Following a comprehensive consultation, the EC published its legislative package for cryptoassets to bring legal certainty to the cryptoasset industry in the EU.

The package includes a proposal for an EU Regulation of Markets in Crypto-Assets (MiCA) as well as a pilot regime for market infrastructures based on distributed ledger technology (DLT) that will allow for experimentation within a controlled environment under a regulator's supervision.

This proposal is part of a wider Digital Finance Strategy as the EU looks to embrace the opportunities of emerging tech.

Key takeaways from the proposal

Scope and definitions

• The regulation applies to entities engaged in the issuance of cryptoassets and services related to cryptoassets in the EU that do not qualify as: a financial instrument, deposits, structured deposits or securitisation.
• The Commission proposes a number of definitions, most significantly:
  • Cryptoasset: a digital representation of value or rights, which may be transferred and stored electronically, using distributed ledger or similar technology.
  • Asset reference tokens: a type of cryptoassets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of several fiat currencies, one or several commodities or one or several cryptoassets, or a combination of such assets.
  • E-money token: a type of cryptoassets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by being denominated in (units of) a fiat currency.
  • Utility token: a type of cryptoasset intended to provide access digitally to an application, services or resources available on a distributed ledger and that is accepted only by the issuer of that token to grant access to such application, services or resources available.
• The proposal also has additional definitions for significant e-money tokens and significant asset reference tokens, when at least three of the following criteria are met (note the Commission is empowered to set higher limits via a delegated act):
  • size of the customer base (should not be lower than two million natural or legal persons);
  • value of the asset reference tokens issued (should not be lower than €2 billion);
  • number and value of transactions (should not be lower than 1 million transactions per day or €1 billion per day);
  • size of the reserve of assets (should not be lower than €2 billion);
  • significance of the issuer's cross-border activities, i.e., the number of Member States that use the token (should not be lower than seven); and
  • interconnectedness with the financial system.

Issuance of cryptoassets 

• Issuers of cryptoassets are required to publish a whitepaper with all the relevant information concerning the cryptoasset issuer and the planned cryptoasset offering or admission to trading on a trading platform for cryptoassets.
• The whitepaper must be notified to the national competent authority, which then can: require the inclusion of supplementary information or amendments; suspend or prohibit the offering if it suspects that a provision has been infringed; or make public that the issuer is failing to comply.
• The regulation also requires that issuers are incorporated in the form of a legal entity in the EU.

Issuance of asset reference tokens

•  As is the case with the issuance of cryptoassets, asset reference tokens will also have to publish a whitepaper and be incorporated in the form of a legal entity in the EU.
• In addition, the proposal includes capital requirements of a minimum of €350,000 or 2% of the average amount of the reserve assets (3% for issuers of significant asset reference tokens).
• The competent authority may require the issuer to hold an amount of own funds up to 20% higher if an assessment deems that the tokens are at higher risk.
• The proposal outlines the requirements for an issuer of the asset reference tokens to have a clear and detailed policy and procedure describing the stabilisation mechanism of such cryptoassets.
• The issuer is obliged to appoint a credit institution (in the case of financial or ‘other’ assets) and/or a registered cryptoasset service provider (in the case of cryptoassets) as custodians of the reserve assets.
• Should the reserve wish to invest reserve funds, it can do so only in highly liquid financial instruments with minimal market and credit risk, something that will be defined by the European Banking Authority (EBA) via regulatory technical standards after consulting the European Securities and Markets Authority.
• There are additional requirements for asset reference tokens that are deemed significant and these will be supervised by the EBA.

Issuance of e-money tokens 

• As above, issuers of e-money tokens need to publish a whitepaper with all relevant information. In addition, they are required to be authorised as a credit institution or as an e-money institution.
• Holders of e-money tokens shall have a claim on the issuer for such e-money tokens which should be issued and redeemed at par value to the monetary value of the token.
• Any funds that are received in exchange for e-money tokens that are invested should be done so in a secure, low-risk assets denominated in the same currency as the one referenced by the e-money token.
• Again, issuers of significant e-money tokens will have additional requirements and will also be supervised by the EBA.

Requirements for cryptoasset service providers 

• The regulation details that cryptoasset services should be provided only by legal persons that have a registered office in the EU and that have been authorised as a cryptoasset service provider in accordance with the regulation.
• MiCA also includes a number of other provisions, such as prudential requirements, organisational requirements, the safekeeping of client funds, information that needs to be provided to clients, complaints handling procedure, conflicts of interest rules and outsourcing rules.
• Specific requirements have also been put in place depending on the type of cryptoasset service provider. Most significant are those of custodians, trading platforms and exchanges.
• Custody on behalf of third parties of cryptoassets or access to cryptoassets must:
  • enter into an agreement with their clients defining their duties and responsibilities;
  • keep a register of positions opened in the name of each client;
  • establish a custody policy including internal rules and procedures to ensure the safekeeping or control of cryptoassets;
  • communicate at least once every three months with the client as well as at each request;
  • segregate holding on behalf of their clients from their own holdings;
  • only use cryptoassets or their cryptographic keys with their client's express prior consent; and
  • be liable for the loss of crypto assets as a result of a malfunction or hack.
• Operation of a trading platform for cryptoassets must:
  • have in place operating rules for the trading platform;
  • have in place effective systems, procedures and arrangements to ensure its trading system is resilient, has sufficient capacity, is able to reject orders that are clearly erroneous, is fully tested and is subject to effective business continuity arrangements;
  • make public the price, volume and time of the transactions executed;
  • complete the final settlement of the transaction on the DLT on the same date as the transact has been executed on the trading platform; and
  • ensure that their fee structures are transparent, fair and non-discriminatory.
• Exchanges dealing with the exchange of cryptoassets against fiat currency or cryptoassets against other cryptoassets must:
• establish a non-discriminatory policy which details the types of clients they accept to transact with;
• publish a firm price of the cryptoassets or a method for determining the price they propose;
• execute the clients' orders at the price displayed at the time of their receipt; and
• publish the details of the orders and the transactions concluded.

The Commission states that the Digital Services Act will:

• Establish clearer and more modern rules concerning the obligations of online intermediaries, including non-EU companies operating in the EU.
• Implement a more effective governance and enforcement system.
• Ensure a level playing field in the digital markets, noting that a lot of the market power currently remains in the hands of a few online platforms. This could include rules on self-preferencing and/or regulatory obligations for powerful platforms.

The consultation covers two work strands.

The first set of rules would relate to the fundamentals of the e-commerce directive, in particular the freedom to provide digital services across the EU single market in accordance with the rules of the place of establishment and a broad limitation of liability for content created by users. Building on these principles, we aim to establish clearer and modern rules concerning the role and obligations of online intermediaries, including non-EU ones active in the EU, as well as a more effective governance system to ensure that such rules are correctly enforced across the EU single Market while guaranteeing the respect of fundamental rights.

The second measure would address the issue of the level playing field in European digital markets, where currently a few large online platforms act as gatekeepers. We will explore rules to address these market imbalances, to ensure that consumers have the widest choice and that the EU single market for digital services remains competitive and open to innovation. This could be through additional general rules for all platforms of a certain scale, such as rules on self-preferencing, and/or through tailored regulatory obligations for specific gatekeepers, such as non-personal data access obligations, specific requirements regarding personal data portability, or interoperability requirements.

In addition, the Commission is also taking the opportunity to consult on other emerging issues related to online platforms, such as the opportunities and challenges that self-employed people face in providing services through online platforms.

The consultation closes on 8 September 2020 and the European Commission expects to publish its proposals for the Act at the end of 2020.

The EC said that new technologies, such as artificial intelligence (AI), robotics, big data, Internet of Things (IoT), cloud computing, blockchain, 3D printing, are gaining relevance in everyday life of businesses and individuals. The use of digital technologies raises questions how information communications technologies (ICT) can contribute to the sustainability and a greener economy.

A successful transition to a carbon-neutral Europe by 2050 will not be possible without the use of digital technologies and applications. However, currently, although some reports and statistics exist and a survey concentrating on AI took place in February 2019, no detailed data are available at Member State level on the take-up and other aspects on these technologies.

The main objective is to obtain a reliable quantitative overview at Member State level on the status of a selection of the below mentioned new technologies and to measure how ICT can contribute to sustainability (this study is not about the sustainability of the ICT sector).

List of technologies to be considered includes: AI, robotics, big data, blockchain, High Performance Computing, cloud, quantum, 3D printing and IoT.

The contract resulting from the award of this call for tenders will be concluded for at most 12 months renewable up to two times for a period of 12 months each. The performance of the tasks should start in the same month as in the first year in case of a renewal.

Estimated total value of the contract excluding VAT: €600,000 for 12 months.

The deadline for applications is 21 April 2020.

The Commission said that cryptoassets, which here are defined as "a digital asset that may depend on cryptography and exists on a distributed ledger", have the potential to bring significant benefits to market participants and consumers.

For example, initiation coin offerings (ICOs) and security token offerings (STOs) allow for a cheaper, less burdensome and more inclusive way of financing SMEs by streamlining capital-raising processes and enhancing competition.

Further, the tokenisation of traditional financial instruments could also open up opportunities for efficiency improvements across the trade and post-trade value chain, which should help with more efficient risk management and pricing.

"If the adequate investor protection measures are in place, cryptoassets could also represent a new asset class for EU citizens," the Commission said.

Further, payment tokens could also present opportunities in terms of cheaper, faster and more efficient payments, by limiting the number of intermediaries.

The Commission said that it has been looking closely at cryptoassets since publishing its FinTech Action Plan in 2018, in which it had mandated the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to assess the applicability and suitability of the current regulatory framework for cryptoassets.

In their ensuing January 2019 advice, the two authorities pointed out that some cryptoassets fall within the scope of EU legislation, "effectively applying it to these assets is not always straightforward".

Moreover, some provisions in existing EU legislation may stop the use of certain technologies, including distributed ledger technology.

The EBA and ESMA also pointed out that most cryptoassets are outside the scope of EU legislation and therefore not subject to provisions on consumer and investor protection and market integrity, among others.

The two authorities also said that certain Member States have introduced legislation on cryptoassets, meaning that there is no harmonised EU framework.

Building on the advice from the two authorities, the consultation should inform the Commission's work on cryptoassets:

• for cryptoassets covered by EU rule, as they qualify as financial instruments under MiFID II or as electronic money under the Electronic Money Directive (EMD2), the Commission has screened EU legislation to assess whether it can be effectively applied; and
• for cryptoassets not covered by EU legislation, the Commission is considering a possible proportionate common regulatory approach at EU level to address potential consumer/investor protection and market integrity concerns, among others.

The consultation contains four sections, seeking the views of stakeholders on:

• various general questions from the perspective of the general public to gain feedback on the use or potential use of cryptoassets;
• whether and how to classify cryptoassets, for both those that fall under existing EU legislation and those that do not;
• views on cryptoassets that fall outside the scope of EU financial services legislation. Here, cryptoassets designate all cryptoassets that are not regulated at EU level, mentioning payment tokens, stablecoins, utility tokens and investment tokens. This sections aims to determine whether an EU regulatory framework is needed for these cryptoassets; and
• views on cryptoassets that fall within the scope of EU legislation, ie under MiFID II and EMD2. Here, they are described as security tokens and e-money tokens. Responses to this section should enable the Commission to assess the impact of potential changes to EU legislation.

The consultation also drew the spotlight on stablecoins, noting that if they were to reach a global scale, they would raise additional challenges in terms of financial stability, monetary policy transmission and monetary sovereignty.

The consultation closes on 19 March 2020

The conclusion will depend "on the facts and circumstances around specific crypto-tokens", Dombrovskis said.

The European Commission will then decide whether further regulation is needed. Dombrovskis said:

"Based on the assessment of risks and opportunities and the suitability of the existing regulatory framework for these instruments, the Commission will determine if regulatory action at EU level is required."

The roundtable focused on three main topics: 

• the implications of cryptocurrencies for financial markets;
• the risks and the opportunities associated with their use; and
• the recent development of initial coin offerings.

Dombrovskis said the roundtable had remarked that the blockchain technology holds strong promise for financial markets.

However, participants also noted that cryptocurrencies have become "subject of considerable speculation" and that this exposes investors to "substantial risk", including the loss of their investment.

"Initial Coin Offerings have become a way for innovative firms in this field to raise substantial amounts of funding. This is an opportunity, but there are also problems that expose investors to substantial risk, such as the lack of transparency regarding the identity of the Regulators and underlying business plans," Dombrovskis said.

He also noted cryptoassets markets may be global, but Europe represents only a small share of global cryptocurrency trading and that the EU therefore needs to work together with its G20 partners and international standard-setters.