With the Markets in Crypto Assets Regulation (MiCAR), the European Union created an independent set of rules for the commercial handling of crypto assets that is directly applicable in all EU member states. The text of the regulation is already very extensive and detailed. Nevertheless, it is necessary in many places to ensure a uniform interpretation by the authorities in the member states. For this reason, the European Securities and Markets Authority (ESMA) is obliged in many provisions of MiCAR to draw up explanatory notes, consult with market participants and publish them. ESMA also has such an obligation in relation to the exemption clause which sets out the alternative relationship between MiCAR and MiFID2. The exemption stipulates that the provisions of MiCAR should not apply to a crypto asset that meets the requirements for a financial instrument within the meaning of MiFID2 regulation. In this respect, it is problematic that the member states developed and applied very different administrative practices in their interpretation of what constitutes a financial instrument under MiFID2 in the period prior to the adoption of MiCAR. The fundamental question of whether MiCAR or MiFID2 regulation should apply to a token in the future therefore requires a uniform interpretation, which is to be made possible by the guidelines to be drawn up by ESMA.

Technology- Neutral Approach and “Substance or Form” Principle for Determining the Relevant Regulatory Regime

ESMA had already published a draft of the guidelines to be drawn up in this regard in January 2024. ESMA had given market participants the opportunity to comment on its draft by the end of April. The final guidelines must be published by ESMA by December 30, 2024, i.e. by the date of full applicability of MiCAR. For the interpretation, ESMA first clarifies in its draft consultation that the question of the classification of a token as a financial instrument should in any case be technology-neutral. The method of tokenization and the technical design are therefore of secondary importance. Instead, the characteristics, design and rights associated with the token should be decisive. This “substance over form” approach, which is also reflected in recital 14 of MiCAR, makes it clear in ESMA’s view that the determination of the legal nature of a token as a MiCAR or MiFID2 product must not be based on the technical shell of the product. However, the technical design will still be relevant for legal applications. This is because it will still be relevant when assessing whether a product constitutes a crypto asset within the meaning of MiCAR. Only then it can be examined in the second step whether this crypto asset constitutes a MiFID2 product in terms of its substance.

When May Tokens Be Classified as Transferable Securities under MiFID2?

Financial instruments within the meaning of MiFID2 regulation are, in particular, transferable securities. The term primarily refers to bonds, shares and other securities, for example for embedding derivatives. To define a transferable security, MiFID2 itself sets out three criteria that a product must meet in order to be classified as a transferable security. Firstly, the product must be part of a “category”. This means that the product must be part of an overall issue, which ultimately establishes its exchangeability and thus also its tradability on the capital market. The latter is the second prerequisite for the existence of a transferable security. ESMA understands this to mean not only traditional stock exchanges and regulated markets, but also all trading venues on which corresponding products can be traded, just as BaFin does in Germany. Finally, according to the definition contained in MiFID2, the product must not be a payment instrument. If these requirements are met, tokens are to be classified as transferable securities according to ESMA and are therefore subject to MIFID2 regulation. The provisions of MiCAR are thus not applicable to such tokens, even though they also meet the definition of a crypto asset under MiCAR.

Attorney Lutz Auffenberg, LL.M. (London)

I.  https://fin-law.de

E. info@fin-law.de

The competent lawyer for advice on the legal design and classification of tokens in our law firm is Attorney Lutz Auffenberg, LL.M. (London).