The Markets in Crypto-assets Regulation (MiCAR) covers electronic money or e-money tokens, a crypto-asset that purports to maintain a stable value by referring to the value of a fiat currency that is a legal tender. The main purpose of this crypto-asset is to be used as a means of exchange inside the European Economic Area (EEA) single market.
Definition of e-money tokens
A crypto-asset is a digital representation of value or rights, which may be transferred and stored electronically, using distributed ledger technology (DLT) or similar technology. In order to consider a crypto-asset as an e-money token, the following requirements must be met:
- It is used as an exchange method;
- It purports to maintain a stable value; and
- It is referred to the value of a fiat currency that is legal tender.
Pursuant to MiCAR, an e-money token is considered "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".
E-money tokens should not be confused with ‘electronic money’, which is defined in the Directive 2009/110/EC (EMD) as "electronically, including magnetically, stored monetary value as represented by a claim on the issuer, which is issued on receipt of funds for the purpose of making payment transactions (…), and which is accepted by a natural or legal person other than the electronic money issuers." This means that electronic money does not always have to qualify as an e-money token under MiCAR while any e-money token can be considered electronic money under EMD.
Authorisation and exemptions
Strict conditions apply to the issuance of e-money tokens. In order to offer e-money tokens to the public or seek admission on a trading platform, the issuer should be authorised as a credit institution or ‘electronic money institution’; and draw up and publish a crypto-asset white paper and notify this white paper to the supervisory authority in the relevant member state. Since e-money tokens are also considered e-money, issuers should also comply with the relevant requirements set out in the EMD, such as pursuit and prudential supervision of the business of electronic money institutions and the requirements on issuance and redeemability of e-money tokens.
The issuance of e-money tokens requires a licence unless the issuer can make use of an exemption. Exemptions from the licence requirement upon an offering include offerings addressed solely to qualified investors and the e-money tokens can only be held by such qualified investors; and offerings where the average outstanding value of the e-money tokens does not exceed EUR 5 million or the equivalent amount in another official currency calculated over a period of 12 months.
The exemptions from the EMD relating to limited networks, certain transactions by providers of electronic communications networks and electronic money institutions issuing only a limited maximum amount of electronic money also apply to e-money tokens.
Whitepaper: requirements and notification
The issuer should publish and notify a crypto-asset white paper to the relevant supervising authority. The white paper should contain all information concerning the issuer, the e-money token and the offer of e-money tokens or their admission to trading that enables prospective buyers to make an informed purchase decision and understand the risks relating to the offer of e-money tokens. Also, the e-money whitepaper should contain a description of the issuer, the issuer’s project and an indication whether the e-money tokens are offered to the public and/or are admitted on a trading platform. Furthermore, the whitepaper should describe the underlying technology and standards of the e-money tokens, the risks relating to the issuer and a detailed description of the rights and obligations attached to the e-money tokens, including the redemption right at par value.
The whitepaper should be published on the issuer's website. Also if the issuer makes use of an exemption of the licence requirement, the issuer should draw up and publish a white paper.
Obligations for e-money token issuers
Marketing communications relating to the issuance of e-money tokens must comply with certain requirements. The marketing must be clearly identifiable as such and provide accurate and transparent information that aligns with the white paper. Furthermore, marketing should clearly disclose the publication of a white paper and provide contact details of the issuer’s website, telephone number, and email address. These marketing materials and communications must be submitted to the relevant supervisory authority upon request.
There are also prudential requirements for the issuers of e-money tokens. MiCAR refers to the requirements as set out in the EMD. The EMD provides for prudential requirements, requirements regarding initial capital and own funds and a restriction on the issuer on conducting certain payment service related activities.
The prudential requirements relate to information obligations regarding the relevant supervisory authority that includes meeting certain thresholds regarding the shareholding in the issuer and substantial changes in the measures taken to protect received cash. Furthermore, the prudential requirements relate to the obligation to conduct a sound and prudent business and the measures that the supervisory authority may take. The EMD states that member states can grant exemptions for the aforementioned obligations.
Own funds and the reserve of assets
In order to guarantee the stable value of e-money tokens, the EMD requires that an initial capital of at least EUR 350,000 should be available at the time of authorisation. Furthermore, the issuer must have own funds equivalent to at least 2% of the average outstanding e-money tokens.
MiCAR requires that at least 30% of the funds received is always deposited in separate accounts in credit institutions. The remaining funds should be invested in low risk financial instruments denominated in the same currency as the referenced e-money token.
Significant e-money tokens
Under MiCAR, the European Banking Authority (EBA) may designate e-money tokens as significant at its own initiative or at the request of the issuer. Issuers of e-money tokens need to consider the criteria on significant e-money tokens in order to be prepared to comply with the related additional obligations set in MiCAR.
E-money tokens may be designated as significant based on the fulfilment of the following prescribed criteria:
- the size of the client base of the e-money token is greater than 10 million;
- the value of the e-money token issued, its market capitalisation (if any) or the size of the reserve of assets of the issuer of the e-money tokens exceeds EUR 5 billion;
- the average number and average aggregate value of transactions in e-money token per day during the relevant period is higher than 2.5 million transactions and EUR 5 billion respectively;
- the issuer of the e-money token is a central platform service provider designated as a gatekeeper under the Digital Markets Regulation;
- the importance of the activities of the issuer of the e-money token on an international scale, including the use of the e-money token for payments and remittances;
- the interconnectedness of the e-money token or its issuers with the financial system; or
- the fact that the same issuer issues at least one additional asset-referenced token or e-money token and provides at least one crypto-asset service.
In case several issuers issue the same e-money token, the fulfilment of the criteria is assessed after aggregating the data from all issuers. The EBA will classify e-money tokens as significant e-money tokens where at least three of the prescribed criteria are met. In making its assessment, the EBA relies on the information in reports that have been submitted by the competent authorities of the issuer’s home member state.
In case an assessment is made pursuant to the request of the issuer, the issuer needs to demonstrate through a detailed programme of operations that it is likely to meet at least three of the prescribed criteria.
The EBA will reassess the classification of significant e-money tokens annually on the basis of the available information, including information from the reports provided by the competent authorities.
Given that significant e-money tokens could be used by numerous holders and pose a potentially greater risk to financial stability than regular e-money tokens, issuers of significant e-money tokens are subject to additional more rigid requirements including but not limited to:
- adopt a remuneration policy that promotes sound and effective risk management;
- a duty on issuers to ensure that these e-money tokens can be held in custody by different crypto-asset service providers authorised for providing custody and administration of crypto-assets on behalf of clients;
- a duty to assess and monitor liquidity needs to meet potential redemption requests. Thus, issuers of significant e-money tokens must establish, maintain and implement a liquidity management policy and procedures;
- conduct liquidity stress testing on a regular basis; and
- increase the average amount of reserve assets to 3%.
Once e-money tokens are designated as significant e-money tokens, the EBA, instead of national authorities, will generally supervise them directly.
The implementation of MiCAR marks an important milestone in providing a regulatory framework for e-money tokens, which have not been comprehensively regulated in existing financial services legislation. MiCAR encompasses key provisions, which should provide market integrity and financial stability by introducing transparency, disclosure, authorisation and supervision in relation to e-money tokens. Its implementation should result in a greater degree of certainty and a more reliable outlook for the investing public. It is expected that MiCAR will encourage further development of regulations in various countries allowing for greater coordination and harmonisation on a global level.
For more information MiCAR and e-money tokens in the EAA, contact your CMS client partner or local CMS experts: Clair Wermers, Karsten Bruinsma, Kilian Rowel, Jovana Bingulac, Jaime Bofill, Marisa Ruiz, Sara Piñero Mosquera and Rodrigo Pérez Gil.