18 months after its coming into effect, the Markets in Crypto Assets Regulation (MiCAR) will be directly applicable law in the European Union. Market participants will then have to comply with the regulatory requirements of the new regulation. The regulation takes a comprehensive approach and attempts to regulate all conceivable types of tokens. Therefore, both initiators and providers of crypto tokens as well as numerous service providers operating business models relating to crypto tokens will have to fulfill regulatory obligations under MiCAR in the future. In order to capture the widest possible variety of known token types, MiCAR utilizes the umbrella term crypto assets. The definition of the term in essence merely requires the token to be a digital representation of a value or right that is electronically transferable and storable using distributed ledger technology (DLT). In addition to the umbrella term, MiCAR also defines specific forms of crypto assets such as e-money tokens, asset-referenced tokens, and utility tokens. In MiCAR’s understanding, the latter are crypto assets that grant digital access to a good or service available via DLT and which are accepted only by their issuer.
German Definition of Crypto Assets Does Not Include Utility Tokens
In Germany, crypto assets are already regulated as financial instruments under the German Banking Act (Kreditwesengesetz, KWG) and the German Investment Firm Act (Wertpapierinstitutsgesetz, WpIG) since January 1, 2020. However, the national legal definition differs significantly from that of MiCAR and only recognizes exchange, payment or investment purposes as a use case for crypto assets. It can also be inferred from the explanatory memorandum to the introduction of crypto assets as financial instruments, that utility tokens should generally not be subjected to the German definition of crypto assets. However, this may have to be assessed differently in individual cases should the utility token also be intended to serve investment purposes. This may be the case if an issuer of utility tokens allows the token to be used within its business model, but at the same time actively works towards making the token tradable on crypto exchanges and holds out the prospect to token acquirers that there may be price gains in the future.
Which Obligations May Arise from MiCAR in Connection with Utility Tokens?
Obligations under MiCAR primarily may arise for issuers of utility tokens and for crypto service providers offering services related to utility tokens. Issuers of utility tokens, like issuers of other crypto assets, will be required to prepare a whitepaper prior to the public offering of their tokens, which must present key information about the token, the issuer and the project behind it. Unlike other token types, however, the public offering will not be allowed to last longer than 12 months if the service behind it is not yet usable. Crypto asset service providers, as with other crypto assets, will have to perform due diligence on their customers when offering their services with relation to utility tokens. However, the issuance of utility tokens itself is not a crypto service for the respective issuer in this context. Therefore, utility token issuers do not need a authorization according to MiCAR. This is to be assessed differently for crypto service providers that support the issuance of utility tokens, for example through custody solutions, placement services or consulting services. This is the main difference between MiCAR and the current German supervisory law, which does not include utility tokens as financial instruments and therefore does not require authorization for service providers involved in utility token issuances.
Attorney Lutz Auffenberg, LL.M. (London)