previously approved by the European Council. MiCA is now one step closer to becoming law. The next stage is for the European Parliament plenary to vote and formally adopt MiCA, which could happen as early as November. If approved, MiCA will likely come into force in 2024.
MiCA is set to shape the regulatory landscape for how crypto-assets, crypto-asset issuers and crypto-asset service providers (CASPs) will be regulated in the European Union (EU) member states. This article is the second in our series of posts discussing the full text of the regulation approved by the European Counsel. Our first post addressed the extent to which NFTs are regulated under MiCA. This post discusses the pathway for regulated token offerings under MiCA.
MiCA lays down separate regimes for issuing:
electronic money or e-money tokens (i.e. stablecoins which purport to maintain a stable value by reference to one official currency),
asset-referenced tokens (crypto-assets which purport to maintain stable value by reference to something else, including one or more official currencies); and
crypto-assets other than the first two categories (crypto-assets).
This post will focus on the third category being the rules applicable to offerings of crypto-assets generally. Special rules apply to e-money tokens and asset referenced tokens given the particular risks which relate to tokens which purport to maintain stable value. We will address these rules in a separate post.
MiCA applies to persons and other undertakings that are engaged in the issuance, offer to the public and admission to trading of crypto-assets or that provide related services in the EU (Art 2). Offerors are those who offer crypto-assets to the public, including issuers (Art 3 (7a)).
"Offer to the public" means:
a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the crypto-assets to be offered, so as to enable potential holders to decide whether to purchase those crypto-assets.
Generally under MiCA, if a person or entity offers a crypto-asset to the public, or seeks admission of a crypto-asset to trading on a trading platform, MiCA will require them to, among others:
be a legal person;
have a white paper for the crypto-asset;
notify their crypto-asset white paper to the competent authority of their home EU state;
publish the white paper.
Issuers of crypto-assets, unlike e-money or asset referenced tokens or CASPs, are not required to have or establish a legal entity within the EU. In that context, a token offeror's home EU state will be the State in which the crypto-asset is first offered or admitted to trading.
Specific obligations apply to the content and form of white papers and marketing communications relating to crypto-asset offerings. All information must be "fair, clear and not misleading" and include basic risk disclosures. Offerors may be liable to purchasers for failing to comply with disclosure requirements and the regulation contemplates a 14 day cooling off period for retail purchasers during the offer period and prior to admission to trading.
A crypto-asset whitepaper must be notified to the offeror's home EU state. Token issuers will also need to provide an explanation of why the relevant crypto-asset is not a financial instrument or other regulated product.
MiCA provides for certain exemptions from these requirements (e.g if the crypto-assets are offered for free, in the context of small or low value wholesale offers, or where crypto-assets are created as a reward for maintenance of a distributed ledger or validation of transactions).
MiCA also provides for transitional and grandfathering arrangements in respect of existing crypto-assets (Art 123). If a crypto asset’s offer to the public ended before MiCA comes into effect, it will be exempted from the offering requirements. If a crypto-asset was admitted to trading on a trading platform before MiCA comes into effect, it will be exempted from admission requirements but remain subject to certain disclosure requirements. The grandfathering provisions under MiCA are likely to create an incentive to issue and obtain wide admission of crypto-assets to trading on exchanges prior to the regulation entering into force.
The token issuance provisions under MiCA represent a potential game changer for token issuers globally as they offer the promise of a regulated, relatively light touch, pathway to issuing tokens to the public. We anticipate that lawmakers around the world will be reviewing MiCA with interest as they craft their own regulatory regimes.