The EU Commission is negotiating a uniform regulation of crypto assets of all Member States. What could change and how Germany is positioned as a crypto location. A guest article by Dr. Sven Hildebrandt, Managing Director of DLC Distributed Ledger Consulting GmbH.
Recently, it has become known little by little what vision the EU Commission has developed for the future of crypto markets in Europe. The as yet unpublished draft of an EU regulation on Markets in Crypto Assets (MiCA) drafts an independent regulatory regime for the issuance and trading of various types of tokens on more than 150 pages. In addition, there are regulations on licensing requirements and supervisory powers with regard to certain service providers. These include in particular custodians, trading platforms (exchanges) and brokers. Once the Regulation has entered into force, it will be directly applicable in all Member States without transposition into national law.
However, contrary to what the suggests, not all types of crypto-assets are covered by the Regulation. In particular, genuine security tokens, i.e. those tokens that are already considered financial instruments under the Markets in Financial Instruments Directive (MiFID), fall outside the scope of the Regulation. Only the MiFID regulations or the corresponding implementation laws in the EU member states continue to apply to them.
What does this mean specifically for STOs and „classic“ financial instruments?
MiFID financial instruments are, for example, shares, bonds or fund units. With these financial instruments it is already irrelevant whether they are „classic“ securities with paper certificates or digital instruments. What is decisive is not the form of issue (paper or digital) but the content.
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The same applies, at least in the opinion of BaFin, to Security Token Offerings. BaFin considers them as securities in the sense of MiFID. They are therefore not covered by MiCA according to this interpretation. This is not the case in all EU countries. It remains to be seen whether the BaFin will continue to adhere to its view in view of the MiCA.
The recently published draft law on electronic securities is also not affected by the regulation: It only concerns „classical“ securities in electronic form.
Crypto currencies and utility tokens
Accordingly, the Regulation focuses on other crypto-assets: crypto-currencies such as Bitcoin and Ether as well as so-called utility tokens, which can represent e.g. access and usage rights within networks, are covered by the MiCA. The MiCA also records so-called asset-referenced tokens. These are stablecoins that are backed by several central bank currencies and/or one or more commodities and/or other crypto-assets.
Special attention is paid to the so-called significantasset-referenced tokens. Due to their distribution and market capitalisation, the EU Commission sees a risk that they could pose a threat to financial stability and the monetary policy sovereignty of central banks. The Commission probably had Facebook Libra in particular in mind. According to the Commission’s request, the supervisory authorities should be able to take greater account of the impact of such stablecoin projects on financial stability in the future. In addition, stricter supervisory regulations are planned for significantasset-referenced tokens.
If, on the other hand, a token is backed by only one central bank currency, i.e. is denominated in EUR, US-$ etc., it is an e-money token. The MiCA is also applicable to e-money tokens. Moreover, e-money remains subject only to the Electronic Money Directive.
White paper and robust IT: What token issuers can expect
Issuers of tokens covered by the proposed Regulation will have to publish a white paper prior to launch, which will have to meet certain requirements. Before publication, the white paper must be submitted to the supervisory authority. There is no provision for review and approval of the white paper. Once submitted and published, a white paper entitles the holder to offer a token throughout the EU.
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Exceptions are made for smaller issues or issues limited to professional investors, as well as for tokens acquired through mining or issued free of charge, such as in the context of Airdrops.
In addition, issuers will in future be subject to certain behavioural obligations, must maintain a robust IT infrastructure and meet security requirements.
EU-wide passporting finally in sight
The draft Regulation does not require that whitepapers submitted and published only once be valid throughout the Union; it also requires that a licence to provide services relating to the crypto assets covered by the Regulation be applied for and granted only once, starting from a (single) establishment in the EU. Crypto-exchanges, brokers or custodians could then offer their services in any Member State.
It is not yet clear what concrete expectations the supervisory authorities will have in this context with regard to suitable managers, risk management, compliance etc. and what capital requirements will apply in each case. It is therefore not yet clear what impact the regulation, with its extensive programme of obligations, will have on young FinTechs and the innovative strength of the industry.
When will the MiCA apply?
The MiCA is still a draft which has to go through the often lengthy European legislative procedure. In addition, the Regulation itself provides for a transitional period of 18 months after entry into force until the rules apply. It will therefore still take some time before the MiCA becomes a reality.
Effects on Germany as a business location
BaFin has been treating crypto currencies such as Bitcoin and Ether as financial instruments for years. In the meantime, this has also been laid down in the German Banking Act. Exchanges, brokers or custodians therefore already require a licence from BaFin if they want to become active on the German market.
Many foreign crypto companies have therefore been considering Germany as a location for entering the European market or for further expansion. Carola Rathke and Thomas Tüllmann, who together with Matthias Winter are among the few experts in crypto law in Germany at Eversheds Sutherland Crypto-Companies, know the reason:
Germany is extremely attractive as a market, and even outside of Germany, regulation creates the trust that is necessary to develop new customer groups or attract financially strong investors. Added to this is the expectation that European regulation will come anyway. The BaFin licence should then create the conditions for serving the European market as seamlessly as possible at the time of a European regulation. Especially large crypto companies that are on an expansion course are currently applying for a BaFin licence or are about to do so.
According to Eversheds Sutherland, MiCA should not be a particular hurdle for these crypto-companies regulated by BaFin.
Classification and outlook
First of all, it is to be welcomed that the choice of the instrument of a regulation creates uniform rules throughout Europe which prevent arbitrage in this respect. It will be interesting to see the reaction of professional market participants who, at least in Germany, have been able to invest in native crypto-assets such as Bitcoin with legal certainty for some time.
An exponential growth of digital assets in institutional portfolios is likely in so far as, after the great success of Bitcoin, nobody wants to be accused of having missed the next trend. This is also demonstrated by the exponentially increasing involvement of traditional market participants in this area, which is currently particularly evident in the custody sector. What is certain is that the question of adequate personnel in particular will be of great importance in the future.
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