The regulation on markets in crypto-assets (Markets Regulation) creates a new regime for crypto-asset service providers and issuers at EU level.
The Markets Regulation applies to persons engaged in the issuance of certain crypto-assets or providing services related to crypto-assets in the EU. Crypto-assets for these purposes means “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”. However, the Markets Regulation does not apply to crypto-assets which are MiFID financial instruments, electronic money, deposits, structured deposits or securitisations as these would already be covered by existing financial services legislation. We therefore expect the Markets Regulation to be predominantly relevant in respect of "utility tokens" and certain types of "exchange tokens".
The Markets Regulation also does not apply to certain intra-group services and has a more limited application to credit institutions and MiFID investment firms.
There are five main areas covered by the Markets Regulation:
- Offerings of crypto-assets
- Issuers of asset-referenced tokens
- Issuers of e-money tokens
- Provision of crypto-asset services
- Market abuse
Offerings of crypto-assets
The Markets Regulation permits issuers of crypto-assets (other than asset-referenced tokens and e-money tokens – see below) to offer these to the public or seek admission to trading on a trading platform provided that they comply with certain obligations.
These include that the issuer is a legal entity and has drawn up a crypto-asset white paper which includes certain detailed specified information (such as a description of the issuer and the applicable risks) and which is notified to the competent authorities. Exemptions to drawing up a white paper apply to certain offerings of crypto-assets including where offered to fewer than 150 people per member state and offerings targeting qualified investors under the Prospectus Regulation.
The Markets Regulation also introduces requirements for marketing communications, including that the information is fair, clear and not misleading.
Issuers of asset-referenced tokens
Issuers of asset-referenced tokens must be authorised to offer asset-referenced tokens to the public or to seek admission of the asset-referenced tokens to trading on a trading platform. They must also be an EU legal entity.
An asset-referenced token is “a type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets”. This is likely to include the majority of stablecoins.
The requirement for authorisation does not apply to credit institutions, certain small-scale asset-referenced tokens and for asset-referenced tokens that are exclusively marketed to, and held by, qualified investors under the Prospectus Regulation.
The Markets Regulation imposes a specific regime for issuers of asset-referenced tokens including prudential, governance and conduct of business requirements. These include a requirement to hold own funds requirements of at least the higher of €350,000 or 2% of reserve assets and rules on holding a reserve of assets backing the asset-referenced tokens. Conduct of business requirements include obligations to act honestly, fairly and professionally, comply with rules on conflicts of interest, provide ongoing information, establish a complaint handling procedure and comply with rules on marketing communications.
A "change in control" regime for the acquisition of issuers of asset-referenced tokens will also apply.
A crypto-asset white paper is required in order to issue asset-referenced tokens. This must include certain detailed information and be approved by the relevant competent authority. The approval of the white paper is valid for the whole of the EU.
Additional obligations apply to issuers of "significant" asset-referenced tokens, such as a remuneration policy, higher own funds requirements and a liquidity management policy.
Issuers of e-money tokens
Issuers of e-money tokens must be authorised credit institutions or electronic money institutions in order to offer e-money tokens to the public in the EU or to be admitted to trading on a crypto-asset trading platform. An e-money token is “a type of crypto-asset the main purpose of which is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender”. This is likely to include many so-called "exchange tokens".
The requirement for authorisation does not apply to e-money tokens that are exclusively marketed to, and held by, qualified investors under the Prospectus Regulation or if the outstanding amount does not exceed EUR 5 million (or equivalent) over a 12-month period.
E-money tokens are deemed electronic money for the purpose of the E-Money Directive and issuers of e-money tokens must generally comply with a number of provisions in the E-Money Directive.
In addition, further obligations specific to e-money tokens apply, including rules on marketing communications. In addition, an issuance of e-money tokens requires a crypto-asset white paper with certain specified information including a description of the issuer and the project and information on risks. The white paper must be notified to the relevant competent authority.
Additional obligations also apply to issuers of "significant" e-money tokens.
Crypto-asset service providers
Crypto-asset service providers must be authorised EU legal entities to provide crypto-asset services to third parties on a professional basis as an occupation or business. Authorised crypto-asset service providers may benefit from a "passporting" regime permitting them to provide services both through a branch or on a cross-border services basis.
Crypto-asset services include custody and administration of crypto-assets, operating a crypto-trading platform, and placing, receiving and transmitting orders for, and advising on, crypto-assets.
A number of organisational rules also apply to crypto-assets service providers including prudential requirements, rules on the management body, risks assessment requirements and rules on outsourcing. They must also meet certain conduct of business requirements such as acting honestly, fairly and professionally, complying with rules on conflicts of interest and establishing a complaint handling procedure. Specific additional requirements will also apply depending on the services being provided.
There will also be a "change in control" regime for the acquisition of crypto-assets service providers.
The Markets Regulation also includes provisions to prevent market abuse involving crypto-assets admitted to trading on a trading platform for crypto-assets (or for which a request for admission to trading on such a platform has been made).
These include prohibitions on insider dealing, the unlawful disclosure of inside information and market manipulation.
Issuers with crypto-assets admitted to trading are also required to make disclosures of inside information.
A copy of the draft Markets Regulation can be found here.