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Decentralised Finance > 11_MiCAR Regulation of Crypto Assets > Flashcards

11_MiCAR Regulation of Crypto Assets Flashcards

1
Q

Regulatory Hurdles of Blockchains

A

- Move digital assets
- in traditional capital markets intermediaries such as banks are regulated
- how could blockchains be regulated? in a distributed infrastructure who is responsible?

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2
Q

What is a token from legal perspective?

A
  • no general legal concept under German civil law
  • Right, Thing or other object?
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3
Q

Legal Risk of Transfer of Tokens

A
  • risk that right and token fall apart
  • in Liechtenstein -> Article 7 of TVTG: “ Disposal over the Token results in disposal over the right represented by the token”
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4
Q

Legal Arrangements for Tokenisation in Germany

A

1. German Electronic Securities Act (eWpG) - 2021
- electronic seucirties are central registered securities and crypto securities
- limited scope: bearer bond (Inhaberschuldverschreibung) and funds
- in future: shares (Zukunftsfinanzierungsgesetz)
- transfer is regulated by law -> no risk of token and right falling apart

**2. Other tokenised rights: **no legal act!
- various legal arrangements are possible -> posible risk of token and right falling apart
- Mitigation: e.g. reward model, takeover of agreement

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5
Q

Overview
Regulation of Token

A
  • 2018: 5th AML-Directive of European Parliament and of the Council
  • 2020: Transformation of 5th AML-Directive to German Law
  • 2023: European Regulation on markets in crypto-assets (MiCAR)
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6
Q

5th AML-Directive (EU2018/843)

2018

A
  • intends to address money laundering and terrorist financing risks
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7
Q

Transformation of 5th AML-Directive to German Law

2020

A

Crypto assets = financial instruments

  • “accepted by natural or legal persons as a means of exchange or payment by virtue of an agreement or actual practice or is used for investment purposes
  • certain activities regarding crypto-assets are regulated comparable to traditional security, banking and financial services (e.g. investment brokerage or properiatry trading)
    -> require BaFin’s authorisation
  • safeguaridng private cryptographic keys for customers is a financial service (crypto custody services)
    -> require BaFin’s Authorization
  • AML-obligations for providers of regulated services
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8
Q

MiCAR Scope

A

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
  • [prevention of market abuse]
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9
Q

MiCAR Regulatory objectives

A
  • securing market integrity and financial stability (in particular prevention of market abuse and financial crime)
  • Enabling the use of innovatie technology (“future-proof economy”, economic growth and new employment opportunities)
  • fostering innovative and inclusive ways of financing (including for small and medium-sized enterprises)
  • Protection of retail holders
  • same regulation in all member states (prevention of regulatory arbitrage)
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10
Q

MiCAR Fact Sheet

A
  • Will apply in every member state of Europe (no transformation in national law required)
  • MiCAR entered into force in june 2023
  • MiCAR’s regulation will apply from 30 December 2024
  • Exception: MiCAR’s regulation on the issuance of stablecoins will apply from 30 June 2024

MiCAR not yet applicable but crypto industry should prepare itself as compliance will need to be in place from date of applicability

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11
Q

MiCAR
A few things to keep in Mind

A
  • MiCAR has broad understanding of crypto-assets -> MiCAR is not limited to blockchain-based tokens
  • All Transferable tokens are covered by MiCAR -> unless miCAR explicitly excludes them (in particular securities and NFTs, loyalty schemes)
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12
Q

Which crypto-assets are excluded from MiCAR?

A
  • securities: crypto-assets that fall within scope of existing union legislative acts on financial services
  • NFTs: crypto asset that are unique & non-fungible
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13
Q

Which Tokens qualify as securities (security tokens)?

A
  • Required: Functional comparability with securities
  • BaFin: Characteristics comparable to those of traditional financial instruments such as shares, debt, securities or units in investment funds (substance over form)
  • membership rights or claims under debt law with pecuniary content, similar to share and debt instruments
  • comparable to participation in company (e.g. participation, invovlement and voting rights)
  • comparable to pecuniary rights (claims against issuer of token or against another party for pecuniary performance such as interest, profit participation)

Not required: Howey Test (Investment contract/security under US laws)
- investment of money
- shared enterprise (success of investors is connected)
- reasonable expectation of profits solely from efforts of others

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14
Q

NFTS
Which tokens qualify as unique and non-fungible?

Smart Contract Standard (technical understanding)

A
  • Smart Contract Standard ERC20: **fungible **within a technical meaning
  • Smart Contract Standar ERC721: Non-fungible within a technical meaning
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15
Q

NFTS under legal understanding

A
  • assets or rights represented should also be unique and non-fungible in order for the crypto-asset to be considered unique and non-fungible
  • MiCAR should also apply to crypto-assets that appear to be unique non-fungible
  • issuance of crypto-assets as NFTs in large series or collection should be considere an indicator of their fungibiility
  • competent authorities hsould adopt a substance over form approach whereby the features of crypto-asset in question determin classifciation and not its designation by issuer
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16
Q

Not every NFT is exempted from application of MiCAR

SUBSTANCE OVER FORM

A
  • unique Token-ID is not sufficient
  • assets or rights represented must be unique and non-fungible in order for the token to be excluded
17
Q

Special Categories of crypto-assets

A
  • utility toke
  • e-money token
  • asset-referenced token
  • other crypto-assets
18
Q

What is a utility token under MiCAR

A
  • crypto-asset only inteded to provide access to a good or service supplied by issuer
19
Q

e-money token under MiCAR

A
  • crypto asset that purports to maintain a stable value by referencing value of one official currency
  • e.g. Stablecoins
20
Q

asset-referenced token under MiCAR

A
  • crypto asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one more official currencies
  • e.g. Stablecoin with fiat currency in combination with other fiat currencies or basket of assets.
21
Q

Definition of **‘offering crypto-assets to the public’ **other than Stablecoins

under miCAR

A
  • ‘offer to public’ means communicationto 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 prospective holders to decde whether to purchase those crypto -assets
22
Q

Requirements when Offering crypto Asset to the public other than stablecoins

A
  • offeror must be legal person
  • draft a white paper
  • white paper must be notified with competent authority and published
    - other requirements:
  • requirements on marketing communications
  • requirements to act honestly, fairly and professionally
  • identifying, preventing, managing and disclosign conflicts of interest
23
Q

Exemptions for the offering of crypto assets to public other then stablecoincs

No Requirements

A
  • no requirements if crypto-asset:
  • is offered for free
  • is automatically created as reward for maintenance of Distributed Ledger or the validation of transactions
  • is utility token providing acess to a good or service that exists or is in operation
  • can only be exchanged for goods and services in a limited network of merchants with contractual arrangements with the offeror

utility toke: e.g. ethereum gas token to pay for transaction fees

24
Q

Exemption for the offering of crypto-asset to the public other than stablecoins under MiCAR

no white paper

A

no White Paper for offers
- to fewer than 150 natural or legal persons per member state
- < EUR 1,000,000 (overa. period of 12 months)
- to qualified investors only (crypto-asset can be held by such qualified investors only)

25
Q

White Paper

A
  • shall inform potential investors about offeror, issuer, project, crypto-asset, rights and obligations attached to crypto-asset, infromation on technology, risks and climate impacts
  • Liability for the information given in a crypto-asset white paper
  • Right of withdrawal of retail holders (14 calendar days)
26
Q

Requirements for Offering Stablecoins to Publi under MiCAR

A
  • Authorization required: Prohitibition with reservation of authorization
  • Asset-referenced token (ART): authorization under MiCar or a regulated credit institution
  • E-Money token (EMT): offeror must be a regulated credit institution or e-money institution
27
Q

Requirements for ART (asset-referenced token)

A
  • white paper
  • reporting to authorities (if issued value > 100 Mio EUR)
  • stop issuance if estimated quartlery avg. number and avg. aggregate value of txs per day associated to its uses as a means of exchange within a single currency area > 1 Mio txs and 200 Mio EUR
  • own funds requirements and reserve of assets (Custody by regulated companies)
  • Transparnecy: amount of ART in circulation and value and composition of reserve of assets
  • right of redemption for holders of the ART (stricter regulation for significant ART)
28
Q

Requirements for EMT (e-money tokens)

A
  • white paper
  • compliance with e-money regulation
  • holders of EMT shall have claim against issuer (redemption by paying funds)
  • issuers of EMT shall issue at part value and on the receipt of funds
  • (stricter regulation for significant EMT)
29
Q

Prohibition of Granting Interest on Stablecoins

A
  • issuers of ART or EMT prohibited to grant interest in relation to asset-referenced tokens
  • crypto-asset service providers prohibited to grant interest when providign crypto-asset services related to ART or EMT
  • any remuneration or any other benefit related to length of time during which a holder of ART or EMT holds such tokens shall be treated as interest
  • incl. net compensation, discount
30
Q

Crypto-asset service providers

services and activities

A

-** custody and administration of cypto on behalf of clients**
- operating trading platform
- exchange of crypto for funds or for other cryptoassets
- exectution of orders for crypto-assets on behalf of clients
- placing of crypto-assets
- reception and transmission of orders for crypto-asset on behalf of clients
- providing advice on crypto
- providign portfolio management on crypto
- providing transfer services for crypto on behalf of clients

31
Q

Requirements for Crypto Asset Service Provider (CASPs)

A
  • authorization required: Prohitibion with reservation of authorisation
  • notification only for regulated companies
  • transitional provisions for CASPs licensed under national law
  • Prudential Requirements (e.g. minimum capital of 50k - 150k EUR)
  • safekeeping of client’s funds and crypto
  • service must be offered within EU (reverse solicitation for 3rd country providers)
  • specific requriements for different crypto-asset services
  • anti-money londering -> EU transfer of funds regulation
32
Q

What is Custody and Administration of Crypto-Assets on behalf of clients

A

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

33
Q

Requirements for Custody and Administration of Crypto on behalf of clients

A
  • agreement with clients (specifying duties and responsibilities)
  • internal register of client’s positions
  • custody policy with rules for safekeeping and controlling clients’ crypto-assets
  • segregation of client’s crypto-asset from own funds / assets
  • liability for loss (capped at market value at the time of the loss)
34
Q

Exemption from requirements of custodial services

A

“hardware or software providers of non-custodial wallets should not fall within scope of this regulation” (Recital 83)

35
Q

What do Transfer Services for Crypto-Assets on behalf of clients entail?

A
  • providing servies of transfer, on behalf of a natural or legal person, of crypto-assets from one distributed ledger address or account to another
  • entity that provides for the transfer
  • on behalf of a client
    - includes off-chain transfers (e.g. within a register of a crypto custodian)
36
Q

Who is not a CASP under Transfer Services?

A
  • validators, nodes or miners

” transfer services should not include the validators, nodes or miners that might be part of confirming a transaction and updating the state of the underlying idstirbuted ledger.” (Recital 9)

37
Q

What is not regulated under MiCAR

A
  • tokens issued in a fully decentralized manner without an identifiable issuer
  • however, cyrpto-asset services in respect of such crypto-assets are covered by MiCAR
  • crypto-asset services need to be provided in a fully decentralized manner (no intermediary) for MiCAR not to apply
38
Q

What does fully decentralized mean under MiCAR?

in context of DeFI

A
  • factual (ie. writing) access to the technical infrastructure?
  • DAOs (Decentralized autonomous organisations)?
  • Concentration of governance tokens?

MiCAR does not clarify according to which criteria fully decentralized is to be assessed

Decentralised Finance (11 decks)

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