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Category: blog EN

Oct 02, 2023

The MiCAR Whitepaper (Part V) – Which Publication Obligations and Subsequent Obligations Apply to the Crypto Whitepaper?

Under the Markets in Crypto Assets Regulation (MiCAR), which will gradually take legal effect in the European Union from June 30, 2024, a crypto whitepaper must be prepared in the event of a public offering of crypto assets as well as when applying for their admission to trading on a trading platform. The first three parts of this series dealt with the content requirements for a whitepaper in the case of an offering or admission in general of crypto assets as defined by MiCAR, as well as of asset-referenced tokens and e-money tokens. The fourth part dealt with marketing communications in the event of the sale of tokens and their consistency in content with the MiCAR whitepaper to be published. This fifth part analyzes how and where to publish a MiCAR whitepaper after it has been created and how to deal with important information that occurs after the whitepaper has been published. All crypto assets relevant under MiCAR for which a whitepaper is to be prepared are addressed.

MiCAR Whitepaper is to be Published on the Provider’s Website

Providers of crypto assets other than asset-referenced tokens or e-money tokens and persons applying for admission of such crypto assets to trading must publish the MiCAR whitepaper on their publicly accessible website. In terms of timing, this must in any case be done prior to the start date of the public offering of the relevant crypto assets or on the start date of the admission. The MiCAR whitepaper must remain available on the website of the providers or persons seeking admission to trading for as long as the crypto assets are held by the public. The published whitepaper for crypto assets other than asset-referenced tokens or e-money tokens must be consistent with the version submitted to the competent authority and any amended version. An issuer of an asset-referenced token must also publish on its website the MiCAR whitepaper and any amended version. The whitepaper must be made publicly available by the start date of the public offering of the asset-referenced token or the start date of the admission of these tokens to trading. This whitepaper must remain published as long as the asset-referenced tokens are held by the public. Prior to the public offering of an e-money token in the European Union or the application for admission of the e-money token to trading, the issuer of the e-money token must also publish the whitepaper on its website.

Supplementary Obligation and Other Publication Obligations in Addition to the MiCAR Whitepaper

Also to be published on the provider’s website is the result of the public offering in the case of an offering of crypto assets other than asset-referenced tokens or e-money tokens. If there is a subscription period, the result must be published within 20 working days after the end of the subscription period. In the case that the offer is open-ended, the number of crypto asset units in circulation must be published on the website on an ongoing basis, at least monthly. Issuers of asset-referenced tokens must publish on their website, in addition to the relevant MiCAR whitepaper, in a publicly and easily accessible place, as soon as possible, a brief, clear, precise and transparent summary of the audit report and the complete and unedited audit report relating to the asset reserve. For the duration of the public offering or for the duration of the admission of the crypto asset to trading, providers of crypto assets other than asset-referenced tokens or e-money tokens, persons applying for admission of such crypto assets to trading, or operators of a trading platform for crypto assets must keep the MiCAR whitepaper up to date. This means that the whitepaper must be amended whenever a new material factor, material error, or material inaccuracy has occurred that may affect the valuation of the crypto assets. The same applies to an e-money token whitepaper. Exactly what constitutes a circumstance that affects the value of the token is not specified in MiCAR and is therefore likely to be a matter of case-by-case determination. Issuers of asset-referenced tokens must notify the competent authority of any intended change to their business model that occurs after the granting of approval or after the approval of the MiCAR whitepaper and is likely to significantly influence the purchase decision of a holder or a potential holder of asset-referenced tokens. In this case, the whitepaper must be updated accordingly.

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    Sep 25, 2023

    Europe goes Crypto (Part XIX) – Crypto Portfolio Management via DeFi Protocols under MiCAR

    The European Markets in Crypto Assets Regulation (MiCAR) will require crypto asset service providers (CASP) to obtain a MiCAR license from their competent authority prior to operating their business from December 30, 2024. CASP based in Germany will then require a BaFin license. One of the crypto services regulated by MiCAR is portfolio management of crypto assets. It occurs when a crypto asset service provider manages portfolios of its clients on a client-by-client basis in the sense that it is allowed to make investment decisions regarding crypto assets with its own discretion according to guidelines agreed upon with the clients. In order to obtain the required BaFin license, the crypto portfolio management provider will have to fulfill the general requirements for the issuance of a MiCAR license. In this respect, it will be required to possess a proper business organization, to have professionally suitable and reliable business managers, and to be able to demonstrate the regulatory initial capital of at least 50,000 euros. Additionally, however, it will also be required to meet specific conditions with regard to the way in which it conducts its business. This includes, in particular, a careful examination of the suitability of recommended crypto assets for the respective customer. In doing so, the crypto portfolio manager must take into account the clients’ investment objectives as well as their risk tolerance, financial circumstances and ability to bear losses. In addition, crypto portfolio managers must not accept monetary benefits from third parties in the course of crypto portfolio management that could influence the investment decisions to be made for the client. Furthermore, crypto portfolio managers for crypto assets are obliged to inform their clients in detail about all crypto-specific risks.

    Interaction with DeFi Protocols and Smart Contracts by Crypto Portfolio Managers

    In connection with the regulatory requirements to be fulfilled by crypto portfolio managers, it is interesting to see to what extent they are allowed by regulatory law to interact with protocols that actually function in a decentralized manner. For example, if a crypto portfolio manager were to implement investment decisions for its client in each case in an automated manner via decentralized smart contracts from the DeFi sector, it would first have to be clarified whether this activity could still be classified as a “managing activity” or whether it would require, as an execution activity, that the MiCAR license granted to the crypto portfolio manager additionally covers executions for clients. Crypto portfolio management is, for all intents and purposes, advisory business. This is already evident from the fact that the specific regulatory obligations of crypto service providers for crypto advisory and crypto portfolio management are jointly regulated in Article 81 MiCAR. Traditionally, and apparently also according to the idea of the MiCAR drafter, a procurement of crypto assets as part of the management activity should regularly be carried out through third-party providers licensed to exchange crypto assets for other crypto assets. These are contracted by the crypto portfolio manager to deliver or take delivery of certain crypto assets with effect for its client’s wallet. However, such third-party providers would not exist in DeFi. In the absence of European interpretative guidance currently being prepared by EBA and ESMA, BaFin has not yet commented on how broadly the definition of crypto portfolio management should be interpreted. In the spirit of a cautious approach, crypto portfolio managers should therefore assume for the time being that execution activities are not covered. Crypto portfolio managers would therefore be on the safe side if they involve an intermediary crypto service provider authorized to execute crypto transactions for the client.

    Execution Service Providers with MiCAR License Also Face Problems with DeFi Trades via Liquidity Pools

    While the regulatory problems may be solved for the crypto portfolio manager by involving an execution service provider with a MiCAR license to swap crypto assets for other crypto assets, they arise again in a different guise for the execution service provider. This is because the latter is also subject to numerous regulatory obligations in the performance of its activities. Insofar as a crypto asset service provider acquires crypto assets for a customer via an interaction with a DeFi protocol, it will also be required to fulfill obligations related to money laundering law. Since clarification of the transaction partner is regularly impossible in the case of an automated liquidity pool without a tangible operator, this may result in the executing crypto asset service provider being unable to execute a corresponding transaction. Particularly problematic are cases in which the procurement of crypto assets is to be carried out systematically via DeFi protocols and decentralized liquidity pools. In these cases, the execution service provider will usually never be able to clarify the origin of the crypto assets he receives from the liquidity pool. The development of an adequate and appropriate administrative practice on this topic should therefore be carried out as soon as possible by the responsible ESMA and EBA, as well as on a national level by BaFin. Crypto asset service providers can accelerate this process by clarifying corresponding business models with BaFin in advance.

    Attorney Dr. Lutz Auffenberg, LL.M. (London)

    I.  https://fin-law.de

    E. info@fin-law.de

    The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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      Sep 18, 2023

      The MiCAR Whitepaper (Part IV) – How to market a Crypto Whitepaper?

      The Markets in Crypto Assets Regulation (MiCAR), which will gradually take legal effect in the European Union from June 30, 2024, stipulates that a crypto whitepaper must be prepared in the event of a public offering of crypto assets or in order to apply for their admission to trading on a trading platform. In the first three parts of the series, we looked at the content requirements for a whitepaper in the case of an offering or admission of crypto assets other than asset-referenced tokens or e-money tokens, as well as asset-referenced tokens and e-money tokens. In this part, we analyze the impact of a MiCAR whitepaper on the marketing of the corresponding crypto assets. MiCAR uses the term marketing communications in this context. However, MiCAR unfortunately does not provide an official definition of the term. The recitals indicate that marketing messages and marketing materials that are also broadcast via new channels such as social media platforms are to be covered. The information contained in marketing messages must be fair, clear and not misleading. The principle applies that the information in promotional messages and marketing materials should be consistent with the information provided in a crypto whitepaper.

      Marketing Communications Must Comply with MiCAR Requirements

      The principle that marketing communications must be consistent with the information in the MiCAR whitepaper can, of course, only apply if such a whitepaper must be prepared. But regardless of the existence of a crypto whitepaper, marketing communications must be clearly recognizable as such. If a MiCAR whitepaper has been created, the marketing materials must refer to it and provide further information on the provider or the person applying for admission of the crypto assets to trading or the operator of the trading platform for the crypto assets in question. In particular, an Internet address, a telephone number and an e-mail address for contacting must be provided. For crypto assets other than asset-referenced tokens or e-money tokens, a note shall be included stating that the marketing communications have not been approved by any authority. Where the preparation of a crypto whitepaper is required, marketing communications shall not be disseminated prior to the publication of the crypto whitepaper. Market soundings, however, are permitted even before that. Regulators in the member states where the marketing communications are distributed have the authority to verify that the communications comply with MiCAR. If a significant new factor, significant error or significant inaccuracy has occurred that may affect the valuation of crypto assets, the marketing communications must be updated, as must the MiCAR whitepaper.

      The Transmission and Publication of Marketing Communications

      The provider of crypto assets, persons applying for admission of such crypto assets to trading or operators of trading platforms for such crypto assets must provide the MiCAR whitepaper to the competent authority of their home Member State. In the case of marketing communications, this shall only be done upon request of the supervisory authorities. The providers of the crypto assets and persons applying for admission to trading must publish their marketing communications on their publicly accessible website in a timely manner and in any event prior to the start date of the public offering of the crypto assets or the start date of the admission. The marketing communications must remain available on the website of the providers or persons applying for admission to trading for as long as the crypto assets are held by the public. If marketing communications have been submitted to regulators, the marketing communications must be consistent with the version submitted to the competent authority and any amended version.

      Attorney Dr. Konrad Uhink

      I.  https://fin-law.de

      E. info@fin-law.de

      The lawyer responsible for providing advice on MiCAR whitepaper creation in our law firm is Attorney Dr. Konrad Uhink.

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        Sep 11, 2023

        Europe goes Crypto (Part XVII) – The MiCAR Acquisition Approval Procedure

        The crypto industry is currently in a consolidation phase. With increasing regulation and an increasingly harsh general economic environment, some market leaders of the past are running into difficulties, while new players and institutions from the traditional financial world are positioning themselves for succession. Established financial institutions in particular are currently looking for ways to position themselves for the crypto market and the field of tokenization. One obvious opportunity here is the acquisition of an existing crypto asset service provider. The acquisition of a crypto asset service provider is regulated in Germany under the German Banking Act (KWG) and the German Investment Firm Act (WpIG) and is subject to a mandatory and successful acquisition approval procedure at BaFin, in which the authority must approve the acquisition by the interested acquirer. Also in case of an increase of a shareholding in a crypto asset service provider resulting in a shareholding of more than 20% or 50%, an acquisition approval procedure at BaFin has to be conducted. In the future, there will be EU-wide regulations in the Markets in CryptoAssets Regulation (MiCAR) for shareholdings in a crypto asset service provider. But how will the acquisition approval procedure work under MiCAR?

        BaFin Must Evaluate Planned Acquisition in MiCAR Acquisition Approval Proceedings

        The regulations on the takeover of a crypto asset service provider regulated under MiCAR will come into force on December 30, 2024. At that point, the competent supervisory authority – in Germany, BaFin – will have to assess whether there are any reasons opposing the takeover in an acquisition approval procedure prior to any planned takeover. The acquisition approval procedure under MiCAR will have to be conducted if the interested acquirer would hold a stake of more than 20, 30 or 50% of the capital or voting rights in the crypto asset service provider after a planned takeover. The acquisition approval procedure is initiated by the interested acquirer, who is obliged to notify BaFin in writing. However, the seller of shares is also subject to a notification obligation if his shareholding in the capital or voting rights would fall below the threshold of 10, 20, 30 or 50% as a result of the planned sale. BaFin will have 60 working days from receipt of acknowledgement to assess the planned acquisition. In the MiCAR acquisition approval procedure, BaFin may consult the Financial Intelligence Unit (FIU) responsible for processing suspicious money laundering reports to verify whether the planned acquisition could raise concerns under money laundering prevention law.

        What Information Must be Submitted to BaFin for an Acquisition Approval Procedure Pursuant to MiCAR?

        MiCAR does not explicitly regulate which specific information and documentation have to be submitted to BaFin within the scope of the acquisition approval procedure under MiCAR. Rather, MiCAR obliges ESMA to develop regulatory technical standards in which the documents and evidence to be submitted are to be specified. It can be assumed that, in addition to the requirement for CVs, certificates of good conduct and other evidence documenting the reliability of the acquirer and the persons behind it, descriptions of the acquirer’s current and future business activities and information on its financial situation will also have to be submitted. In any case, however, in accordance with the provisions of MiCAR, it will be necessary for the competent authority to verify in the aquisition approval procedure whether the interested acquirer is reliable and whether the persons actually managing the crypto asset service provider’s business are professionally suitable. The subject of the examination will be, in particular, whether the crypto asset service provider is likely to be able to fulfill all regulatory obligations under MiCAR even after the proposed acquisition. In cases where there is sufficient suspicion that the planned takeover is for money laundering or terrorist financing purposes, the competent authority will not be able to approve the takeover.

        Attorney Dr. Lutz Auffenberg, LL.M. (London)

        I.  https://fin-law.de

        E. info@fin-law.de

        The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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          Sep 04, 2023

          The MiCAR Whitepaper (Part III) – What Content is Required for the E-Money Token Whitepaper?

          The Markets in Crypto Assets Regulation (MiCAR), which will have legal effect in the European Union as of June 30, 2024, requires that a whitepaper be prepared in the event of a public offering of e-money tokens or admission of e-money tokens to trading on a trading platform. In the first two parts of the series, we addressed the content requirements for a whitepaper in the case of an offering or admission of crypto assets other than asset-referenced tokens or e-money tokens, as well as asset-referenced tokens. In this part, we address the whitepaper requirements for e-money tokens. MiCAR defines an e-money token as a crypto asset that is intended to maintain value stability by reference to the value of an official currency. In this context, issuers of e-money tokens may in principle only be legal entities that are licensed as credit institutions or as e-money institutions.

          Content Requirements for a MiCAR Whitepaper for E-Money Tokens

          The content requirements for a whitepaper for e-money tokens have many similarities with the content requirements for the whitepaper for crypto assets and asset-referenced tokens supplemented by some unique features for e-money tokens. The whitepaper for e-money tokens must also contain information about the issuer. In particular, it must be evident from the whitepaper what the legal form and company ID of the issuer is and what its address is. In addition, issuers must provide information about their financial performance over the past three years in an e-money token whitepaper if the issuer has been in existence for that long. As mentioned above, only regulated companies licensed as credit institutions or as e-money institutions may issue e-money tokens. Accordingly, a whitepaper for e-money tokens must contain accurate information about the authorization as an issuer of the e-money token and the name of the competent authority that granted the authorization. In the event that the issuer also issues other crypto tokens or also performs activities related to crypto tokens, this must be clearly stated. Information about the e-money token must then be included, such as the token’s characteristics and precise details of any natural or legal persons involved in the token’s design and development. Specific information about the e-money token’s public offering or admission to trading must also be included. This information includes such things as the total number of tokens. In another section of the whitepaper, the rights and obligations associated with the e-money token must be described, as well as information about the technology underlying the tokens. A separate section must also present and explain the issuer-related and e-money token-related risks.

          The Requirements Specified for E-Money Tokens by MiCAR Must be Addressed

          The section on the rights and obligations associated with e-money tokens must include information on how the issuer ensures compliance with the requirements established by MiCAR for the issuance of e-money tokens. MiCAR stipulates that holders of e-money tokens are entitled to a claim against the issuer of the relevant e-money tokens. Upon demand by the holder of an e-money token, the issuer must repay the monetary value of the e-money token to the holder at any time and at par value. Accordingly, a detailed description of the right to redeem at par value and the procedure and conditions for exercising such rights must be included. As with asset-referenced tokens, a reorganization plan and a redemption plan must be established for e-money tokens. The redemption plan must document that the issuer of the e-money token is capable of redeeming the outstanding issued e-money token without causing undue economic harm to its holders. Accordingly, the whitepaper must include a description of the rights associated with the implementation of the reorganization plan and the redemption plan.

          FIN LAW

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            Aug 28, 2023

            Europe goes Crypto (Part XVI) – How is Crypto Advisory Regulated under MiCAR?

            The Markets in Crypto Assets Regulation (MiCAR) will regulate numerous activities as crypto asset services as of December 30, 2024. German providers of crypto asset services will not be allowed to operate without a corresponding BaFin license unless their business falls under an exemption regulated by MiCAR. One of the crypto asset services that will be regulated under MiCAR in the future is the provision of crypto advisory services. The wording of the crypto asset service itself initially does not specify which particular advisory services will be covered by the permission requirement and thus by the requirement for a BaFin license. However, MiCAR contains a definition in this respect that brings more clarity. According to this definition, advice on crypto assets includes offering or making personalized recommendations to clients or agreeing to make such recommendations at the request of the client or at the initiative of the crypto asset service provider providing the advice with respect to one or more transactions relating to crypto assets or the use of crypto asset services. The somewhat cumbersome definition clearly shows that advice on crypto assets can by no means refer only to transactions involving crypto assets. Rather, it is also intended to cover advisory services that relate to the use of crypto asset services. The definition thus goes further than its counterpart in the MiFID regulation, which only refers to transactions with financial instruments.

            BaFin License according to MiCAR Only for Personalized Recommendations

            According to the above-mentioned definition, the focus of the provision of crypto advisory is therefore not on the subject matter of the advice, but rather on the offer or provision of personalized recommendations to customers. These can then relate either to transactions with crypto assets or to the use of crypto asset services. The latter can be those offered by the advisor itself or those offered by third parties. A recommendation will be considered personalized if it refers specifically to the personal circumstances of the advised person, i.e. if it takes into account his personal financial situation, his experience and his willingness to take risks. With regard to the necessity of a BaFin license, it will make no difference whether the advisor actually takes the personal circumstances into account. Rather, it will be sufficient to justify the obligation to obtain a BaFin license under MiCAR that the advisor gives the appearance to his client that he is providing him with personalized advice tailored to his needs. With respect to the recommendation of crypto asset services, crypto advisors will have to appreciate in particular the personal needs of their clients with respect to the use of crypto asset services. However, not only the crypto asset service type itself will be relevant, but also the conditions of a service offer in light of the customer’s personal circumstances, insofar as the use of specific offers of a specific crypto asset service provider is advised.

            MiCAR Obligates Crypto Advisors to Comply with Specific Compliance Obligations

            Crypto advisors will not only have to apply for a BaFin license under MiCAR but will also have to fulfill specific compliance obligations once the MiCAR license is granted. In particular, they will have to inform their clients whether they provide their advisory services independently. All potential conflicts of interest that could be capable of impairing the advisory service must be disclosed. For example, if preferential advice is given on the use of crypto asset services from a particular provider, this must be disclosed. Crypto advisors must also provide their clients with detailed information on how they conduct the analyses on which their recommendations are based. Furthermore, according to MiCAR, crypto advisors must provide comprehensive information about costs and ancillary costs. This includes the costs of their own advisory services as well as costs of the crypto assets recommended to or marketed to the client and the client’s payment options in this regard. Finally, crypto advisors are subject to extensive disclosure obligations with regard to the risks associated with recommended crypto assets or crypto asset services. Crypto advisors must also point out any risks of loss, limited liquidity and the fact that crypto assets are not covered by the commonly known deposit protection systems.

            Attorney Dr. Lutz Auffenberg, LL.M. (London)

            I.  https://fin-law.de

            E. info@fin-law.de

            The competent lawyer for questions regarding crypto asset services and BaFin license under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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              Aug 21, 2023

              The MiCAR Whitepaper (Part II) – What Needs to Be in the Whitepaper for Asset-Referenced Tokens?

              The Markets in Crypto Assets Regulation (MiCAR), which will take legal effect in the European Union as of June 30, 2024, stipulates that a whitepaper must be prepared in the event of a public offering of asset-referenced tokens or admission of such tokens to trading on a trading platform. In the first part of the series, we looked at the content requirements for a whitepaper in the case of an offering or admission of crypto assets other than asset-referenced tokens or e-money tokens. In this part, we address the whitepaper requirements for asset-referenced tokens. Such a token is understood to be a crypto-asset that is not an e-money and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies. In this context, issuers may in principle only be credit institutions or legal entities that have obtained a license under MiCAR.

              Content Requirements for a MiCAR Whitepaper for Asset-Referenced Tokens

              The content requirements for a whitepaper for asset-referenced tokens basically have many similarities with the content requirements for the whitepaper for crypto assets other than asset-referenced tokens or e-money tokens supplemented by specifics for asset-referenced tokens. First, the whitepaper must contain information about the issuer. This information includes, in particular, the most important company data (e.g., legal form, address, company ID) as well as precise information on the issuer’s financial performance over the last three years, provided the issuer has been in existence for as long as that. Since issuers generally require a license or must be a credit institution, information on the relevant supervisory authorities should be included. Next, information about the asset-referenced token must be included, such as the token’s characteristics and precise details about any natural or legal persons involved in the token’s operation. Specific information about the public offering of the asset-referenced token or the admission to trading must also be included. Such information may include the total number of tokens or time limits on the offering. In another section of the whitepaper, the rights and obligations associated with the asset-referenced token must be presented, as well as information about the technology underlying the tokens. In the section concerning the rights and obligations associated with the tokens, a detailed description of the holders’ claim against the issuer in respect of the assets associated with the tokens must be included in particular.

              Separate Section on the Reserve of Asset to Be Included in MiCAR Whitepaper

              The whitepaper for asset-referenced tokens must include a separate section on the reserve of assets. The reserve of assets is the basket of reserve assets used to secure the claim against the issuer. The purpose of the reserve is to ensure that the claims of the bearers of asset-referenced tokens do not turn out to be unenforceable and that the corresponding assets are in fact available. Accordingly, the issuer shall include information on the composition of the reserve of assets and a detailed description of the mechanism for matching the value of the reserve of assets with the claims related to the asset-referenced token, including legal and technical aspects, in the MiCAR whitepaper. The specific mechanisms for issuing and redeeming asset-referenced tokens must also be described in the whitepaper. If the issuer has invested a portion of the reserve of assets, then it must provide information about this and describe the investment policy for the reserve of assets.

              FIN LAW

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                Aug 14, 2023

                Flashbots and MEV – Does MiCAR Ban Transaction Ordering?

                The new Markets in Crypto Assets Regulation (MiCAR) will not only impose regulatory licensing and transparency requirements on issuers, offerors and service providers in the crypto market. Rather, MiCAR will also introduce comprehensive market abuse regulation for the European crypto market in order to ensure fairness and equal opportunities for trading in crypto assets in the EU. To ensure a functioning market abuse prevention, in the future, persons who professionally broker or execute transactions in crypto assets will be obliged by Art. 92 MiCAR to implement effective precautions, systems and procedures for the prevention and detection of market abuse. In the European crypto scene, a discussion has now flared up about whether this new obligation under MiCAR could mean a de facto ban on so-called MEV activities. The abbreviation MEV stands for “Maximum Extractable Value” in the crypto sector and is particularly relevant in the area of so-called transaction ordering. Here, market participants can search for particularly lucrative transactions via the use of tools known as flashbots and transmit them directly to validators for transaction confirmation without the transaction having previously been included in the public transaction mempool accessible to all validators. For validators, the supply of MEV transactions by flashbots represents a significant competitive advantage in the hunt for block rewards.

                Art. 92 MiCAR is Not a Prohibition Provision

                First, it must be clarified that Art. 92 MiCAR is not a prohibition provision. Rather, the provision serves to oblige intermediaries and exporters of transactions in crypto assets to effectively assist in the prevention and detection of market abuse cases. If market participants obliged under Art. 92 MiCAR discover that there are reasonable indications of market abuse in the course of their business activities, they must report this immediately to the competent authority in their country of residence. The regulatory content of the provision is thus, in addition to the obligation to create the conditions to be able to recognize cases of abuse in their own business operations, a reporting obligation. In contrast, Art. 92 MiCAR does not prohibit the operation of a flashbot or the participation in MEV transactions or transaction ordering. Whether the provision can nevertheless be relevant for operators of flashbots will depend in each case on the specific structure of the business activity of the market participant concerned. For example, according to its wording, the obligation only affects intermediaries and exporters of transactions involving crypto assets. In this context, it is questionable whether the operation of flashbots or the transmission of a transaction to a validator for confirmation and inclusion in a block of the underlying blockchain can be an activity covered by Art. 92 MiCAR. In this respect, the wording refers to transactions on crypto assets. The activity of a flashbot operator, on the other hand, is aimed at providing an unconfirmed transaction to a validator and not at brokering a transaction over crypto assets or executing a crypto transaction itself. The direct application of Art. 92 MiCAR to flashbot operators is therefore rather unlikely, at least according to the wording of MiCAR, even though it will always depend on the specifics of the individual case.

                ESMA Could Bring Clarity to MEV and Transaction Ordering under MiCAR

                MiCAR requires ESMA to develop regulatory technical standards (RTS) also on the interpretation of Art. 92 MiCAR. A first draft is to be put out for public consultation in the first quarter of 2024. ESMA must submit the final version to the EU Commission by December 30, 2024. In the RTS, ESMA could also comment on the treatment of MEV as well as flashbots and transaction ordering within the scope of MiCAR’s abuse regulation for the crypto market. If MEV activities were then potentially classified as abusive activities in certain constellations, Art. 92 MiCAR could, where appropriate, require intermediaries of transactions in crypto assets and validators to implement arrangements, systems and procedures as part of their business operations to effectively detect and report market abuse activities to the competent authorities. Validator operators would thus become addressees of regulatory compliance obligations through MiCAR. In contrast, a general prohibition of transaction ordering, MEV activities or the use of flashbots cannot be derived from Art. 92 MiCAR.

                Attorney at Law Dr. Lutz Auffenberg, LL.M. (London)

                I.  https://fin-law.de

                E. info@fin-law.de

                The lawyer responsible for advising on market abuse regulation under MiCAR in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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                  Aug 07, 2023

                  The MiCAR Whitepaper (Part I) – Required Content of the Whitepaper for Crypto Assets

                  The Markets in Crypto Assets Regulation (MiCAR), which will come into legal effect in the European Union in the course of 2024, stipulates that a whitepaper must be prepared when crypto assets are offered to the public or admitted to trading on a trading platform. Depending on the qualification of the crypto asset as a value-referencing or e-money token or other crypto asset, the whitepapers must meet certain requirements. In this series, we want to look at what content needs to be considered and what the differences are between the different categories of tokens. In this first part, we will address the so-called other crypto assets than value-referenced tokens and e-money tokens. MiCAR considers a crypto asset to be a digital representation of value or rights that can be electronically transferred and stored using distributed ledger technology or similar technology. The extent to which the following content is applicable to value-referenced tokens and e-money tokens will be addressed in the subsequent series.

                  Minimum Requirements for the Content of a MiCAR Whitepaper

                  The content requirements for a crypto asset whitepaper basically have a lot in common with the content requirements for a securities prospectus. The whitepaper must provide information about the issuer as well as information about other key players in the project. In particular, this information includes key company data (e.g., address, LEI), potential conflicts of interest, and accurate information about the issuer’s financial performance over the past three years. Furthermore, the white paper must contain a detailed description of the project. This information section requires, among other things, information on why the crypto asset is being issued, who is involved in the implementation of the project, and details on the use of funds. Specific information about the public offering of the crypto asset or the admission to trading must also be included. This information includes, for example, details about the issue price, total number of crypto assets or time limits of the offer. In another section of the white paper, the rights and obligations associated with the crypto assets must be presented, as well as information about the technology underlying the crypto assets. As with standard capital markets documents, there must be issuer- and crypto-asset-specific risks in the whitepaper. With the exception of a standard disclaimer that the crypto asset may lose all or part of its value, there must be no statement about the future value of the crypto asset.

                  Additional Formal and Content Requirements for the MiCAR Whitepaper

                  There are currently no specific format templates or a limit on the number of pages permitted. ESMA shall develop corresponding technical standards for implementation until 30th of June 2024. However, based on the MICAR, it can already be stated that the first page must contain a clear declaration that the whitepaper has not been approved by any competent authority of a member state and that the provider bears sole responsibility. Following this statement, the governing body of the provider or applicant must certify that the whitepaper meets the requirements of MiCAR. Following this, a summary must be included. This must provide, in concise and non-technical language, material information about the crypto asset’s public offering or intended admission to trading. The whitepaper itself does not have to be approved, but it must be submitted to the competent supervisory authority no later than 20 working days prior to the date of publication. The submission must also include information on why the crypto asset in question is subject to MiCAR. Prior to the launch date of the offer or admission, the whitepaper must be published on the provider’s or applicant’s website and remain available there for as long as crypto assets are held by the public.

                  FIN LAW

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                    Jul 31, 2023

                    Europe goes Crypto (Part XV) – The Investment Brokerage with Crypto Assets under MiCAR

                    The Markets in Crypto Assets Regulation (MiCAR), which will take legal effect for crypto service providers in the European Union as of December 30, 2024, is very closely oriented to the services known from MiFID2 regulation when it comes to the activities to be regulated. In this respect, one of the crypto services that can only be provided in the future on the basis of a MiCAR license will also be the acceptance and transmission of orders for crypto assets for clients. The provision itself does not clarify from whom the orders are to be accepted and to whom they are to be transmitted. In this respect, it is not clear at first glance which specific crypto service is meant by the wording. However, a corresponding formulation for the description of a financial service requiring a license can be found in relation to financial instruments in Annex I of MiFID2. There, as is well known, the somewhat awkward wording means investment brokerage in relation to financial instruments covered by MiFID2 regulation. Crypto service providers, who therefore broker supply and demand between two parties without themselves becoming a party to an exchange contract for crypto assets in order to work towards the conclusion of a contract between these two parties, are to be regulated as crypto investment brokers in the future and must obtain a MiCAR license for their activities.

                    Requirements for a MiCAR License for Investment Brokerage with Crypto Assets

                    In order to successfully obtain a MiCAR license, a corresponding license application must be submitted to BaFin in Germany. The license application requires very careful preparation. Applicants applying for a MiCAR license at BaFin must first meet the minimum regulatory requirements under MiCAR for crypto service providers. In the case of investment brokerage with crypto assets, these include in particular the maintenance of a minimum capital of 50,000 euros at all times, reliable and professionally suitable directors, and a professional business organization to meet all legal and regulatory requirements. In addition, crypto service providers that wish to engage in investment brokerage with respect to crypto assets must comply with specific compliance obligations under MiCAR. For example, they are required to exercise particular diligence when transmitting client orders to crypto trading platforms and other crypto service providers. In this regard, they must establish and implement procedures and arrangements for the prompt and proper transmission of client orders. Further, MiCAR prohibits them from receiving monetary benefits from trading platforms or other crypto service providers for forwarding client orders. The prohibition serves to ensure that crypto asset investment brokers provide the best possible service to their clients and do not refer them to a crypto service provider that is not optimal for the clients for their own economic interest. Finally, crypto asset brokers must not misuse information about customer orders that have not yet been executed and must take precautions in their business in this regard.

                    No Tied Agent Under a Liability Umbrella Under MiCAR

                    The concept of the tied agent known from the field of investment brokerage with financial instruments, which exclusively provides investment brokerage for the account and under the liability of a correspondingly licensed company and which does not require its own BaFin license for this purpose, is not provided for in MiCAR. Consequently, every provider of investment brokerage with crypto assets will in principle have to obtain an independent MiCAR license from BaFin. This is still different for investment brokers brokering crypto assets under the provisions of the German Banking Act (KWG) and Investment Firm Act (WpIG) that are currently still in force in Germany. According to both national supervisory regimes, crypto assets are financial instruments – albeit defined differently than in MiCAR – and thus suitable objects of investment brokerage requiring a license. According to the exceptions regulated in the KWG and the WpIG), this can also be provided without an individual BaFin license by means of a liability umbrella as a tied agent. Such arrangements will no longer be possible in the future under the MiCAR regime. In view of the current liability umbrella regulation under the KWG and the WpIG in Germany, the legislator will have to decide in the near future how to deal with the special regulation for purely national business models, which is not in line with MiCAR. Tied agents currently brokering crypto assets under a liability umbrella should promptly consider obtaining their own MiCAR license in order to be able to operate their business after December 30, 2024.

                    Attorney Dr. Lutz Auffenberg, LL.M. (London)

                    I.  https://fin-law.de

                    E. info@fin-law.de

                    The lawyer responsible for advising on obtaining a MiCAR license for investment brokerage with crypto assets in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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                      Jul 24, 2023

                      ESG in the Securities Prospectus – ESMA Publishes Statement on Sustainability-Related Information Requirements

                      The topics of environmental, social and governance (ESG) are becoming increasingly important for the financial industry and must be taken into account at various levels. ESG information also plays a significant role when raising money through the capital market. The European Securities and Markets Authority (ESMA) has therefore announced a public statement on sustainability-related information in prospectuses in accordance with Regulation (EU) 2017/1129 (Prospectus Regulation) on July 11, 2023. Accordingly, ESMA’s requirements must be taken into account when issuing non-equity securities, in particular green bonds, and for issuing stocks. The Prospectus Regulation requires that a securities prospectus contains all required information that is essential for investors to form an informed opinion for the investment decision. This information may include, in particular, ESG information, which must then be included in the prospectus accordingly. However, the ESMA requirements are only intended to specify the existing information requirements. Additional information requirements, however, are not established. BaFin welcomes ESMA’s comments and will also take them into account in the approval procedure for a securities prospectus.

                      Circumstances of the Issuer and Type of Security are Decisive for ESG Disclosures

                      The type of sustainability information required to meet the requirements of the Prospectus Regulation depends on the materiality of the information for an investor. The circumstances of the issuer and the nature of the securities in question will determine what information is considered material. In this regard, issuers must specify the basis for any statements about their sustainability profile or that of the securities they issue. Information provided in the risk factors of a securities prospectus should not be used to excuse failure to address factors over which the issuer exercises control. For example, a disclaimer that the proceeds of the offering may be invested contrary to the project selection criteria set forth in a prospectus relates to a factor over which an issuer exercises control. It should therefore not be included as a disclaimer. The comprehensibility of sustainability information should be ensured by complying with the requirements set out in Regulation (EU) 2019/980. In particular, the prospectus should clearly define the components of the mathematical formulas and, where applicable, clearly describe the product structure. All technical terms relating to sustainability should also be adequately defined.

                      ESG Aspects to be Considered for Stocks and Non-Dividend Securities in the Securities Prospectus.

                      To the extent that sustainability-related disclosures are required to be included in a company’s non-financial reporting on the basis of other European directives, issuers should also include these disclosures in a stock prospectus. With respect to bonds whose proceeds are used to finance or refinance green or social projects or activities, ESMA expects disclosure on how the proceeds are used and managed, as well as information that enables investors to assess the sustainability objectives underlying the project evaluation and selection process. For bonds where the financial or structural characteristics depend on the issuer achieving predefined ESG targets, disclosures on the selected Key Performance Indicators (KPIs) and Sustainability Targets (SPTs) are to be included in the securities prospectus. Furthermore, information shall be included to enable investors to assess the consistency of the KPIs and the related SPTs with the relevant sector-specific science-based targets (if applicable) and the issuer’s sustainability strategy. For the aforementioned types of bonds, if issuers intend to disclose post-issuance information, this should be included in the securities prospectus. In addition, it should be indicated which information will be reported and where it can be obtained.

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                        Jul 17, 2023

                        Europe goes Crypto (Part XIV) – When is a MiCAR License Required for the Placement of Crypto Assets?

                        The Markets in Crypto Assets Regulation (MiCAR) will also regulate crypto service providers offering the placement of crypto assets from December 30, 2024. In addition to the general licensing requirements MiCAR imposes on any crypto service provider, crypto service providers that wish to offer the placement of crypto assets will additionally have to meet specific obligations tailored to their specific crypto service in order to be eligible for a MiCAR license. In any case, they will have to maintain the minimum regulatory capital of EUR 50,000 and have professionally qualified and reliable business managers and a professional business organization. In addition, crypto service providers wishing to offer the placement of crypto assets will have to comply with detailed information obligations towards their clients and implement specific and adequate procedures to identify, avoid, regulate and disclose any conflict of interest that may be associated with their activity. But what specific activity is actually regulated via the crypto service of placing crypto assets and when is the obligation to apply for a MiCAR license triggered in this regard?

                        Placement of Crypto Assets Under MiCAR is Special Case of Crypto Brokerage

                        MiCAR defines crypto asset placement as the marketing of crypto assets to purchasers on behalf of or for the account of the provider or a person associated with the provider. The definition makes it clear that crypto asset placement under MiCAR is a marketing activity in which the crypto asset service provider is is active on the side of the provider of the crypto assets in question. However, it is not clear from the definition whether the activity must necessarily be a brokerage activity or whether the placement of crypto securities can also be assumed in the case of a sale of crypto securities from the crypto service provider’s own stock, as long as the sale is ultimately made for the account of the provider. However, since the sale of crypto assets from the crypto service provider’s own holdings would already fall under the more specific crypto service of exchanging crypto assets for money or other crypto assets and the provider would no longer have an economic interest in the further sale, there is good reason to assume that the placement of crypto assets under MiCAR is a special case of crypto brokerage. It can be assumed from the special provisions of MiCAR on the placement business with crypto assets, that a placement agreement must be concluded between the crypto service provider and the offeror in any case, in which the details for the placement of the crypto assets are regulated. According to MiCAR, it is also possible for the placement service provider to agree on a fixed takeover obligation with respect to the crypto assets vis-à-vis the provider in the event that the placement of the crypto assets is not as successful as planned.

                        Special Obligations of Crypto Asset Service Providers for the Placement of Crypto Assets

                        MiCAR requires that crypto asset placement service providers enter into a placement agreement with the providers of the crypto assets to be placed. Prior to conclusion, i.e. at the latest in the placement agreement, crypto asset service providers must disclose to the providers the manner in which the placement is to be carried out and whether, or in what amount, they guarantee minimum sales. The amount of transaction fees associated with the proposed placement must also be disclosed, and in this respect both crypto and cash transaction fees are likely to be relevant. In addition, prior to entering into the placement agreement, crypto asset service providers offering placement services must disclose the target group of buyers they will be approaching and what they plan in terms of the placement period, the process and the expected price of the placement service. Furthermore, crypto asset service providers offering the placement of crypto securities must design their internal procedures in such a way that, in particular, conflicts of interest in connection with a simultaneous proprietary distribution by the provider, incorrect planning with regard to the placement price or monetary or non-monetary incentives of the provider for the crypto asset service provider can be identified and avoided.

                        Attorney Dr. Lutz Auffenberg, LL.M. (London)

                        I.  https://fin-law.de

                        E. info@fin-law.de

                        The lawyer responsible for advising on obtaining a MiCAR license for the placement of crypto securities in our law firm is Attorney Dr. Lutz Auffenberg, LL.M. (London).

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