Welcome back to our ongoing series on crypto-assets. In our previous discussion, we explored the legal aspects of e-money tokens under the Markets in Crypto-Assets (MiCA) regulation. Our focus was on the foundational aspects like issuance, redeemability, marketing, and fund investment related to e-money tokens. We recommend perusing that article for a broad understanding of e-money tokens if you missed it.
Today, we advance further into this topic, focusing on a specific class of tokens known as 'Significant E-Money Tokens.' These tokens have additional implications and responsibilities, which make their understanding essential for anyone involved in the crypto space.
Classification of E-Money Tokens as Significant E-Money Tokens
What makes an e-money token "significant"? It all comes down to the criteria stipulated in the MiCA regulations. Under these provisions, the European Banking Authority (EBA) can label e-money tokens as "significant" if they meet at least three of the outlined criteria mentioned below. The classification process occurs under two main instances:
During the initial report following the offering or seeking admission of tokens to the public.
If the tokens meet the criteria in two consecutive report periods.
For cases where multiple issuers release the same e-money token, data from all issuers is considered for the assessment. The competent authorities from the issuer's home Member State must report all relevant information for the assessment to the EBA and the European Central Bank (ECB) twice a year.
Interestingly, if the issuer is based in a Member State that doesn't use the Euro as its official currency, or if the e-money token is referenced to a non-euro Member State's official currency, the data must also be transmitted to that Member State's central bank.
After evaluating the token against the criteria and confirming that it meets the conditions, the EBA prepares a draft decision to classify the e-money token as significant. The issuer, the competent authority of the issuer's home Member State, the ECB, and, when applicable, the central bank of the concerned Member State are all notified of this draft decision. These parties are then given 20 working days to submit their written observations and comments. The EBA will duly consider these inputs before making a final decision.
If the EBA concludes to classify an e-money token as significant, it will notify the issuer and its competent authority. Consequently, the supervisory responsibilities related to the issuer are transferred from the competent authority of the issuer's home Member State to the EBA. This transition happens within 20 working days from the date of notification.
However, there's an exception to this rule. For significant e-money tokens denominated in a non-euro official currency, supervisory responsibilities won't transfer to the EBA if at least 80% of the token holders and transaction volume are concentrated in the home Member State.
The EBA must also conduct an annual reassessment of the classification of significant e-money tokens. If it determines that a token no longer meets the criteria, it prepares a draft decision to declassify the e-money token from being significant and notifies all concerned parties. Like the classification process, these parties are given 20 working days to submit their observations and comments in writing before the EBA makes a final decision. Suppose the EBA decides that an e-money token is no longer significant. In that case, supervisory responsibilities related to the issuer are transferred back from the EBA to the competent authority of the issuer's home Member State. This transition happens within 20 working days from the date of notification.
Specific Criteria
The criteria to be met for e-money tokens to be classified as "significant," as indicated in Article 43 of MiCA, are:
Number of Holders: There must be more than 10 million holders of the e-money token.
Value and Market Capitalization: The value of the e-money token issued, its market capitalization, or the size of the asset reserve of the issuer must exceed 5 billion Euros.
Transaction Volume: The average number and aggregate value of transactions per day during the relevant period must be higher than 2.5 million transactions and 500 million Euros, respectively.
Gatekeeper Issuer: If the issuer of the e-money token also provides core platform services designated as gatekeeper according to the Regulation (EU) 2022/1925, the token could be classified as significant.
International Activities: The issuer's activities on an international scale, particularly the use of the e-money token for payments and remittances, can make the token significant.
Interconnectedness: The e-money token or its issuers must have significant interconnectedness with the financial system, showing the token's influence within the broader financial network.
Multiple Issuances and Services: If the same issuer issues at least one additional asset-referenced token or e-money token, and provides at least one crypto-asset service, the token could be deemed significant.
Voluntary Classification of E-Money Tokens as Significant
Opting for Classification: An issuer of an e-money token, who is authorized as a credit institution or an electronic money institution (or is applying for such authorization), can voluntarily opt for their e-money token to be classified as a 'significant' e-money token. In such an instance, the competent authority must notify the European Banking Authority (EBA), the European Central Bank (ECB), and, in certain cases, the central bank of the Member State concerned.
For the token to be classified as 'significant' in this manner, the issuer needs to illustrate, via a detailed program of operations, that it is probable to meet at least three of the criteria set out in Article 43(1) of the MiCA Regulation (set out above).
Draft Decision by EBA: Post notification, within 20 working days, the EBA is to prepare a draft decision based on the issuer's program of operations, highlighting whether the e-money token fulfills or is likely to fulfill at least three of the criteria mentioned in Article 43(1). This draft decision is then to be shared with the competent authority of the issuer's home Member State, the ECB, and, in certain cases, the central bank of the concerned Member State.
After notification of the draft decision, there's a window of 20 working days for the competent authorities, the ECB, and potentially, the central bank of the Member State concerned to provide written observations and comments. The EBA then carefully considers these comments before finalizing the decision.
Final Decision: The EBA's final decision on the classification of an e-money token as 'significant' is to be made within 60 working days of the initial notification. The decision is then to be communicated to the issuer of the e-money token and the competent authority without delay.
Transfer of Supervisory Responsibilities: Should an e-money token be classified as 'significant' per a decision by the EBA, supervisory responsibilities concerning the issuers of these tokens will transition from the competent authority to the EBA within 20 working days of the decision's notification. The EBA and the competent authorities will work together to ensure a smooth transition of supervisory competencies.
Derogation: An exception exists where supervisory responsibilities for issuers of significant e-money tokens denominated in an official currency of a Member State other than the Euro will not be transferred to the EBA. This applies if at least 80% of the holders and transaction volume of these significant e-money tokens are, or are expected to be, concentrated in the home Member State. The competent authority of the issuer's home Member State will then provide annual information to the EBA on applying this derogation. In this context, a transaction is considered to occur in the home Member State if either the payer or the payee are established in that Member State.
Additional Requirements for Issuers of E-money Tokens
Electronic money institutions that issue significant e-money tokens must comply with:
Articles 36, 37, 38, and Article 45(1) to (4) of MiCA, which replace the requirements of Article 7 of Directive 2009/110/EC. These articles outline obligations around reserves of assets, custody, and investment of these assets, and the adoption and implementation of a risk management policy.
Article 35(2), (3), (5), and Article 45(5) of MiCA, which take the place of Article 5 of Directive 2009/110/EC. These provisions involve the calculation of own funds requirements, stress testing, and a stipulation that own funds amount to 3% of the average amount of reserve assets for issuers of significant asset-referenced tokens.
However, there's a deviation from Article 36(9): issuers of significant e-money tokens must mandate an independent audit every six months from the date the e-money tokens are classified as significant, as per either Article 56 or 57.
Regulation for Non-Significant Tokens: Competent authorities of the home Member States have the authority to require e-money institutions that issue e-money tokens (not deemed 'significant') to comply with any requirement specified in paragraph 1. This measure is in place to mitigate risks, such as liquidity and operational risks, and risks stemming from non-compliance with the reserve management requirements.
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To wrap things up, the digital landscape is continually evolving, and so are the regulatory frameworks to keep it in check. The Markets in Crypto-Assets (MiCA) regulation offers detailed guidelines on how digital assets, including e-money tokens, should be handled, issued, and regulated in the European Union.
Notably, under MiCA, issuers of significant e-money tokens are subject to specific requirements around reserves of assets, own funds, and risk management, focusing on enhanced reporting and auditing. The regulations also provide the competent authorities the discretion to apply these requirements to non-significant tokens to mitigate various financial and operational risks.
We ensure that our clients are well informed and can navigate the evolving landscape of digital assets confidently. As the world moves towards a digital future, we're here to help you understand and comply with the necessary regulations. Stay informed, stay compliant, and embrace the future with us! DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.
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