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In the pulsating heart of the global economy, technological innovations unfurl at a relentless speed, profoundly influencing the mechanics of the corporate world. The repercussions of these advancements aren't confined to new opportunities; they also present a unique set of challenges that require robust risk management strategies. The ensuing discourse serves as a roadmap, illuminating key areas where technology and business intersect. We will explore the significance of strategic innovation and the necessity of prudent capital allocation in maintaining corporate longevity. Delving into the realms of cybersecurity and artificial intelligence, we will scrutinize the pressing need for stringent regulatory compliance and a well-grounded ethical framework. While this narrative does not exhaustively cover all aspects of the broad technological landscape, it strives to provide valuable insights into managing its risks. The Imperative of Innovation and Strategic Capital Allocation The Crucial Role of Innovation in Business Longevity Innovation is no longer a luxury; it is a necessity for enterprises seeking sustainable growth. The question is not whether innovation is vital to a company's survival but how much it is woven into the fabric of its products and processes. Assessing Research and Development Investments Investing in research and development (R&D) is an essential part of the innovation equation. Businesses need to evaluate their R&D expenditure in relation to their competitors, ensuring they maintain a competitive edge in the market. Addressing Risks of Obsolescence and Social Acceptability In the rapidly evolving business landscape, companies must constantly evaluate the risk of obsolete products or services. Similarly, they should also consider the changing societal norms and expectations that could affect the acceptability of their offerings. Ensuring Optimal Capital Allocation for Innovation Innovation requires both human and financial capital. Businesses must assess their allocation strategies and invest adequately in innovative efforts. The Distinction between Expenses and Investments For the sake of management, it is essential to draw a line between expenses and investments. While both are crucial for a business, differentiating them can help understand the company's overall financial health and future prospects. Digital Footprint, Technological Competency, and Artificial Intelligence The Importance of Robust Cybersecurity Measures Creating a robust digital presence demands a parallel development of substantial cybersecurity safeguards. These measures serve as the first line of defense, safeguarding the company's valuable assets and the data of employees and customers. The Necessity of Periodic Cybersecurity Audits Maintaining a secure digital front in the dynamic digital arena is not a one-time event but an ongoing process. Companies must commit to regular, rigorous cybersecurity audits, ensuring their security measures evolve to counter new threats and vulnerabilities. Complying with Evolving Privacy and Personal Data Regulations The use and management of data, especially with the deployment of AI, brings regulatory challenges. Businesses must stay abreast of and compliant with the latest privacy laws and regulations, mitigating potential legal repercussions and upholding trust with stakeholders. Evaluating the Impact of Artificial Intelligence on Business Operations AI technologies offer promising prospects and introduce new dynamics that can transform business operations. Organizations must actively assess how AI could impact their business, identifying opportunities that can optimize processes and strategies. Assessing Competitor's Approach towards Disruptive Technologies A keen awareness of competitors' strategies regarding disruptive technologies like AI and blockchain is crucial. Such insights can inspire new ideas and offer a comparative benchmark for the company's technological initiatives. Equipping the Workforce to Manage Technological Opportunities and Risks Lastly, these new technologies emphasize the importance of a tech-savvy workforce. Companies must invest in training and skill development, ensuring their teams are well-equipped to navigate the intricacies of these technologies and mitigate associated risks. Implementing Governance and Ethical Frameworks for AI Strategy The Need for an AI Governance and Ethics Framework Implementing a comprehensive AI governance and ethics framework becomes paramount as artificial intelligence continues to permeate various aspects of business operations. This framework is a roadmap for responsible AI usage, ensuring its application aligns with the company's values, legal mandates, and ethical commitments. Managing AI-related Risks and Regulatory Adherence An integral part of the governance structure is a risk management strategy that anticipates and mitigates AI-related risks. These risks may span data privacy concerns, ethical dilemmas, and financial implications. Furthermore, with regulations around AI in flux, maintaining regulatory adherence is a dynamic process. Organizations must stay updated on legal developments and ensure their AI strategy evolves accordingly, protecting their interests and ensuring a responsible AI journey. Conclusion: Unveiling a New Era of Sustainable Growth with Disruptive Technologies As we stand at the dawn of a transformative technological era, businesses must embrace the imperative of evolving intelligently and ethically. The effective integration of disruptive technologies such as artificial intelligence will undoubtedly be the linchpin for future growth, but it demands more than mere adoption. The future of sustainable growth lies in harmonizing with these technological shifts, not merely surviving them. This means going beyond integrating new technologies and proactively fostering an ecosystem that enables continuous evolution and growth. Fundamentally, success will be defined by the ability to anticipate change, adapt in real time, and align technological deployment with organizational ethos and objectives. This alignment will be the blueprint for creating a sustainable competitive advantage and ensuring long-term success. 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.

Introduction: AI and Organizational Challenges In an era of digital acceleration, generative artificial intelligence technologies, such as ChatGPT and similar platforms, have surged to prominence. These cutting-edge tools offer potential in many applications, yet they also pose questions about their use within corporate structures. Organizations worldwide stand at a crossroads, deliberating whether to incorporate these technologies into their day-to-day operations. The debate is about more than just utilization, but how to manage and regulate its application to minimize associated legal risks - a challenge amplified by the general lack of regulatory oversight in most jurisdictions. Some enterprises have adopted a cautious stance, opting not to allow their workforce to use generative AI, a decision fraught with risks. However, for forward-thinking companies keen on harnessing the benefits of these technologies, the path forward requires establishing comprehensive measures to promote responsible AI usage. Risks Associated with Generative AI Technologies Corporate Governance and Accountability The decision to adopt generative AI technologies carries profound implications for a company's governance structure and accountability. These technologies require a degree of control and monitoring that extends beyond individual employees to the highest levels of leadership. Confidentiality One of the inherent risks with generative AI technologies lies in the potential exposure of sensitive corporate information. Given that most AI technologies are third-party owned, there is a risk of unintentionally disclosing confidential details or trade secrets. Cybersecurity The data security implications must be considered. With confidential information stored on third-party databases, vulnerabilities in cybersecurity measures could lead to breaches and unauthorized access to a company's sensitive data. Data Privacy and Protection Data privacy and protection requires strict protocols about the categories of confidential or sensitive information employees may use when interfacing with AI technologies. Intellectual Property Establishing ownership over data and outputs generated by generative AI technologies is paramount. Companies need to clearly articulate their rights over these outputs as long as they do not infringe on the entitlements of third parties. Regulatory Compliance Ensuring the storage and processing of data or personal information comply with relevant laws and regulations is essential in mitigating legal risks. Liability Generative AI usage can lead to claims from various quarters, including clients, users, third parties, and regulatory bodies. Proactive risk management strategies must be adopted to prevent such outcomes. Contracting with Third-Party Providers When using AI solutions, companies often rely on third-party service providers. Agreements with such providers should be carefully examined to avoid excluding or limiting liability clauses unfavorable to the company. Data Bias and Discrimination Generative AI technologies can inadvertently perpetuate biases in the company's data, which could lead to reinforced stereotypes, discrimination, or exclusionary practices. Outdated, Inaccurate Information and Misinformation Companies should be aware of the potential for generative AI technologies to use outdated or inaccurate information, which could result in incorrect responses. Additionally, they may become targets of misinformation campaigns. Unqualified Advice When employees use generative AI to provide advice to clients without proper review, there is a risk of unauthorized entities issuing advice. Ensuring all advice is vetted and reviewed is vital to maintaining the integrity of the company's operations. The Potential Dangers of Non-Intervention Without a clear stance on adopting AI in the workplace, companies expose themselves to what is known as 'shadow IT'—the unsanctioned use of technology not deployed or approved by the company. In the face of prohibitive company policies or a lack of guidance, this scenario arises when employees clandestinely deploy generative AI technologies. Such unsanctioned usage amplifies the company's risk manifold as it eliminates any ability to monitor or regulate AI technologies. Without company-wide protocols and safeguards, employees' unregulated usage of AI can lead to unpredictable and potentially harmful outcomes. These could range from data privacy breaches and legal non-compliance to misuse of sensitive information and flawed decision-making based on unverified or biased AI outputs. Furthermore, the company may also be exposed to reputational risks, potential liabilities, and regulatory penalties. Hence, companies must be active in their approach towards AI. Establishing a policy regulating AI use within the company's operational framework is highly recommended to mitigate these issues. This preemptive action guides employees, ensuring that generative AI technologies are responsible, ethical, and aligned with the company's objectives. Strategic Interventions: Building a Responsible AI Framework Establishing Governance Structures The first step to responsibly incorporate AI within an organization involves building robust governance structures. Leadership must adopt proactive roles in defining and managing AI's deployment. Forming dedicated committees, task forces, or Centers of Excellence focused on Responsible AI can effectively manage potential risks and ensure adherence to the company's ethical standards and values. Policy Implementation for Responsible AI Establishing comprehensive Responsible AI policies serves as an instrumental roadmap for its ethical adoption. These policies must detail mechanisms to mitigate legal, technical, and financial risks. They should also delineate ethical boundaries aligned with the company's values, thereby ensuring that the deployment of AI is in line with the organization's ethos. Tailored Training Programs To foster a Responsible AI culture, employees must be equipped with the necessary knowledge about AI's nuances. Tailored training programs should be initiated based on employees' roles in AI initiatives. Legal, technical teams, and board members should be educated on AI's ethical, legal, and financial risks to ensure informed decision-making. Ethical Impact Assessments and Reviews Carrying out ethical impact assessments is a prudent measure to ensure AI adoption aligns with company policies and prevailing laws. These assessments scrutinize AI initiatives for potential ethical or legal pitfalls. As part of this process, creating a dedicated AI Ethics Review Board can be instrumental in validating AI projects based on their ethical impact assessments. Pioneering Industry Codes of Conduct Leading organizations can spearhead the establishment of industry-accepted codes of conduct for AI use. These guidelines serve as a reference point for ethical AI deployment. They can also garner trust from regulatory authorities and stakeholders, promoting a standardized approach to AI ethics in the industry. Auditing and Monitoring Compliance initiatives are only complete with proper auditing and monitoring mechanisms. Resources should be dedicated to ensuring compliance with adopted interventions and company policies. A comprehensive auditing and monitoring strategy can also be instrumental in identifying policy violations, thereby strengthening the company's AI governance framework. Conclusion: Embracing Responsible AI at Every Organizational Level The integration of generative AI technologies in the business landscape poses a multitude of opportunities and challenges. Harnessing the power of AI calls for responsible usage guided by robust governance structures and vigilant monitoring mechanisms. Organizations can successfully navigate the complexities of AI deployment by implementing a comprehensive framework for Responsible AI, achieving optimal benefits while mitigating potential risks. Responsible AI is not just about compliance with laws and regulations but also about infusing an ethical mindset at every organizational level. It requires a comprehensive understanding of AI's capabilities, limitations, and potential risks and a commitment to promoting transparency, accountability, and fairness in its usage. Whether starting an AI journey or looking to enhance current AI initiatives, we can provide customized advice to ensure all operations align with regulatory provisions and ethical standards. By helping to interpret and apply these guidelines, we can turn potential challenges into opportunities for growth and innovation. 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.

The wave of digital innovation continues to surge globally, and Bermuda, a pioneering leader in regulating digital assets, has again risen. As of May 19, 2023, the island nation's government has effectively amended the Digital Asset Business Act 2018, known as "DABA" or the "Act." This transformative move augments the legal and regulatory framework underpinning the digital asset business (DAB) landscape in Bermuda. With a sharpened focus on specifying the classes of DAB activity necessitating a license from the Bermuda Monetary Authority (BMA), the amendments are also aimed at fostering a more streamlined administration of the Act. Unveiling a New Licensable Activity in DAB The latest amendment to the Digital Asset Business Act 2018 ushers in a new frontier in Bermuda's digital asset landscape with the inclusion of an additional licensable activity. This expanded jurisdiction includes those service providers who engage in 'digital asset lending or digital asset borrowing or digital asset repurchase transactions.' In the vibrant and dynamic realm of digital assets, this development is significant. It captures a wider range of financial activities under the Act, allowing for increased oversight and regulation of emerging business models in the digital assets space. With respect to the administrative aspect, undertakings granted a license following the enforcement of this new activity will be obligated to pay a proposed new annual fee. The magnitude of this fee is set to reflect the nature and complexity of the DAB activity involved. Meanwhile, for undertakings already licensed and performing this DAB activity, the obligation to pay the annual fee will only arise when such a fee is due next. License Exemptions for Entities Under the Investment Business Act 2003 The alterations to the Digital Asset Business Act (DABA) also bring relief to entities licensed under the Investment Business Act 2003 (IBA). This amendment recognizes the intersection of operations between these entities and those involved in digital asset businesses (DAB). The new stipulation exempts IBA-licensed entities engaged in DABA-related activities on an 'ancillary' basis from obtaining a separate DABA license. However, the exemption is not without checks and balances. It necessitates the DAB's senior representative to report to the Bermuda Monetary Authority if the DAB ceases its provision of IBA services in an 'ancillary' manner. The Notification Requirement The DAB's senior representative must notify the Bermuda Monetary Authority when the DAB stops providing Investment Business Act 2003 (IBA) services in an 'ancillary' fashion. This change is a move to ensure the clear demarcation of activities carried out under the IBA and DABA. Deciphering Administrative Penalties: A Note on Terminology The government has removed the term "civil" from sections 7, 16, 57, and 66 of the Act. This action has been undertaken to distinguish these penalties from civil penalties prescribed under section 39. Through this change, the clarity of the Act’s provisions on administrative penalties has been reinforced. * * * Navigating new regulatory landscapes can be a complex task, and our team at Prokopiev Law Group is here to help you. Our experts and partners can advise on the applicable laws relevant to your organization. We stand ready to assist you in comprehending how to meet any requirements and ensuring that your business operations align with the current regulatory provisions. Reach out to us for comprehensive, precise, and personalized advice. Let us help you turn legal complexities into clear pathways for your business growth. 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.

With Non-Fungible Tokens (NFTs) at its forefront, the blockchain revolution is transforming the digital landscape, promising artists and creators an avenue for sustainable income. Royalties, a crucial cog in the NFT machinery, ensure continuous earning potential for creators even after the initial sale of their work. This in-depth article examines NFT royalties, their significance, their function within marketplaces, and their future trajectory. What are NFT royalties? In the world of non-fungible tokens (NFTs), royalties serve as an innovative mechanism to provide creators with continuous financial remuneration for their work. Fundamentally, a royalty is a certain percentage of the sale price paid to the creator each time their NFT is bought or sold. As blockchain technology keeps a transparent and tamper-resistant record of all transactions, the mechanism for royalty distribution becomes automated and assured. As such, creators can enjoy a perpetual income stream where a fraction of the revenue from every subsequent sale of their work comes back to them. Historical Context: Intellectual Property and Royalties in Web2 In the traditional Web2 world, artists and creators have always sought various forms of income from their work. Intellectual property rights, such as copyrights, have been the main legal tool to secure these earnings. These rights grant creators exclusive control over the use and distribution of their work, allowing them to charge fees (or royalties) for others to use or sell it. However, the enforcement of intellectual property rights and the collection of royalties have presented challenges. In the Web2 model, tracking subsequent sales of a piece of work (especially digital work) and collecting associated royalties often required extensive legal agreements and intermediaries, creating complications and inefficiencies. Additionally, the protection of creators' interests was often compromised due to contractual power imbalances between creators and large studios or corporations. Passive Income and NFTs: The Role of Royalties Enter NFTs and the Web3 paradigm, where the idea of royalties has been revitalized and reimagined. With NFTs, royalties can be directly coded into the smart contract of the token itself. Every time the NFT changes hands, the smart contract automatically pays a certain percentage of the sale price as a royalty to the original creator's cryptocurrency wallet. This is irrespective of how often the NFT is sold or how much its price changes over time. Royalties thus introduce a passive income model for creators in the NFT ecosystem. These are income sources that require minimal to no effort to maintain after the initial work is done. In this context, after the original creation and sale of the NFT, creators continue to earn from the subsequent purchases of their work without any additional effort. This model creates an enduring income stream for creators and sets a new standard for artist compensation in the digital world. The Imperative of NFT Royalties NFT royalties represent a transformative shift in how creators can derive lasting value from their work. Unlike traditional models, where creators typically earn a one-time fee for their creation, NFT royalties offer a continual return on the original artistic investment. Each time an NFT is sold or exchanged on a blockchain platform, the creator is entitled to a portion of that transaction. This royalty mechanism fosters a sustainable income stream that can dramatically alter the creator's financial landscape. The Shift to Web3: Correcting Economic Imbalances In the Web2 framework, tracking secondary sales of artistic works and ensuring creators receive their due royalties is complex and fraught with legal and logistical hurdles. Blockchain technology, upon which NFTs are built, provides an immutable and transparent ledger of transactions. This allows creators to quickly monitor the chain of ownership of their work and guarantee they receive their rightful royalties from secondary sales. The transition to Web3 and utilizing NFTs signify a marked evolution in protecting creators' interests and substantially reducing the asymmetry within economic relationships. Royalties as a Pillar of Sustainability for Creators By enabling creators to earn a percentage from every subsequent sale of their work, NFT royalties establish a financial sustainability model. This passive income flow can continue indefinitely, providing creators with a reliable and potentially significant source of revenue. Furthermore, as these royalty payments are typically programmable within the blockchain, multiple creators can benefit from a single NFT, thus extending the financial reach of this model. Moreover, NFT royalties facilitate the creation of an economy that prioritizes and rewards creators. This is a radical departure from Web2 business models, which often need to pay more attention to creators' contributions. NFT collections also use royalties as a means to fund their operational costs, highlighting the versatility and practicality of this financial instrument within the digital sphere. NFT Royalties and the Fight Against Wash Trading NFT royalties have an unexpected ally in the fight against deceptive market practices such as wash trading. In wash trading, a market participant manipulates the perceived value of an NFT by creating multiple accounts or wallets to buy and sell the same NFT, artificially inflating its price. With the enforcement of NFT royalties, each transaction incurs a cost paid to the original creator. Thus, wash traders who conduct numerous transactions to inflate prices must pay substantial royalties. This additional cost discourages such practices, creating a more authentic and stable marketplace. Through the strategic implementation of NFT royalties, the digital market can maintain its integrity while promoting the interests of creators. The Interface for Creators: NFT Marketplaces NFT marketplaces act as a vital nexus between creators and potential buyers, facilitating the creation, sale, and secondary trading of NFTs. In addition to providing a platform where creators can mint and sell their NFTs, marketplaces play a significant role in validating projects and adding credibility to them by listing them. They provide a virtual exhibition space where creators can showcase their work to a broad, often global, audience. Assessing the Impact of Marketplace Royalty Policies Marketplaces can enforce their royalty policies, which can profoundly affect the dynamics of the NFT ecosystem. Royalty policies influence NFT trading volumes, a critical indicator of the health and vitality of a collection or a blockchain network. Some marketplaces have experimented with varying royalty models, from removing royalties to introducing optional royalties where the purchaser decides whether to pay royalties to the creators. However, such policies can negatively impact creators, reducing their potential to earn recurring income from their work. A lack of guaranteed royalties can create an unsustainable and uncompetitive environment for creators, especially those new to the NFT space. The Delicate Balance: Sustaining the Creator Economy Ensuring a sustainable creator economy requires a delicate balancing act. Marketplaces must balance supporting creators with fair royalty policies and healthy trading volumes. Overzealous or poorly implemented royalty policies can stifle trading, while too lenient policies can disenfranchise creators. A robust and sustainable creator economy promotes innovation and diversity in the NFT space. Royalties form a critical part of this equation, providing creators with ongoing income and encouraging the development of new and unique NFTs. The right balance can lead to a thriving marketplace where creators, buyers, and sellers all benefit. Marketplaces and the Transformation of NFTs As the NFT space has matured, marketplaces have played an integral role in its transformation. Aggressive growth strategies, including airdrop techniques based on NFT transaction activities, have fueled the competitive fire among marketplaces. However, this intense competition has also led to "royalty wars," with reductions in royalty fees adversely affecting the ecosystem's health. Despite the challenges, some marketplaces are taking measures to protect creators' interests, such as blocking the sale of NFTs in secondary markets that do not offer royalties. Although this move has been criticized, it also underscores the importance of NFT royalties in maintaining a healthy and vibrant ecosystem. The Evolution of NFT Marketplaces: Growth Strategies and Impact Over the past few years, NFT marketplaces have employed various growth strategies, fundamentally transforming the NFT landscape. Based on NFT transaction activities, tactics like airdrops have shifted the marketplace from organic growth to aggressive growth hacking. Such changes, driven by competition and market conditions, have profoundly impacted the dynamics of the NFT space. Despite the challenges and controversy surrounding NFT royalties, they remain a pivotal aspect of the NFT business model. Not only do royalties make the NFT model more sustainable for founders of NFT collections, but they also make the creation of art and digital content a more viable livelihood for creators. Moreover, with the advent of dynamic NFTs and intelligent NFTs, the role of royalties could evolve further. These new forms of NFTs can alter or upgrade their metadata, bringing a new dimension to the creator economy and possibly introducing new ways for creators to earn royalties. The Unfolding Landscape: Dynamic and Intelligent NFTs The landscape of NFTs is evolving at a rapid pace. New concepts, such as dynamic NFTs and intelligent NFTs, are pushing the boundaries of the traditional NFT model. Dynamic NFTs can alter or upgrade their metadata, leading to the potential emergence of new traits and capabilities. Intelligent NFTs, on the other hand, integrate elements of artificial intelligence, allowing NFTs to reflect a closer representation of their holders' authentic selves. These advancements enrich the user experience and may create novel avenues for royalty generation. Embracing NFT Royalties: A Competitive Edge for Future Companies Adopting NFT royalties may give companies a competitive edge as the digital economy advances. The model of ensuring creators continue to earn from the sales of their works aligns with the trend towards decentralization and a fairer distribution of resources. This practice aligns with the principles of the Web3 model, fostering an environment where creators are rewarded for their work's popularity and longevity. It also fosters customer loyalty by incentivizing the buying and selling of NFTs, contributing to a more vibrant and engaged community. As such, companies that embrace and effectively implement NFT royalties are likely to stand out in the increasingly competitive digital marketplace. 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.

The European Union has taken a decisive step forward in its digital journey by introducing the Digital Service Package, a part of the broader strategy "A Europe fit for the Digital Age." The package comprises two distinct but complementary elements - the Digital Service Act (DSA) and the Digital Markets Act (DMA). The dual aim is safeguarding digital services and user rights in a secure digital environment while promoting innovation, growth, and competitiveness in the European Single Market. The Digital Service Act (DSA): A New Era of Digital Services Regulation As we navigate the uncharted waters of digital innovation, the European Union seeks to build a framework that ensures a safer, more responsible digital space. The cornerstone of this initiative is the Digital Services Act (DSA), which ushers in a new era of digital services regulation. The Framework and Scope of DSA The DSA stands on the shoulders of the e-Commerce Directive. Over two decades have passed since the implementation of this directive, and it's no secret that it now struggles to keep pace with the rapidly evolving digital economy. To address this, the DSA seeks to redefine the rules of digital interaction and establish a more updated regulatory landscape for the digital sphere. The DSA's provisions apply to digital service providers within the EU. This includes a broad spectrum of platforms such as online marketplaces, social networks, content-sharing platforms, app stores, and online travel and accommodation platforms. The guiding principle is simple yet powerful: anything illegal offline should also be illegal online. This mantra resonates throughout the DSA, forming the basis for its various obligations and regulations. Key Obligations Under the DSA At the core of the DSA are the responsibilities that all internet service providers must uphold, irrespective of their size. The Act aims to increase accountability and traceability in the digital space, encouraging service providers to prevent illegal content and engage in responsible business practices actively. Among the specific provisions of the DSA are: Rules concerning the removal of illegal content and counterfeit goods. Transparency requirements for online marketing based on usage profiles and algorithms. Regulations that require online advertisers to inform visitors about the rationale behind the ads they see and the identity of the advertiser. Special Provisions for Different Size Providers One of the key strengths of the DSA is its understanding of the diverse digital landscape. Not all service providers are created equal, and the DSA recognizes this by designing its rules asymmetrically. The nature, size, and impact of a provider's services determine the extent to which DSA obligations apply. Large online platforms, which play a crucial role in public discourse and economic transactions, are subject to additional, stricter regulations. Smaller platforms, meanwhile, can be exempted from the more burdensome obligations unless they voluntarily adopt these best practices for a competitive edge. Furthermore, micro and small companies can enjoy an exemption from a set of obligations for up to 12 months, even if they experience significant growth during that period. The Digital Markets Act (DMA): Ensuring Fair Digital Markets With the monumental rise of digital platforms, the balance of power in digital markets has come under the spotlight. Who are the Gatekeepers? 'Gatekeeper' is a term coined to represent the significant players within the digital platform market - those that wield enormous influence due to their size, market power, and role as a conduit between users, businesses, and customers. The DMA specifically targets these gatekeepers to prevent them from imposing unfair conditions on businesses and end users. The prime examples of such platforms include search engines, social media channels, certain websites, and cloud systems. Determining a Gatekeeper: Key Factors A company's status as a gatekeeper is not merely a result of its size or market visibility. The European Commission will evaluate a company on several fronts to ascertain whether it fits the 'gatekeeper' profile. This presumption arises when: The company demonstrates a strong economic position that significantly impacts the internal market and is operational in multiple EU countries. This is presumed when the annual EEA turnover exceeds 7.5 billion EUR in the last three years and the market capitalization surpasses 75 billion EUR. The company exhibits a strong intermediation position, linking a large user base to numerous businesses. This is presumed if the company operates a core platform service with more than 45 million monthly active end users in the EU and more than 10,000 business users. The company has an entrenched and durable market position, indicating long-term stability. This is established if the company has met the above thresholds consistently over the last three financial years. Even if a company does not meet these thresholds, the European Commission can still label it as a gatekeeper after conducting a market investigation. Obligations and Restrictions for Gatekeepers Gatekeepers are identifiable by their size and influence and the rules they must follow under the DMA. They are required to: Permit third-party interoperability with the gatekeeper's services in specific situations. Allow business users to access data generated in their use of the platform. Enable business users to promote their offers and finalize contracts with their customers outside the gatekeeper's platform. The DMA also imposes restrictions on gatekeepers. These prohibitions include: Favoring their own services and products in ranking over similar offerings from third parties on the platform. Hindering consumers from linking to businesses outside their platforms. Restricting users from uninstalling pre-installed software or apps. Tracking end users outside of their core platform service for targeted advertising without obtaining explicit consent. Penalties for Non-Compliance The DMA does not merely lay down rules; it also ensures their enforcement. If a gatekeeper fails to comply with the obligations set forth in the DMA, the European Commission can impose hefty fines, amounting to up to 10 percent of the global group turnover. The DMA is thus a promising step towards leveling the digital playing field, enabling smaller platforms, SMEs, and start-ups to compete more fairly with established digital giants. Impact on SMEs, Startups, and Other Digital Platforms As SMEs, startups, and smaller digital platforms navigate through the stormy seas of the digital market, the DSA and DMA act as beacons of regulatory light. By calibrating rules based on the size and influence of online platforms, these legislations provide smaller entities with a fair chance to compete. Other Forthcoming Digital Legislation Beyond the DSA and DMA, the European Union's tech agenda holds a plethora of legislative proposals. Currently in the pipeline, these legislations aim to regulate digital technologies more comprehensively. They span various sectors, including data economy, cybersecurity, artificial intelligence, and fintech. Businesses should be vigilant of these developments, as these rules will shape the future digital environment, demanding new standards of compliance and ethical conduct. Conclusion The DSA and DMA represent significant strides toward a fair and safe online environment in an increasingly digital world. They offer a more robust framework to protect users' rights and ensure fair competition. However, they also challenge all stakeholders, especially digital service providers, who must align their practices with these new rules. The journey may be challenging, but it promises to lead toward a digital market that is more equitable, transparent, and resilient. 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.

The transformative wave of artificial intelligence (AI) has made its way to the workplace, bringing tools like ChatGPT into common usage. These generative AI tools—built on large language models—possess the power to carry out a vast array of tasks, from drafting emails to generating code. With their adoption within organizations growing formally and informally, it's become necessary to consider a corporate policy to regulate their use. This guide explores why such a policy is necessary, the key considerations when devising a policy, and how to implement it in your organization effectively. Why a Corporate Policy on Generative AI is Necessary The advent of generative AI tools, such as ChatGPT, has opened up a world of opportunities in the workplace. While this technology offers significant benefits, it also ushers in unique challenges and potential pitfalls that call for a definitive corporate policy to regulate its use. There are several key reasons why such a policy is necessary. Firstly, the accuracy of the information generated by AI tools currently is not infallible. Since these tools operate based on vast data inputs, the possibility of outputting information that could be misleading, biased, incomplete, or factually incorrect—"hallucinations," as they are termed in the AI world— is a real concern. A clear-cut policy can make employees cognizant of this, encouraging them to vet and validate all AI-generated content. Secondly, the data privacy implications of using generative AI tools are not underestimated. Tools like ChatGPT could potentially use shared data for various purposes, such as quality control or debugging, or even integrate it into their datasets, raising potential issues of data privacy and confidentiality. It is crucial, then, for a corporate policy to explicitly guide employees on the acceptable use of these tools in line with data protection laws, confidentiality obligations, and ethical standards. The third reason lies in mitigating legal risks associated with the misuse of AI tools. By delineating the boundaries of permitted use, a corporate policy can reduce the likelihood of legal issues cropping up due to inadvertent misuse or misunderstanding of the AI tool's capabilities. This proactive approach echoes the one taken with the use of other company-provided IT and communication tools, as well as the internet and social media by employees. The fourth factor deals with intellectual property ownership because expressive works generated by AI tools may not be eligible for copyright protection. It posits that copyright law protects human expression, not machine-generated works. Therefore, a corporate policy should offer clear guidance on using AI tools for creating potentially copyrightable works, considering the organization's IP goals. Lastly, implementing a corporate policy can drive efficient and responsible use of AI tools. It can streamline workflows, maximize benefits, and curtail distractions or inefficiencies from misuse or misinterpreting the AI tools' capabilities. Developing and Implementing a Corporate Policy Formulating a corporate policy for using generative AI tools involves careful consideration and strategic planning. Here are some steps to help shape a comprehensive policy: Scope of Use A pivotal starting point in developing a corporate policy for generative AI is defining the scope of use. This pertains to identifying the specific functions for which employees can leverage these tools, such as drafting emails, creating reports, conducting research, or writing software code. By stipulating the permitted uses, the policy can prohibit employees from deploying these tools in high-risk scenarios, such as investment or employment-related decisions that could inadvertently breach laws like the GDPR. Additionally, it's crucial to determine the target audience for the policy and whether specific sub-policies are necessary for different teams based on their unique risk factors and needs. Data Privacy and Confidentiality Guidelines The second component of the policy should focus on data privacy and confidentiality. Guidelines must be established for handling sensitive data, including personal and proprietary information. These guidelines might range from acceptable sharing parameters to strict prohibitions on sharing such information via these AI tools. Simultaneously, the policy should also delineate security procedures aligned with other company-wide security protocols, like the storage of AI-generated content and deletion of sensitive data post-use. Employee Training Once the policy is in place, it's crucial to ensure employees understand and can correctly adhere to it. This necessitates a robust training program that comprehensively covers the policy's guidelines and offers practical advice for responsibly using generative AI tools. Training should also stress the importance of vetting AI-generated content, reinforcing the necessity for critical thinking and validation in tandem with AI use. Compliance Monitoring The fourth step is to establish mechanisms for monitoring compliance with the policy. Regular audits of employee interactions with generative AI tools and the content generated can help ensure adherence to the policy. Additionally, employees should be encouraged—or, in certain cases, required—to disclose when their work product is AI-generated, further fostering transparency and promoting due diligence in content validation and verification. Policy Updates Lastly, as the field of generative AI continues to evolve, so should corporate policy. Regular reviews and updates of the policy should be scheduled to address any new developments, potential risks, and changing legal landscapes. Assigning a dedicated team or individual to oversee this review process ensures that your policy remains up-to-date and relevant in an ever-evolving technological landscape. Conclusion Developing and implementing a comprehensive corporate policy governing such tools is a necessary step toward managing these risks. By delineating the scope of AI use, establishing clear data privacy and confidentiality guidelines, investing in employee training, and ensuring ongoing compliance monitoring and policy updates, organizations can create a solid foundation for responsible AI use. While adherence to these policies relies on the integrity and compliance of the employees it addresses, such a strategy can empower organizations to leverage the full potential of generative AI tools. This, in turn, will facilitate compliance with legal and regulatory requirements and contribute to a more effective, innovative, and legally compliant workplace. 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.

Dubai has made significant strides with its regulatory framework for cryptocurrencies. In 2023, the Emirate introduced new rules and established the Virtual Asset Regulatory Authority (VARA), tasked with overseeing virtual assets' use, exchange, and investment within its jurisdiction. The authority's comprehensive approach covers everything from licensing requirements to company and compliance obligations. Its meticulousness reflects Dubai's ambition to become a global digital asset leader while ensuring protection and transparency for all market participants. What is VARA? - A Snapshot of Dubai's Cryptocurrency Regulator Shaping the contours of the cryptocurrency landscape in Dubai is the Virtual Asset Regulatory Authority (VARA). An instrumental body established recently, VARA stands as a beacon of regulation and oversight in virtual assets and related activities within the Emirate. Functioning with a broad mandate, VARA's authority extends to every aspect of virtual asset service provision. They set the game's rules by defining the licensing requirements for virtual asset service providers (VASPs). However, their role doesn't merely end at rule-setting; VARA possesses the discretionary power to decide on the duration of licenses and even suspend them when necessary. VARA's responsibilities continue beyond shaping regulatory guidelines. They also ensure that all entities in Dubai that wish to engage in virtual asset activities are licensed under their oversight. Any institution or individual planning to venture into any virtual asset activity must first obtain VARA's green light. Types of Cryptocurrency Services Under VARA's Regulation Each service category comprises specific, stringently regulated functions, ensuring a well-ordered operation of the virtual asset ecosystem. Here is a snapshot of these cryptocurrency services: Advisory Services Advisory services revolve around providing personalized recommendations to clients about actions or transactions pertaining to virtual assets. The provision of such advice is conditional upon factors like the client's understanding and experience in virtual asset investments, financial standing, and investment objectives. Broker-Dealer Services Broker-dealer services encompass various activities, including facilitating the arrangement of orders, soliciting or accepting orders for virtual assets, matching transactions between buyers and sellers, and conducting transactions as a dealer on behalf of the entity. These services also extend to making a market in virtual assets using client assets and offering placement, distribution, or other issuance-related services to clients launching virtual assets. Entities engaged in these activities must comply with the VA Issuance Rulebook. Custody Services Custody services involve the safekeeping virtual assets for other entities and act upon their verified instructions. Only VASPs that maintain each client's assets in separate virtual asset wallets can qualify for a Custody Services Licence, further underpinning the need for a robust and secure custodial infrastructure. Exchange Services Exchange services entail conducting exchanges, trades, or conversions between virtual assets and fiat currency or between various virtual assets. This category also includes maintaining an order book to facilitate these transactions. Lending and Borrowing Services Under this category, virtual assets are transferred or lent from one or more parties (lenders) to one or more other parties (borrowers), understanding that these assets will be returned either during or at the end of the agreed-upon period. Payments and Remittances Services These services involve receiving virtual assets for transmission or transfer from one entity to another or from one entity to a different virtual asset wallet, address, or location. VA Management and Investment Services VA Management and Investment Services incorporate acting on behalf of an entity as an agent or fiduciary, or taking responsibility for managing, administering, or disposing of that entity's virtual assets. Services may include investment management or staking virtual assets to earn fees or other amounts paid to validators or node operators of a proof-of-stake Distributed Ledger Technology. Cost of Providing Cryptocurrency Services in Dubai The Virtual Asset Regulatory Authority (VARA) mandates a set of license applications and annual supervision fees for each virtual asset service category. Here is a breakdown of the costs associated with providing these services: Advisory Services Licence Application Fee: AED 40,000 Annual Supervision Fee: AED 80,000 Broker-Dealer Services Licence Application Fee: AED 100,000 Annual Supervision Fee: AED 200,000 Custody Services Licence Application Fee: AED 100,000 Annual Supervision Fee: AED 200,000 Exchange Services Licence Application Fee: AED 100,000 Annual Supervision Fee: AED 200,000 Lending and Borrowing Services Licence Application Fee: AED 100,000 Annual Supervision Fee: AED 200,000 Payments and Remittances Services Licence Application Fee: AED 40,000 Annual Supervision Fee: AED 80,000 VA Management and Investment Services Licence Application Fee: AED 100,000 Annual Supervision Fee: AED 200,000 The Licence Application Fee is applicable for all license applications, regardless of the type of regulated VA activity. The License Extension Fee applies for each additional VA activity. Importantly, these fees are due at the time of submission of the Licence application, and the application will only be processed once the payments are received. VASPs must pay an Annual Supervision Fee for each licensed VA activity before conducting any actions. VARA reserves the right, at its sole discretion, to impose additional fees or modify supervision and authorization fees. This discretion may be exercised when VARA deems it necessary to allocate additional resources for regulatory oversight, supervision or in response to complaints made to VARA about a VASP. Fees imposed by VARA are separate and independent from any fees charged by other competent authorities, whether in the UAE or outside. Furthermore, VARA can impose a fee for applications by prospective issuers seeking approval to issue a Virtual Asset. Licensing Requirements Once a license is granted, the Virtual Asset Service Providers (VASPs) must comply with all licensing conditions outlined by VARA. These conditions include, but are not limited to, strict adherence to all Regulations, Rules, and Directives, both at the time of licensing and throughout operation. In cases where a VASP conducts any licensed VA activity outside the Emirate, compliance with the existing Regulations, Rules, and Directives is considered the minimum standard. In other words, VARA's regulations must be adhered to irrespective of the regulatory regime of the other jurisdiction. A professional exemption applies to professionals such as registered practicing lawyers, accountants, and professionally licensed business consultants. These individuals do not need a license to carry out any incidental VA activities in their professional practice. However, they must maintain authorization from a competent professional body and hold appropriate professional indemnity insurance. VARA reserves the right to determine whether an entity has invoked this professional exemption appropriately. There's also a category of entities known as "Exempt Entities" that, subject to certain conditions, aren't required to comply with certain regulatory provisions. These conditions include seeking confirmation of exempt entity status and obtaining no-objection confirmation from VARA before carrying out any VA activities. Entities involved in large-scale proprietary trading, those investing their own portfolio in Virtual Assets exceeding the equivalent value of USD 250,000,000 within a rolling thirty calendar day, must register with VARA. This registration, however, does not imply a license to carry out any VA activities. Voluntary registration is open for entities providing technology services related to Distributed Ledger Technology to other businesses or entities actively investing their own portfolio in Virtual Assets. VARA's Powers VARA possesses discretion in granting licenses. In doing so, it considers all information provided during the licensing process and any other relevant information. The licensed VA activities will be clearly specified in each license, and VARA may also incorporate any limitations or stipulations it sees fit. The authority retains the power to vary, suspend, or revoke licenses. VARA may also impose additional requirements during the licensing process. Finally, VARA charges fees for processing the application for a license or any other authorization and for the supervision of any entity that has been granted a license. The Rulebooks Governing VA Activities VARA's regulatory system for Virtual Asset (VA) activities extends to specific Rulebooks. These Rulebooks serve as a guide and regulatory framework, outlining the expectations and requirements for Virtual Asset Service Providers (VASPs) in their operations. They are integral to VARA's regulatory landscape. General Rulebooks All VASPs must comply with four primary Rulebooks that govern various activities. These Rulebooks, which may be revised over time, are: Company Rulebook: This sets forth the regulations concerning the company's governance, management, and operational aspects. It may include stipulations on organizational structure, roles and responsibilities, and general business practices. Compliance and Risk Management Rulebook: This Rulebook is central to understanding and managing risk. It details procedures for risk identification, assessment, and mitigation. Additionally, it outlines the compliance requirements to ensure adherence to all applicable laws, regulations, and directives. Technology and Information Rulebook: As VASPs operate in a technologically driven space, this Rulebook provides guidelines on technological infrastructure, data security, information management, and related processes. Market Conduct Rulebook: This Rulebook is designed to ensure fair and transparent market practices. It includes regulations on professional conduct, market integrity, customer relations, and transparency in operations. VA Activity-Specific Rulebooks Beyond the four general Rulebooks, there are several VA Activity-specific Rulebooks that VASPs must adhere to. The applicability of these Rulebooks depends on the specific VA activities the VASP is licensed to perform. They include: Advisory Services Rulebook: This Rulebook guides the professional and operational standards required when offering advisory services in the VA space. Broker-Dealer Services Rulebook: For VASPs involved in buying, selling, and dealing in VAs, this Rulebook outlines the specific requirements, responsibilities, and standards to be upheld. Custody Services Rulebook: VASPs providing custody services for VAs must follow the directives in this Rulebook, which may encompass requirements around the security, handling, and storage of VAs. Exchange Services Rulebook: This Rulebook governs the standards and operations for VASPs offering exchange services, detailing the guidelines for exchange processes, security measures, and transaction procedures. Lending and Borrowing Services Rulebook: For those offering VA lending and borrowing services, this Rulebook outlines the specific protocols, risk considerations, and customer relations requirements. Payments and Remittances Services Rulebook: VASPs facilitating VA payments and remittances must comply with this Rulebook, which stipulates procedures for these services, including security, speed, and customer protection measures. VA Management and Investment Services Rulebook: For VASPs involved in managing and investing in VAs, this Rulebook governs the regulations for investment strategies, portfolio management, and investor relations. In conclusion, the series of Rulebooks outlined by VARA signifies the commitment to ensure a thorough, organized, and regulated environment for VA activities. They create a comprehensive structure for VASPs, fostering a level playing field, ethical practices, and the highest degree of professionalism in the industry. Please visit the official VARA website for additional details regarding these Rulebooks' specific requirements and directives. It provides comprehensive and current information to ensure absolute compliance with all VA Activities regulations. 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.

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. * * * 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.

Welcome back to our deep dive series exploring the diverse landscape of the Markets in Crypto-Assets Regulation (MiCA). Previously, we delved into the complexities of Asset-Referenced Tokens (ARTs), their classifications, and the unique responsibilities issuers bear under MiCA. If you haven't had the chance to read those articles yet, we recommend starting with them to fully understand the context (Part 1, Part 2, Part 3, and Part 4). Today, we focus on another exciting facet of MiCA – E-money Tokens (EMTs). These instruments are transforming the digital financial landscape by leveraging the potential of blockchain technology while maintaining regulatory compliance. This article aims to demystify the regulations around EMTs and provide a comprehensive understanding of what it entails to issue and manage these digital tokens under MiCA. Whether you're an issuer looking to delve into this dynamic world or a curious observer eager to grasp the nuances of digital finance regulations, you're in the right place. Let's dive in. Requirements for the Offer to the Public or Admission to Trading of E-money Tokens (Article 48) The entity making the offer or seeking to trade an EMT in the EU must be the issuer of this EMT. In addition, the issuer: Must be authorized as a credit institution or an electronic money institution. Has to prepare a crypto-asset white paper, notify the competent authority of it, and make it public (below in detail). If the issuer provides written consent, other entities can also offer or seek to trade its EMT. These entities must comply with Articles 50 (Prohibition of granting interest) and 53 (Marketing communications) of MiCA. For regulatory purposes, EMTs are treated as electronic money. If an EMT references an official currency of an EU Member State, it is considered as being offered to the public in the Union. If an issuer intends to offer EMTs to the public or seek their admission to trading, they must notify their competent authority of their intentions 40 working days before the planned date. Even if exempted under the particular circumstances (below in detail), issuers must prepare a crypto-asset white paper and notify the competent authority. Deep Dive: E-Money Directive Exemptions Let's look at the exemption stipulated under Article 9(1) of Directive 2009/110/EC and how it interacts with MiCA's requirements to EMTs. Article 9(1) of the E-Money Directive gives Member States the discretion to relax certain requirements for institutions dealing with electronic money under specific circumstances: The total business activities of the institution must generate an average outstanding electronic money amount that doesn't exceed a limit set by the Member State, but in no case should it surpass EUR 5,000,000. None of the natural persons responsible for managing or operating the business have been convicted of offenses related to money laundering, terrorist financing, or other financial crimes. What does this mean in the context of MiCA? MiCA Article 48(1) sets forth the requirements (mentioned above here) for any person or entity intending to offer E-money tokens (EMTs) to the public or seeking admission to trading in the EU. However, issuers of EMTs who fall under the exemption as per Article 9(1) of the E-Money Directive are not required to comply with those MiCA's requirements in Article 48. In simple terms, if an issuer qualifies for the exemption under the E-Money Directive, such issuers do not need to be authorized as a credit institution or electronic money institution, nor are they required to notify and publish a crypto-asset white paper to offer or trade EMTs. Application of The Electronic Money Directive to EMTs: A Closer Look MiCA's regulations concerning EMTs do not apply to EMTs exempt under Articles 1(4) and (5) of the Electronic Money Directive. Let's examine these exemptions: Article 1(4) of the Electronic Money Directive states that the Directive does not apply to the monetary value stored on exempted instruments that can be used to acquire goods or services either within a limited network of service providers or for a limited range of goods or services. This typically includes store gift cards or loyalty points redeemable only within the issuer's network. Article 1(5) of the Electronic Money Directive specifies that it does not apply to the monetary value used for payment transactions made through telecommunication, digital, or IT devices, where the purchased goods or services are delivered to and used through the same type of device. However, this exemption is valid only when the telecommunication, digital, or IT operator does not act only as an intermediary between the payment service user and the goods or services supplier. So, if EMTs fall under these exemptions, they're not bound by most of MiCA's regulations regarding ETMs. However, there are two exceptions to this: Paragraph 7 of Article 48 and Article 51, which discuss the content and form of the crypto-asset white paper for e-money tokens, still apply to these EMTs. Issuance and Redeemability of E-money Tokens Article 49 of MiCA centers around the issuance and redeemability of e-money tokens (EMTs). It presents certain regulations that deviate from the stipulations in Article 11 of the Electronic Money Directive (Directive 2009/110/EC) exclusively for the issuance and redeemability of EMTs: Claim Rights: EMT holders are granted a claim right against the issuers of those EMTs. Issuance At Par Value: Issuers of EMTs must issue these tokens at par value upon receiving funds. Par value, in this context, means that the face value of the EMT must equal the amount paid to acquire it. Redeemability At Par Value: The issuer must redeem EMTs at any time and at par value upon the holder's request. Redemption refers to exchanging your EMTs for traditional funds, other than electronic money. Redemption Conditions: The conditions for redemption must be prominently mentioned in the crypto-asset white paper. This makes the redemption process transparent to EMT holders, ensuring they are fully informed about the terms of redeeming their EMTs. No Redemption Fee: Lastly, redeeming EMTs must not be subject to any fee. No Interest on E-money Tokens Looking closely at Article 50 of the Markets in Crypto-Assets (MiCA) regulation, we can better understand the rules relating to granting interest on e-money tokens (EMTs). In contrast to Article 12 of the Electronic Money Directive (Directive 2009/110/EC), this article stipulates specific prohibitions for EMT issuers and crypto-asset service providers. No Interest from EMT Issuers: In the first place, issuers of EMTs are expressly forbidden from granting interest related to EMTs. No Interest from Crypto-Asset Service Providers: Similarly, crypto-asset service providers, the entities that offer services related to crypto-assets, including EMTs, are also barred from offering interest when providing these services. Definition of Interest: For clarity, Article 50 goes a step further to define what would be considered as 'interest'. Under this provision, any remuneration or benefit related to the length of time a holder keeps an EMT is classified as interest. This could include net compensation or discounts that have an effect equivalent to that of interest. It could come directly from the issuer or third parties and might be directly associated with the EMT or from the remuneration or pricing of other products. The Crypto-Asset White Paper for E-Money Tokens Article 51 of MiCA regulation highlights the content and structure a crypto-asset white paper for e-money tokens (EMTs) must follow. This document is crucial as it provides potential holders with information about the EMT, the issuer, and the technology behind it. The details required in the white paper include: Information about the issuer: The issuer's details and its background should be clearly mentioned. About the EMT: Information regarding the EMT should be provided, including its functionalities and mechanisms. Public offer details: Clear and comprehensive data about the EMT's public offer and potential trading should be present. Rights and obligations: The white paper should detail the rights and obligations of holding the EMT. Underlying technology: It should also explain the technology supporting the EMT. Risk factors: Details about potential risks associated with the EMT should be given. Environmental impacts: The white paper should identify any significant adverse environmental impacts related to the consensus mechanism to issue the EMT. The paper also must identify any other party offering the EMT to the public or seeking its trading, along with the reason for their involvement. Fairness and clarity are essential in the white paper. All information must be truthful, clear, and not misleading. There should be no material omissions, and the information should be presented concisely. A prominent statement must appear on the first page, stating that any competent authority in the EU hasn't approved the paper and that the issuer is solely responsible for its content. In addition, the document should contain explicit warnings that the EMT isn't covered by investor compensation schemes or deposit guarantee schemes under EU directives. The white paper should also include a statement from the issuer's management body confirming that the document complies with MiCA and that, to their best knowledge, the information presented is complete, fair, and not misleading. A summary written in non-technical language, providing key information about the public offer or trading of the EMT, should be inserted after the management statement. This summary should be understandable, comprehensive, and laid out clearly, with a warning that decisions to purchase should be based on the entire white paper. A table of contents, date of its notification, and details about redemption conditions should also be included in the white paper. The document should be prepared in the official language of the home Member State or a language customary in the sphere of international finance. If the EMT is also offered in another Member State, the white paper must be prepared in that state's official or financial language. The white paper must be available in a machine-readable format, and the European Securities and Markets Authority (ESMA), in cooperation with the European Banking Authority (EBA), is tasked with developing standard forms and formats. Before the public offer or seeking admission to trading, the issuer should publish the white paper on its website and notify its competent authority at least 20 working days before its publication. It's important to remember that any significant new information or changes capable of affecting the assessment of the EMT should be reflected in a modified white paper, which should be notified to the authorities and published on the issuer's website. Liability of Issuers of E-Money Tokens Article 52 of the MiCA regulation addresses the responsibility and potential liability of issuers of e-money tokens (EMTs) concerning the information provided in a crypto-asset white paper. Here's a simplified breakdown: Issuer Liability: If an EMT issuer violates Article 51, by providing incomplete, unfair, unclear, or misleading information in the crypto-asset white paper or a modified version, both the issuer and the members of its administrative, management, or supervisory body are accountable to the EMT holder for any loss arising from this violation. Limitations on Liability: Any contractual conditions that seek to exclude or limit this civil liability won't have any legal effect. It implies that an issuer cannot limit or avoid their liability for the information provided in the white paper through any contractual agreements with the token holders. Evidence: The burden of proof is on the EMT holder. They need to provide evidence indicating that the issuer violated Article 51 by giving incomplete, unfair, unclear, or misleading information and that the holder's decision to buy, sell, or exchange the EMT was influenced by this information. Summary Information Liability: The issuer and its officials are not liable for losses suffered due to reliance on the information provided in a summary, including any translations, unless the summary is misleading, inaccurate, or inconsistent when read along with the other parts of the white paper or does not provide key information to assist prospective holders when deciding whether to buy the EMT. National Law: This article does not affect any other civil liability applicable under national law. Marketing Communications for E-Money Tokens Article 53 of the MiCA regulation presents rules regarding marketing communications related to e-money tokens (EMTs). It ensures clarity, fairness, and consistency in marketing practices. Requirements for Marketing Communications: Any marketing communication related to an offer to the public or the trading of EMTs must adhere to specific requirements: The marketing communication must be identifiable as a promotional activity. The information contained in the marketing communication must be fair, clear, and not misleading to the public. The details in the marketing communication must be consistent with the information presented in the crypto-asset white paper, the document outlining the issuer's plan for the digital asset. The marketing communication must also clearly state that a crypto-asset white paper has been published and provide the issuer's website address, a contact telephone number, and an email address. Right of Redemption Statement: All marketing communications must include an explicit statement that EMT holders have the right to redeem their tokens against the issuer at any time and at the tokens' face value. Publication of Marketing Communications: All marketing communications, including any modifications, should be published on the issuer's official website. Approval by Authorities: Competent authorities are not required to pre-approve marketing communications before publication. Notification to Authorities: However, issuers must be prepared to provide their marketing communications to competent authorities upon request. Timing of Dissemination: Marketing communications cannot be disseminated before the publication of the crypto-asset white paper. This restriction ensures potential investors can access the full white paper information before encountering promotional materials. This rule does not prevent issuers from conducting market soundings - gathering information on the interest of potential investors. Investment of Funds Received in Exchange for E-Money Tokens Article 54 of MiCA provides guidelines on how issuers of e-money tokens (EMTs) should manage and invest the funds they receive in exchange for their tokens. Funds Safeguarding: In line with Article 7(1) of Directive 2009/110/EC (the E-Money Directive), all funds received in exchange for EMTs must be safeguarded. This means that these funds must be protected and kept separate from other funds of the EMT issuer, ensuring they're readily available for redemption. Minimum Deposit Requirement: At least 30% of the received funds must be deposited into separate accounts in credit institutions. This provision ensures a portion of the funds is always readily available and is kept safe in a regulated institution. Investment of Remaining Funds: The remaining funds (i.e., 70% or less) should be invested in secure, low-risk assets. These assets should be: Highly liquid, meaning they can easily be sold or exchanged for cash without causing a significant change in their price. Carry minimal market, credit, and concentration risks, indicating they have a low chance of decreasing in value and do not focus the investments too heavily in one area. Denominated in the same official currency as the one referenced by the EMT. Wrapping Up Part One: Navigating E-Money Tokens We've just concluded the first installment of our guide on understanding e-money tokens under MiCA. The intricacies of this new legislation may be complex, but with each article, we aim to bring clarity and insight into this evolving landscape of digital finance. At Prokopiev Law Group, we pride ourselves on staying ahead of the curve in digital asset regulation. Our team keenly monitors the latest developments and is prepared to guide you through each step of your digital asset journey. Do you have questions or need assistance with a specific issue? Don't hesitate to reach out to us. We are eager to support you. Stay tuned for Part Two of our series on e-money tokens, where we'll continue our journey through the MiCA's provisions. Thank you for joining us in this first stage of the journey. Together, we're decoding the future of digital finance. 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.

Welcome to our fourth part of exploring the Markets in Crypto-Assets (MiCA) regulation requirements for asset-referenced tokens. In this installment, we turn our focus towards significant asset-referenced token issuers. These tokens wield considerable influence within the market and, consequently, come under additional regulatory scrutiny. If you're new to our series or wish to revisit earlier parts, you can access Part 1, Part 2, and Part 3. Classification of asset-referenced tokens as significant Let's break down Article 43 of MiCA, which provides a roadmap to classifying asset-referenced tokens as 'significant.' The token in question must meet at least three of the following criteria: The token has more than 10 million holders. The value of the token, its market capitalization, or the issuer's reserve of assets exceeds EUR 5 billion. The average daily number and total value of transactions in the token during the relevant period exceed 2.5 million transactions and EUR 500 million, respectively. The token issuer is recognized as a gatekeeper in providing core platform services. The issuer's activities, including the use of the token for payments and remittances, are significant on an international scale. The token or its issuer is interconnected with the financial system. The issuer also issues at least one additional asset-referenced or e-money token and provides at least one crypto-asset service. If multiple issuers issue the same token, the classification is based on aggregated data from all issuers. The European Banking Authority (EBA) classifies a token as significant when it meets these criteria either following authorization or during two consecutive reporting periods. Once a token is classified as significant, supervisory responsibilities are transferred from the issuer's home Member State's competent authority to the EBA. This classification and associated supervisory responsibilities are reassessed annually. The Commission will determine further specifications of the criteria for a token to be classified as significant through delegated acts. Voluntary classification of asset-referenced tokens as significant Article 44 of MiCA sets out the provisions regarding the voluntary classification of asset-referenced tokens as significant asset-referenced tokens. These provisions are essential as they allow issuers to opt for their tokens to be recognized as significant, opening up a different regulatory landscape. Issuers can express their desire for their asset-referenced tokens to be deemed significant. This desire is to be notified immediately to the European Banking Authority (EBA), the European Central Bank (ECB), and, in certain cases, the central bank of the issuer's home Member State. For an asset-referenced token to be voluntarily classified as significant, the issuer must illustrate, through a detailed program of operations, that it will likely meet at least three of the criteria specified above. Upon receiving such a request, the EBA has 20 working days to prepare a draft decision based on the operational program, determining whether the token fulfills or is likely to fulfill the necessary criteria. This draft is then notified to the competent authority of the issuer's home Member State, the ECB, and, in certain cases, to the central bank of the Member State. All these authorities have 20 working days to provide observations and comments on the draft decision. The EBA will duly consider these before arriving at a final decision. The final decision is made within 60 working days of the initial notification, which is immediately conveyed to the issuer and its competent authority. If a token is classified as significant, the supervisory responsibilities shift from the competent authority to the EBA on the authorization date or when the crypto-asset white paper is approved. Specific Obligations Article 45 of MiCA deals with additional specific obligations that issuers of significant asset-referenced tokens must comply with. This extends to the basic requirements, with increased scrutiny given the potential systemic risks such tokens pose. Issuers of significant asset-referenced tokens must formulate, implement, and maintain a remuneration policy that encourages robust and efficient risk management. This policy must not incentivize the relaxation of risk standards. The issuers must ensure these tokens can be held in custody by various authorized crypto-asset service providers. This includes service providers outside of their group and should be done fairly, reasonably, and non-discriminately. Monitoring liquidity needs is vital. The issuers must assess and continuously keep track of liquidity requirements to fulfill token redemption requests. A comprehensive liquidity management policy and procedures should be implemented to maintain a resilient liquidity profile capable of withstanding stressful scenarios. Regular liquidity stress tests need to be conducted by these issuers. Depending on these tests, the European Banking Authority (EBA) might decide to bolster liquidity requirements. The stress test must cover all activities if an issuer offers more than one token or provides other crypto services. The reserve requirement percentage stated in Article 35(1) (own funds requirements) is set at 3% of the average reserve assets amount for these issuers. If multiple issuers offer the same significant token or an issuer offers multiple tokens with at least one classified as significant, all the above apply to each issuer. The EBA, in cooperation with the European Securities and Markets Authority (ESMA), will develop regulatory technical standards that specify the minimum requirements of the remuneration policy, liquidity management policy, and liquidity requirements, including setting a minimum deposit amount in each official currency. Furthermore, it will detail the process and timeframe for an issuer to adjust the amount of its own funds. Lastly, EBA, ESMA, and the European Central Bank (ECB) will issue guidelines for the common reference parameters of stress test scenarios to be included in the stress tests. These guidelines will be periodically updated, considering the latest market developments. * * * Comprehending the intricacies of MiCA can be a complex task, given its technical legal language and detailed stipulations. But remember, you're not in this alone. At Prokopiev Law Group, we specialize in demystifying these legal complexities for you. Whether you're an existing blockchain business, a startup looking to break into the crypto space, or an investor wanting to make sure your investments are legally protected, we're here to help you navigate through the ever-evolving digital asset landscape. Our objective is to empower you with the right legal intelligence so you can focus on what you do best - innovating and growing in the crypto space. Together, let's build a compliant, robust, and successful future in the digital asset universe. With Prokopiev Law Group at your side, rest assured, you're always a step ahead in your crypto journey. 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.

Welcome to the third part of our exploration of the Markets in Crypto-assets (MiCA) regulations pertaining to asset-referenced tokens. Our journey has delved into the importance of organizational structure, risk management processes, financial requirements, and much more. You might find reading Part One and Part Two beneficial if you're just joining us. In today's discourse, we will unravel the intricacies of the reserve of assets requirement, a cornerstone provision critical in promoting asset-referenced tokens' stability. It's a complex topic that's crucial to understanding the intricate web of compliance and accountability that the MiCA legislation weaves. Reserve of Assets Obligation for Issuers of Asset-Referenced Tokens under MiCA Article 36 of MiCA lays out the essential requirements related to the obligation of asset-referenced token issuers to maintain a reserve of assets. It details how these reserves should be structured and managed, including the specific composition, segregation, valuation, and audit requirements. Reserve of Assets: Issuers of asset-referenced tokens must always establish and maintain a reserve of assets. This reserve should be managed in a way that (a) covers the risks associated with the assets referenced by the tokens; addresses liquidity risks linked to the permanent rights of token holders' redemption. Legal Segregation: In the best interest of the token holders, the reserve of assets must be legally separate from the issuer's estate and the reserves of other asset-referenced tokens. Operational Segregation: The reserve of assets must also be operationally segregated from the issuer's estate and the reserves of other tokens. Regulatory Technical Standards: The European Banking Authority (EBA), in cooperation with the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB), is tasked with developing regulatory technical standards to specify liquidity requirements further. These will include (a) guidelines for daily and weekly liquidity; (b) techniques for liquidity management; (c) minimum deposit amounts in each official currency. Multiple Tokens and Issuers: Issuers that offer multiple asset-referenced tokens must operate separate reserves for each token. Similarly, different issuers offering the same token should maintain only one reserve. Effective Management: The issuer's management body must ensure the effective and prudent management of the reserve, matching the issuance and redemption of tokens with a corresponding increase or decrease in the reserve. Valuation: The reserve's aggregate value should be determined using market prices and at least equal the total value of claims against the issuer from circulating tokens. Stabilization Mechanism Policy: Issuers must have a clear policy outlining the stabilization mechanism of their tokens. This policy should cover several elements, including the assets referenced, risks, issuance and redemption procedures, investment policy, and more. Audits: An independent audit of the reserve of assets is required every six months. Audit results must be reported to the competent authority and made public, except in specific circumstances that may require a delay in publication. Valuation Methodology: Valuation at market prices should be conducted using the mark-to-market method when possible. When not possible, or if the market data isn't of good quality, a more conservative mark-to-model method is recommended. Custody of reserve assets Article 37 of the MiCA regulation deals with the custody of reserve assets by issuers of asset-referenced tokens. In layman's terms, this provision regulates how the companies that issue tokens representing some underlying value must manage and protect the assets that back up these tokens. This is to ensure that the value of the tokens remains stable and the interests of the token holders are safeguarded. 1. Custody Policies Companies that issue asset-referenced tokens must have policies to ensure that they always maintain control of the reserve assets backing the tokens. This includes ensuring the assets are not encumbered or used as financial collateral. These companies must be able to access the reserve assets quickly to meet any redemption requests from the token holders. Companies must avoid situations where custody of the reserve assets is concentrated with one custodian or where the reserve assets are concentrated in one area. 2. Multiple Tokens and Issuers If a company issues more than one type of asset-referenced token, it must have a separate custody policy for each reserve of assets. Multiple companies can maintain a single custody policy if they issue the same asset-referenced token. 3. Holding Reserve Assets Depending on the nature of the reserve assets, reserve assets must be held in custody by specific types of institutions, including crypto-asset service providers, credit institutions, or investment firms. This custody should be established five working days after the date of issuance of the asset-referenced token. 4. Due Diligence in the Selection of Custodians Companies must exercise due diligence when selecting and reviewing the custodians of their reserve assets. Custodians must be different from the issuer and should have the necessary expertise and reputation to act respectively. Companies must ensure that the reserve assets held in custody are protected against claims of the custodians' creditors. 5. Selection and Review of Custodians Custody policies should outline the criteria for selecting custodians and the process for reviewing these appointments. Companies should regularly review their custodian appointments, considering their exposure to the custodians and monitoring their financial conditions. 6. Custody Manner Custodians must follow specific rules when holding assets in custody, depending on the type of the reserve asset. All reserve assets should be identifiable as belonging to each reserve of assets. 7. Contractual Arrangements The appointment of custodians should be evidenced by a contractual arrangement, which regulates the flow of information necessary for them to perform their functions. 8. Honesty and Fairness Custodians should act honestly, fairly, professionally, independently, and in the interest of the issuers and the holders of asset-referenced tokens. 9. Conflict of Interest Custodians should not engage in activities that could create conflicts of interest unless they have properly separated their custody tasks from their potentially conflicting tasks and the potential conflicts of interest have been properly identified, monitored, managed, and disclosed. 10. Loss of Assets In case of a loss of a financial instrument or a crypto-asset held in custody, the custodian that lost the asset must compensate the issuer without undue delay unless the loss occurred due to an external event beyond their control. Investment of reserve assets by the issuers of asset-referenced tokens Investment Parameters: Issuers who wish to invest a portion of their reserve assets can do so, but certain stipulations bind them. Investments must be limited to highly liquid financial instruments, meaning they can be quickly and easily converted to cash without significant loss in value. These instruments must also demonstrate minimal market, credit, and concentration risks. Undertakings for Collective Investment in Transferable Securities (UCITS): Assets invested in UCITS are presumed to possess minimal market, credit, and concentration risks. This is only valid if the UCITS invests solely in assets specified by the European Banking Authority (EBA) and the issuer has taken steps to minimize concentration risk. Custody of Invested Assets: All financial instruments in which the reserve assets are invested must be held in custody. Profit, Loss, and Risk: Any gains or losses resulting from the investment of the reserve assets are solely the responsibility of the issuer of the asset-referenced token. This includes fluctuations in the value of the financial instruments and any counterparty or operational risks. Regulatory Technical Standards: In cooperation with the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB), the EBA will create technical regulatory standards detailing the highly liquid financial instruments bearing minimal risks. These standards will consider the different types of assets that an asset-referenced token can reference and the correlation between those assets and the highly liquid financial instruments the issuers might invest in. Constraints will be imposed on the concentration to prevent the issuer from investing or holding in custody more than a certain percentage of reserve assets in any one entity or group. Redemption rights of holders of asset-referenced tokens Permanent Right of Redemption: Holders of asset-referenced tokens have a continuous right to redemption against the token issuers. This right also extends towards the reserve assets if the issuers are unable to fulfill their obligations. Issuers must develop, sustain, and enforce precise policies and procedures about this right of redemption. Redemption Process: When a token holder requests redemption, the issuer must either repay an amount equivalent to the market value of the referenced assets or deliver the assets themselves. This amount will be paid in funds other than electronic money. Issuers need to establish a policy detailing: The specific conditions, such as thresholds, periods, and timeframes, for exercising the right of redemption. The mechanisms and procedures to guarantee token redemption, even under stressed market circumstances, as well as during the implementation of a recovery plan or an orderly redemption. The valuation principles of the tokens and reserve assets upon redemption. The settlement terms for the redemption. The steps issuers take to manage fluctuations in the reserve assets to prevent any negative market impacts. Suppose issuers accept payment in funds other than electronic money, denominated in an official currency when selling a token. In that case, they must always offer an option to redeem the token in the same official currency. It is crucial to note that the redemption of asset-referenced tokens should not be subject to any fees except as provided in Article 46 of MiCA (recovery plans regulation). Granting interest in relation to asset-referenced tokens No Interest on Tokens: Issuers of asset-referenced tokens are expressly prohibited from granting any form of interest in connection with these tokens. Crypto-Asset Service Providers: The restriction also applies to crypto-asset service providers. When providing services related to asset-referenced tokens, these providers are also forbidden from granting interest. Definition of Interest: The term 'interest' is broadly defined here. Any compensation, benefit, or financial advantage related to the length of time a holder retains asset-referenced tokens is treated as interest. This includes net compensation, discounts, or similar financial benefits with the same impact as interest. Whether it's received directly from the issuer or third parties, and whether it's directly associated with the token or from the remuneration or pricing of other products - if it benefits the token holder in a way equivalent to receiving interest, it's treated as such. * * * That wraps up the third part of our detailed analysis of MiCA's provisions for asset-referenced tokens. Next time, we'll continue our journey through MiCA's comprehensive regulatory framework, shedding light on more legal intricacies and provisions. Stay tuned for the upcoming parts, where we continue to simplify and demystify the MiCA for you. 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.

Welcome back to our comprehensive exploration of the Markets in Crypto-assets (MiCA) regulation! If you've missed out on our earlier discussion, no worries, you can catch up on Part 1 right here. We will focus more on asset-referenced tokens as we continue our journey through this vital regulatory framework. This segment will provide an in-depth understanding of more legal nuances associated with these tokens, their issuance, and the responsibilities of issuers, all under the scope of MiCA. The Revocation of Authorization for Asset-Referenced Tokens Issuers Under MiCA's framework, the authorization granted to issuers of asset-referenced tokens isn't perpetual and can be withdrawn under certain circumstances. This measure aims to maintain the crypto market's integrity and protect token holders' interests. Let's delve into the situations that can lead to the revocation of this authorization: Inactivity: If the issuer hasn't conducted any business for six months straight or hasn't utilized its authorization for a year, the competent authority can withdraw the authorization. Irregular Obtention: The authorization can be rescinded if the issuer acquired its authorization through improper methods, such as by providing false information in the application or the crypto-asset white paper. Non-compliance: If the issuer no longer meets the conditions under which the authorization was given or if the issuer seriously breaches the provisions of this MiCA. Redemption Plan: The authorization can be rescinded if the issuer has been subjected to a redemption plan. Ceasing Operations: If the issuer voluntarily renounces its authorization or decides to cease operations. Threat to Market Integrity: If the issuer's activities pose a significant risk to market integrity, financial stability, smooth operation of payment systems, or expose the issuer or the sector to severe money laundering and terrorist financing risks. Moreover, if the European Central Bank (ECB) or the relevant central bank opines that the asset-referenced token poses a significant threat to the smooth operation of payment systems, monetary policy transmission, or monetary sovereignty, the competent authority can withdraw the issuer's authorization. The competent authorities also may limit the amount of asset-referenced tokens to be issued or set a minimum denomination amount for the asset-referenced token. Indeed, the presence of asset-referenced tokens in financial systems can have significant implications for monetary policy and financial stability. For instance, if a token becomes widely adopted, it could influence the transmission mechanism of monetary policy or affect the functioning of payment systems. Moreover, in extreme cases, it could challenge the sovereignty of monetary policy if it starts replacing the national currency for a large number of transactions. Under the ECB or the relevant central bank opinion, the competent authority must either withdraw the issuer's authorization or impose restrictions to tackle such situations. It signals a clear message that the era of free crypto-assets circulation ends, and now crypto projects shall co-exist with traditional financial structures on an unequal basis. This significant development shows that the EU is taking crypto-assets very seriously. Modifying Crypto-Asset White Papers for Asset-Referenced Tokens Issuers of asset-referenced tokens must notify their competent authority in the home Member State about any planned changes to their business model, which might significantly influence the decision-making of current or potential token holders. Such changes include (non-exclusive list): Adjustments to governance arrangements, including reporting lines to the management body and risk management framework. Alterations to the reserve assets and the custody of these assets. Changes to the rights granted to asset-referenced token holders. Modifications to the method of issuance and redemption of the asset-referenced tokens. Updates to the transaction validation protocols for the asset-referenced tokens. Changes to the functioning of the issuer's proprietary distributed ledger technology (where applicable). Changes to mechanisms ensuring the liquidity of the asset-referenced tokens, including the liquidity management policy for issuers of significant asset-referenced tokens. Modifications to arrangements with third-party entities regarding reserve asset management, investment of the reserve, custody of reserve assets, and the distribution of tokens to the public (if applicable). Changes to the complaints-handling procedures. Updates to the risk assessment for money laundering and terrorist financing and related policies and procedures. These planned changes must be notified to the competent authority 30 working days before they are due to take effect. Once any such change is notified, the issuer must then draft a modified crypto-asset white paper, maintaining the consistency of information order with the original white paper. This draft must then be notified to the competent authority of the issuer's home Member State. Upon receipt, the authority must electronically acknowledge the receipt within five working days and approve or refuse the modified white paper within 30 working days from the acknowledgment of receipt. During the examination period, the competent authority may request additional information, explanations, or justifications concerning the draft. Liability of Issuers of Asset-Referenced Tokens for the Information Provided in a Crypto-Asset White Paper Issuers of asset-referenced tokens are legally responsible for the accuracy and clarity of information provided in their crypto-asset white papers, including any modified versions. Here are the key points: If an issuer provides incomplete, unfair, unclear, or misleading information in its crypto-asset white paper, they and their administrative, management, or supervisory body members are liable for any loss incurred due to this infringement. This liability applies to a holder of the asset-referenced tokens who has suffered the loss. Any attempt to exclude or limit this civil liability through contractual arrangements will be rendered legally ineffective. This rule ensures that issuers cannot evade their responsibilities to provide accurate and clear information. The burden of proof in such cases rests with the token holder. They must present evidence indicating issuers violation by providing incomplete, unfair, unclear, or misleading information, and that this information influenced the token holder's decision to purchase, sell, or exchange the asset-referenced tokens. However, issuers and their administrative, management, or supervisory body members are not liable for losses from reliance on a white paper summary, including any translations of it. The exceptions to this are if the summary is misleading, inaccurate, or inconsistent when read alongside the other parts of the crypto-asset white paper or if it does not provide key information that would help prospective holders decide whether to purchase the asset-referenced tokens when read in conjunction with the rest of the white paper. Lastly, the issuer may also be held accountable under specific national laws in addition to the liabilities stated in MiCA. Issuers' Obligations and Publication of the Crypto-Asset White Paper MiCA legislation outlines specific standards of conduct that issuers of asset-referenced tokens must adhere to and sets rules for publishing the crypto-asset white paper. Obligation to Act Honestly, Fairly, and Professionally: Issuers are obligated to act honestly, fairly, and professionally. Their communication with current and potential holders of asset-referenced tokens should always be clear, fair, and not misleading. The best interests of the token holders must be at the heart of the issuers' actions. This means that issuers should prioritize the holders' interests over their own or other competing interests. All token holders should be treated equally. However, there might be instances where certain holders receive preferential treatment. If that's the case, this must be disclosed in the crypto-asset white paper and, where applicable, in marketing communications. Publication of the Crypto-Asset White Paper: Approved crypto-asset white paper and modified versions should be published on the issuer's website. The crypto-asset white paper must be publicly accessible by the start date of the asset-referenced token's public offer, the asset-referenced token, or the token's admission to trading. The approved crypto-asset white paper and, where applicable, the modified version should remain available on the issuer's website as long as the public holds the asset-referenced token. Marketing Communications, Ongoing Information, and Complaints-handling Procedures Requirements for marketing communications: These communications must be readily identifiable as marketing material, and their content should be fair, clear, and not misleading. They must align with the information presented in the crypto-asset white paper. They should state that a crypto-asset white paper has been published, providing the issuer's website address, telephone number, and email for contact. A clear statement must be included indicating that token holders can redeem their tokens from the issuer at any time. Any modifications to marketing communications should be published on the issuer's website. Marketing communications must be provided to competent authorities upon request. No marketing communication should be disseminated before the publication of the crypto-asset white paper, though this doesn't affect the issuer's ability to conduct market soundings. For the continuous provision of information to token holders: Issuers should publicly disclose on their website, clearly, accurately, and transparently, the number of asset-referenced tokens in circulation, and the value and composition of the reserve assets. They should publish a summary of the audit report related to the reserve of assets and the full, unedited audit report on their website as soon as possible. Any event that could significantly impact the value of the tokens or the reserve of assets should be disclosed promptly and transparently on the issuer's website. Regarding the handling of complaints: Issuers should establish and maintain effective and transparent procedures for addressing complaints from token holders and other interested parties, including consumer associations representing token holders. If tokens are distributed partially or entirely by third-party entities, issuers should also facilitate handling complaints between token holders and these entities. Token holders should be able to lodge complaints with the issuers or, where applicable, with third-party entities free of charge. Issuers and, where applicable, third-party entities should develop a template for filing complaints and keep a record of all received complaints and the actions taken in response. Issuers should investigate all complaints promptly and fairly and communicate the results of these investigations to token holders within a reasonable period. Conflicts of Interest Issuers must set up and maintain policies and procedures to identify, prevent, manage, and disclose conflicts of interest. These conflicts of interest may arise between the issuer and any of the following parties: Their shareholders or members. Any direct or indirect shareholder or member with a significant holding in the issuers. The members of their management body. Their employees. The holders of asset-referenced tokens. Third party entities for operating the reserve of assets, and for the investment of the reserve assets, the custody of the reserve assets and, where applicable, the distribution of the asset-referenced tokens to the public. Regarding disclosure, issuers must clearly display the general nature and sources of these conflicts of interest on their website and the steps taken to mitigate them. This disclosure should be detailed enough to enable prospective token holders to make an informed decision about purchasing the asset-referenced tokens. Governance Arrangements MiCA stipulates the governance arrangements for issuers of asset-referenced tokens, covering a wide range of responsibilities. Key points to note are: Issuers must have robust governance structures, including a clear organizational structure with well-defined and transparent lines of responsibility. They should also have effective procedures to identify, manage, monitor, and report risks, alongside sound administrative and accounting procedures. The management body members must have a good reputation and possess appropriate knowledge, skills, and experience. They should not have any criminal records related to money laundering, terrorist financing, or any other offenses that could tarnish their reputation. They should also be able to commit enough time to their duties effectively. The management body should regularly assess and review the effectiveness of the policy arrangements and procedures. Shareholders or members with significant holdings in the issuers should also have a good reputation. Issuers must adopt policies and procedures to ensure compliance with MiCA. These should include policies and procedures on: Reserve of assets Custody of the reserve assets Rights granted to token holders Issuance and redemption of tokens Transaction validation protocols Functioning of the issuer's proprietary distributed ledger technology Ensuring the liquidity of tokens Arrangements with third-party entities for operating the reserve of assets Issuers' consent given to others that might offer or seek admission to trading the tokens Handling of complaints Conflicts of interest The issuer must have appropriate and proportionate systems, resources, and procedures to ensure their services' regular performance and safeguard data availability, authenticity, integrity, and confidentiality. If an issuer discontinues its services and activities, it must submit a plan to the competent authority for approval. Lastly, issuers must ensure regular audits by independent auditors, with the audit results being communicated to the issuer's management body and made available to the competent authority. Own Funds Requirements Issuers of asset-referenced tokens must maintain own funds that are at least equal to the highest of the following: €350,000. 2% of the average amount of the reserve of assets over the preceding six months. A quarter of the fixed overheads from the preceding year. If an issuer offers more than one type of asset-referenced token, the own funds should represent the sum of the average amount of the reserve assets backing each token. The own funds should consist of the Common Equity Tier 1 items and instruments, as referred to in Regulation (EU) No 575/2013, with full deductions applied. The competent authority in the issuer's home country may require the issuer to hold up to 20% more own funds than calculated by the rules mentioned earlier if assessments indicate a higher risk. The evaluation of risk can be based on factors such as the issuer's risk management processes, the quality, and volatility of the reserve assets, the rights granted to token holders, investment policy risks, the value and number of transactions settled in the token, the importance of the markets where the token is offered, and the market capitalization of the token. Issuers must conduct regular stress tests considering severe financial and non-financial stress scenarios. The competent authority may require the issuer to hold between 20% and 40% more own funds depending on the results. The European Banking Authority (EBA), in cooperation with the European Securities and Markets Authority (ESMA) and the European Central Bank (ECB), is tasked with developing regulatory standards to specify the procedures for adjusting to higher own funds requirements, the criteria for requiring a higher amount of own funds, and the minimum requirements for the design of stress testing programs. * * * We've now reached the conclusion of our in-depth exploration of the MiCA regulation concerning asset-referenced tokens. We hope this breakdown has made these complex legal provisions more understandable and accessible. In case you missed it, here's a link to the first part of our analysis on asset-referenced tokens under MiCA. And stay tuned because we're just getting started! In the next part of our series, we will delve into more intricate details and nuances of MiCA, continuing our journey through this critical regulation. Understanding regulations like MiCA is essential for anyone involved in the crypto asset industry. However, these texts can be dense and difficult to navigate, which is where we come in. We're here to help you make sense of these regulations and ensure that you understand the implications for your business or investment decisions. We're your reliable partner in navigating the complex landscape of crypto asset legislation. 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. 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