Stablecoins and E-money Tokens Issuance Under the New MiCA Regulation

With MiCA’s entry into force, the crypto market finally has the legal clarity it always needed. MiCA provides the much-needed legal clarity for the operation, structure, and governance of crypto-asset issuers, which is a huge step toward legitimizing the market. Once fully implemented, the precedent-setting regulation will supersede all national crypto legislation and establish a uniform EU legal framework for the crypto industry.

Crypto market actors according to MiCA Regulation

The most significant change brought by MiCA Regulation is that it clearly defines the different market actors to either crypto-asset issuers or crypto-asset service providers (CASPs), it classifies their activities and provides a transitional period as the regulation will roll out in stages:

  • 30/06/2024 firstly, for stablecoin issuers; and then
  • 30/12/2024 for other market participants

Meaning that the regulation provides just enough time for all crypto entities to prepare their activities for a smooth transition to a new regulatory regime.

Regarding stablecoins, the regulation identifies 2 types:

  • asset-referenced tokens; and
  • e-money tokens (EMT);

As stablecoins, both types purport to maintain a stable 1:1 redemption value in reference to one of the FIAT currencies of the EU member states e.g. 1 ART/EMT = 1 EUR. The main difference between these two types of stablecoins is the underlying asset that purports to maintain that stable value:

  • ARTs can be based on any assets – stocks, bonds, commodities, precious metals, real estate etc.
  • EMTs can only be based on FIAT currency.

Conditions for persons seeking admission to trading of an EMT

The transitional period is crucial for e-money token issuers since their issuance is restricted to already regulated credit and electronic money institutions.

Accordingly, entities whose activities involved the issuance of e-money will now be able to issue e-money tokens as well. Even though it was never prohibited to issue e-money on a distributed ledger technology (DLT), the regulation finally makes this point clear by equating e-money tokens to e-money and refers to the e-money directive for further regulation.

One point to note, though, is that contrary to the current stablecoin standard, the regulation prohibits interest yield from holding or staking EMTs and equates e-money tokens to EMTs. However, the funds that the issuer receives in exchange for the issuance of the EMTs may be invested in low-risk assets, provided that at least 30% of the received funds are kept in a safeguarding account.

In addition, according to MiCA the person seeking admission to trading of an EMT must also be the issuer of that EMT, meaning that credit and electronic money institutions will have to have the technical capabilities of issuing EMTs in-house rather than have them issued by a third party.

As a result, credit and electronic money institutions seeking to issue EMTs need to use this transitional period to ascertain whether they have sufficient technical capabilities allowing them to do so.

Alternatively, there’s a possibility to acquire a crypto-asset issuer or seek out their platforms. Regardless of the method, the issuer needs to guarantee that the technical capabilities are going to be sufficient to comply with the oversight and reporting requirements. Likewise, one should also consider whether the DLT allows for crypto-asset custody or other functionalities that form the core of the issuer’s activities.

Apart from the technical capabilities, EMT issuers have other obligations that they need to comply with. For instance, since they are already licensed entities, they don’t have to go through an authorization process for the issuance of EMTs, but they do have to prepare a comprehensive crypto-asset white paper and notify it to the competent authorities 40 days prior to the issuance of the EMT.

Stablecoin White Paper – Information that must be provided

The white paper is split into 6 parts ranging from the information that must be provided about the issuer, the tokens and the underlying technology:

1. Information about the issuer of the EMT: such as name, address; legal form; contact details with the estimated time of response; parent company; issuer’s involvement in other crypto activities, including its connection to the entity running the DLT; financial status for the past 3 years;

2. Information about the token: name and abbreviation; characteristics of the EMT; information regarding developers;

3. Information about the offer to the public or admission to trading: Indication whether the white paper concerns an offer to the public or admission to trading; units of EMT to be offered to the public;

4. Information on the rights and obligations attached to the EMTs: modification of rights and obligations; rights of redemption; rights of holders when issuer is insolvent, in a recovery / redemption plan;

5. Information on the underlying technology: technical specifications of the used DLT; consensus mechanism and technical operation of storing and transferring the EMT; environmental effects;

6. Information on the risks: description of risks relating to the issuer, EMT and the underlying technology

Ultimately, the liability of the information that is provided in the white paper rests upon the issuer, meaning that in case of any inconsistencies the users of those EMTs will have the option of legal claim against it. Not only that, but the information provided in it will have to be consistent with the issuer’s marketing communications, which will have to be published on the issuer’s website as well.

EBA preparatory recommendations for stablecoin issuers

Keeping in mind that credit institutions and EMIs are already free to issue EMTs, the EBA urges the current and potential issuers of stablecoins to start taking preparatory steps during the transitional period while the  local legal requirements and e-money directive are still applicable.

In particular, the EBA prompts ART and EMT issuers to follow the following guidelines:

1. Conduct a thorough legal assessment.

Examine the legal, regulatory and supervisory conditions, as well as jurisdiction related to ART/ EMT activities. The issuers should familiarize with present and future regulations for stablecoin issuance. Currently, there are no EU limits on issuing e-money on distributed ledger technology. Hence, the legal clarity that will be implemented via MiCAR offers an excellent opportunity for crypto-asset issuers to begin developing their platforms early.

2. Assess your Risk Profile.

Understand the potential risks associated with these activities and their impact on the overall company’s risk profile.

3. Take the following preparational steps for ART and E-money token issuers:

4. Set high standards of disclosure and fair treatment. Meaning that the issuer should guarantee objective equal opportunities for all clients by establishing its conditions and rendering its services in an unambiguous way. The issuer should also develop a transparent and fair White Paper encompassing all aspects of the token issuance (as prescribed by annexes 2 and 3 of MiCAR) including the need to evaluate the effects the issuance could have on the environment. Accordingly, issuers should be conscious of the underlying technology, especially the type of consensus mechanism (Proof of Work (PoW) or Proof of Stake (PoS)) used and its application capabilities.

5. Prepare Well-Defined Business Models. The issuers’ business models should be well-defined and include a truthful set of marketing communications and an extensively thought-through program of operations taking due regard to the technical arrangements of the crypto-asset issuance.

6. Ensure Sound Governance and Risk Management. The members of the managing bodies must be of good repute and have sufficient knowledge and skills in the crypto-asset industry. Their competences should allow them to not only sensibly manage the entity’s activities, but also allow them to fully understand the most relevant risks which would provide them the opportunity to pre-empt them.

7. Have Robust Reserve, Recovery, and Redemption Arrangements. The issuer has to prepare and make effective all necessary policies and procedures that would ensure the smooth functioning of the crypto-asset issuance activities. In particular, the issuer must prepare policies and procedures relating to the reserve assets, that would allow its efficient management and provide the possibility of monitoring potential liquidity or market risks. Policies relating to operational risks, including the risks arising from over-reliance on third parties. Data protection, money laundering and terrorist financing risk mitigation policies. Policies and procedures identifying, preventing and managing potential disclosure of conflicts of interest. And also, the establishment of internal control mechanisms including sound administrative and accounting procedures.

8. Communication with Competent Authorities. ART and EMT issuers are encouraged to communicate, on a timely basis, to the competent authority in the jurisdiction of establishment the information about the token.

General impact of MiCA on crypto market

In conclusion, MiCA’s implementation marks a pivotal moment for the crypto industry, offering the long-awaited legal clarity that has been lacking. With its comprehensive approach to categorizing and regulating crypto-asset issuers and service providers, MiCA brings about a uniform EU framework that supersedes national laws. As the complex landscape of crypto regulation continues to evolve, it becomes increasingly crucial for credit institutions and EMIs to seek expert guidance on the new requirements, especially during the transitional phase as they are going to be the first entities scrutinized by the MiCA regulation. To ensure a smooth transition and compliance to these new standards, seeking professional counsel remains an essential step for all participants in the crypto market.

With less than a year left for stablecoin issuers to prepare for the MiCA regulation, here is a summary of the essential preparatory notes:

Evaluation of own technical capabilities:

  • Own stablecoin issuance technology; or
  • Procurement of an issuance infrastructure;
  • Acquisition of CASPs for the creation of the infrastructure;

Preparation of the white paper:

  • Procuring appropriate underlying technology and infrastructure;
  • Evaluation of the corporate and governance arrangements;
  • Establishing adequate tokenomics;
  • Evaluation of conflicts of interest;
  • Evaluation and establishment of cooperations with third parties;
  • Strategy of offering the EMT to the public;
  • Consideration of possible trading platforms for the distribution of EMTs;

Evaluation of risks and liability for:

  • Inadequate technical standards of the underlying technology;
  • Misleading white paper;
  • Inconsistent marketing materials;
  • Deficient Clients’ funds safeguarding arrangements

Find out more about E-Money Institution licensing here.

Prepared by Tautvydas Petrošius, Associate of ECOVIS Proventuslaw, and Inga Karulaitytė, Partner of ECOVIS ProventusLaw

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