Lindemann Law

Asset-Referenced Tokens (ARTs) under the MiCA Regulation

ARTs, or Asset-Referenced Tokens, are a specific type of crypto-asset defined by MiCAR. They serve to maintain a stable value by linking to legal tender (e.g. US dollar or euro) or other assets (such as gold, securities, other crypto assets or any combination of these).

Imagine you have a digital token, and it’s an ART. This token’s value is linked to, let’s say, the price of gold. So, if the price of gold goes up, the value of your ART should also go up, keeping it stable and less prone to wild price swings, which is common in the crypto world.

MiCAR, the European regulation, oversees ARTs. It categorizes crypto-assets based on their purpose and risks.

  • E-Money Tokens: These are like digital versions of traditional money (euros, dollars). They’re stable and straightforward, referencing a single fiat currency.
  • ARTs: They’re similar to E-Money Tokens but can reference various assets. For instance, an ART could be linked to the price of oil, a basket of cryptocurrencies, or even multiple fiat currencies. This diversification makes them more complex.
  • Other Crypto-Assets: This catch-all category includes crypto-assets that don’t aim to stabilize their value by referencing other assets. For example, Bitcoin, which doesn’t rely on anything else for its value, falls into this category.
Why Does It Matter?

Understanding the distinctions is crucial because it determines how these crypto-assets are regulated. E-Money Tokens and ARTs, aiming for stability, face different rules than other crypto-assets like Bitcoin, which are more speculative.

MiCAR’s definition of ARTs is quite broad to adapt to the evolving crypto landscape. This allows for various reference assets, which means some ARTs might have more price fluctuations than others.

ARTs are primarily designed for transactions, not investments. So, issuers and crypto-asset providers can’t offer interest on ART holdings.

To help everyone understand these distinctions better, the European Securities and Markets Authority (ESMA) will release guidelines. These will make it clearer which category different crypto-assets, especially ARTs, fall into under MiCAR.

Licensing in the EU
If you want to issue Asset-Referenced Tokens (ARTs) in the EU, you need to be incorporated and licensed under MiCAR within an EU member state. For non-EU entities currently offering ARTs in the EU, taking action promptly is essential. This involves setting up a company within an EU member state and obtaining the necessary license. Keep in mind that the authorization process can be time-consuming, so early preparations are crucial.

EU-Wide Validity
When you obtain an ART license, after notifications to EU countries of operations passporting) it can be valid throughout the entire European Union. This means that you can offer your ARTs to the public anywhere in the EU, and they can be traded on crypto platforms. To be eligible for such authorization:

  • You must be a legal entity or undertaking established in the EU that has received a license from the Competent Authority (CA) in your home member state.
  • Alternatively, you don’t need special authorisation if you’re already a licensed credit institution. However, you must comply with specific rules set forth by MiCAR.

This authorization is like a European passport for your ARTs. It streamlines your ability to conduct business across the EU without needing separate approvals from each member state, making the process more efficient and less cumbersome.

Exemptions from ART Issuance Rules

  1. Qualified Investors: The rules mentioned earlier, which dictate who can issue ARTs, do not apply if the offer of ARTs is exclusively directed towards and can only be held by qualified investors.
  2. Value Limit: Another exemption relates to the value of issued ARTs. If the total value of ARTs issued doesn’t surpass EUR 5 million (or the equivalent in another official currency) during a 12-month period, the regulations governing ART issuance may not apply. This provides flexibility for smaller-scale ART offerings.
Applying for ART Authorisation: A Detailed Process

The process of obtaining authorization for issuing Asset-Referenced Tokens (ARTs) is comprehensive. Here’s a closer look at how it works:

1. Submission of Application:
The issuer submits an application to the regulator, which includes extensive information. This application covers details about the issuer, a program outlining their business model, a crypto-asset white paper, governance arrangements, and various policies and procedures like Business Continuity Planning (BCP), internal control mechanisms, risk management policies, safeguarding data procedures, and more.

2. Regulatory Technical Standards:
The specific documentation and data required during the licensing procedure will be further specified in regulatory technical standards. These standards will be developed by the European Banking Authority (EBA) in collaboration with ESMA and the European Central Bank (ECB).

3. Timelines:
While formally the regulator has 60 working days from the receipt of a complete application to issue a draft decision, the actual authorization process may take a few months. This is because of the involvement of multiple regulatory bodies like EBA, ESMA, and ECB (or the relevant central bank) in the process.

4. Refusal of Authorization:
The regulator has the authority to deny authorization if there are clear and demonstrable reasons to believe that the issuer does not meet MiCAR’s requirements. Such refusal could occur if the issuer’s business model is seen as a significant threat to market integrity, financial stability, and payment system operations or poses serious risks related to money laundering and terrorist financing.

The White Paper
is a critical document for ARTs. What requirements a white paper should have:
  1. The white paper should include comprehensive information about the issuer, the ART itself, and the offer or admission to trading of ARTs. This information is essential for potential buyers to make informed decisions about purchasing ARTs. It helps them understand the risks associated with investing in these tokens.
  2. The white paper goes beyond the basics. It provides intricate details about the technical, environmental, financial, and legal aspects of the ARTs. This depth of information ensures transparency and helps investors evaluate the token thoroughly.
  3. The white paper must meet specific quality standards. It should be clear, fair, and not misleading.
  4. Issuers are obligated to publish the crypto-asset white paper on their websites. This accessible publication allows potential investors to review the document easily.
  5. Failure to meet these obligations, including content quality, may result in liability for the issuer’s management or the Competent Authority (CA) to a holder of ARTs. This underscores the importance of full compliance.

Contents of the White Paper:

  1. issuer information,
  2. details about the ART,
  3. the offering to the public or admission to trading,
  4. rights and obligations tied to the ART,
  5. underlying technology,
  6. risks,
  7. reserve of assets,
  8. the environmental impacts of the consensus mechanism used for ART issuance.

Importantly, the white paper should clearly state that ARTs may lose their value, may not always be transferable or liquid, and are not protected by investor compensation schemes or deposit guarantee schemes.

Information within the white paper should be presented concisely and comprehensibly, adhering to fairness and clarity principles.

Obligations for ART Issuers

Reserves of Assets and Own Funds.
To safeguard the value of ARTs, issuers must establish and maintain reserves of assets. Additionally, they must maintain a certain level of own funds, ensuring financial stability. These requirements are as follows:

  • Own funds of at least EUR 350,000.
  • 2% of the average reserve of assets.
  • A quarter of the fixed overheads from the preceding year.

Issuers must carefully assess these financial requirements, factoring in both the reserve of assets and own funds.

Reserve of Assets and Prudential Requirements.

  • Issuers must maintain an asset reserve continually. This reserve serves to mitigate risks associated with the assets linked to ARTs and address liquidity risks stemming from token holders’ redemption rights.
  • The reserve of assets must be distinct from the issuer’s assets and those of other ARTs.
  • Issuers should establish and enforce custody policies, procedures, and contractual arrangements for managing reserve assets.
  • While issuers can invest some reserve assets, a portion must remain in highly liquid financial instruments with minimal risk.

Additional Own Funds Requirement.
Beyond the base own funds requirement, the home member state’s Competent Authority (CA) may demand that an issuer maintain own funds up to 20% higher than the specified amount. This additional requirement might be imposed when there’s an elevated risk related to the tokens or assets held.

Marketing Communications Compliance.
Marketing communications related to ART issuances must adhere to specific criteria:

  • They should be clearly identifiable as marketing materials.
  • Marketing content must provide accurate and transparent information that aligns with what’s presented in the white paper.
  • It must also disclose the publication of the white paper.
  • The marketing materials should clearly provide contact details for the issuer’s website, telephone number, and email address.
  • Additionally, marketing communications must be reported to the relevant CA upon request.

These obligations are fundamental for ensuring the stability and integrity of the ART market.

Significant ARTs
To be classified as significant, an ART must meet at least three of these criteria:

  • Big User Base: An ART used by more than 10 million people.
  • Impressive Value: An ART with a total value of over EUR 5 billion.
  • Central Role: It’s like the issuer acting as a gatekeeper in the world of digital markets.

Competent Authorities keep an eye on these significant ARTs and report to the EBA at least twice a year.

If you’re an issuer of a significant ART, you have some extra tasks:

  • You need to set up a policy that encourages smart risk management.
  • Make sure your ARTs can be safely held by authorized crypto-asset service providers.
  • Always be ready to handle lots of transactions and potential cashouts. This means keeping tabs on your liquidity and having a plan.
  • Conducting regular liquidity stress tests to evaluate their ability to handle adverse scenarios.
  • You’ll need to have more assets in reserve, equal to 3% of your ART’s value.

An ART can be seen as significant during two periods:

  1. When CAs report it to the EBA for the first time.
  2. When CAs report it to the EBA for two times in a row.

Once the EBA says your ART is significant, you’ve got more responsibilities to make sure everything runs smoothly and stays safe. So, issuers must be prepared for these extra tasks and responsibilities.

Title III, Articles 16 – 47 delineate regulations governing Asset-Referenced Tokens

Are you facing challenges in understanding, adapting, or executing the MICA regulations for your business? Feel free to reach out to schedule an individual consultation with our expert.

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