Netherlands: Asset-referenced tokens (ARTs) in detail

Published on Aug 16, 2023

EU regulation MICAR now regulates asset-referenced tokens

1. DEFINITION OF ARTS

MiCAR defines Asset-referenced tokens (ARTs) as a type of crypto-asset that is not an electronic money token and that purports to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies.

Knowing which crypto-assets fall under the MiCAR definition of ARTs is the first step in determining which regime will apply to the crypto-asset white papers, issuers’ licensing, reserve assets and own capital requirements.

The classification between the different categories of crypto-assets under MiCAR is based on the risks they entail and whether the crypto-assets seek to stabilise their value by reference to other assets. Both ARTs and e-money tokens purport to maintain a stable value by reference to other assets, while the third catch-all category of other crypto-assets does not pursue such function through collateralisation. Algorithmic stablecoins, which are not backed by reserve assets will not classify as ARTs.

The demarcation line between e-money tokens and ARTs is drawn by the type of reference assets. E-money tokens may refer only to a single fiat currency while ARTs may refer to a broader class of assets, including baskets of goods, commodities, other crypto-assets, a combination of such assets or fiat currencies. ARTs cover only crypto-assets, which do not qualify as e-money tokens. In contrast to e-money tokens, ARTs may refer to a fiat currency only in combination with other fiat currencies or a basket of assets.

To ensure the regulation is future proof, the final version of the definition of ARTs under MiCAR includes a broad reference to the scope of possible collateral assets. However, such a broad reference allows for a large variety of reference assets, which means that the price of some types of reference assets may fluctuate.

The intended function of ARTs as a means of exchange as opposed to store of value and investment instrument is reflected in the prohibition for the issuers and crypto-asset service providers to grant interest on the holding of ARTs. The European Securities and Markets Authority (ESMA) will publish guidelines on the criteria for distinction between crypto-assets, and in particular ARTs, under MiCAR and financial instruments under the Directive on markets financial instruments (MiFID II).

2.AUTHORISATION: REQUIREMENTS AND EXEMPTIONS

Firms issuing ARTs must be incorporated and licensed under MiCAR within the territory of the EU. Therefore, non-EU entities issuing ARTs currently in the EU should act now to establish a company in a EU member state and obtain a license, given that the authorisation process is time-consuming. Firms based in the EU already offering ARTs but are not authorised should analyse if their activities could be and to what degree covered by MiCAR requirements in order to prepare for licensing before MiCAR comes into force.

Validity of ART license for the entire European Union

Offering to the public and admission to trading of ARTs will require an authorisation. The issuer of ARTs must be:

  • a legal person or undertaking established in the EU that has obtained a license by the Competent Authority (CA) of its home member state; or
  • already licensed credit institution (which does not need a special authorisation, but must comply with certain rules).

The authorisation gives access to the European passport. It means that the license granted by the home regulator is valid across the entire EU and allows an issuer of ARTs to offer to the public, throughout the EU, the ART for which it has been authorised or to admit to trading such ART on a crypto platform.

Exemptions

The rules stated above on who can issue ARTs will not apply:

  • if the offer to the public of ARTs is addressed solely to and can only be held by qualified investors; or
  • the average outstanding value of issued ARTs does not exceed EUR 5 million (or the equivalent amount in another official currency) over a 12-month period.

Application for authorisation and assessment

The authorisation process involves detailed investigation of the application submitted by the issuer to the regulator and extends to, among other things, information on the issuer, a programme of operations setting out the business model adopted, a crypto-asset white paper, governance arrangements and a number of policies and procedures (e.g. BCP, internal control mechanism and risk management policy, safeguarding data procedure, etc.). The documentation and data to be filed under the licensing procedure will be further specified in the regulatory technical standards to be developed by the European Banking Authority (EBA) in close cooperation with ESMA and the European Central Bank (ECB).

Although formally the timeframe for issuing the draft decision by the regulator is 60 working days from the receipt of a complete application, it is likely that the final authorisation would be in the range of a few months of minimal processing period, given the involvement of EBA, ESMA and ECB (or relevant central bank) in the process. The regulator could refuse authorisation where there are objective and demonstrable grounds that the issuer fails to meet MiCAR’s requirements or that the issuer’s business model might pose a serious threat to market integrity, financial stability, systems for the smooth operation of payment, or exposes the issuer or the sector to serious risks of money laundering and terrorist financing.

3.WHITE PAPER

The white paper should contain all information concerning the issuer, the ART itself and the offer of ARTs or their admission to trading that is necessary to enable prospective buyers to make an informed purchase decision and understand the risks relating to the offer of ARTs. The crypto-asset white paper must contain detailed information about the issuer and the ART, which includes detailed information on certain technical, environmental, financial and legal aspects of the ARTs. The whitepaper has to be clear, fair and not misleading. The white paper will need to be published on the issuer’s website. If the issuer does not meet the obligations regarding the quality of the content, the management or CA may be liable to a holder of ARTs.

Compliance with the obligations for an ART white paper is essential for issuers of ARTs. Failure to meet these obligations may result in liability for the management of the issuer.

The issuer is obliged to publish and notify a crypto-asset white paper to the relevant supervising authority. The white paper should contain all the information about the issuer of the ART, the ART itself, the offer to the public of the ART or its admission to trading, the rights and obligations attached to the ART, the underlying technology, the risks, the reserve of assets and the principal adverse impacts on the climate and other environment-related impacts of the consensus mechanism used to issue the ART. Furthermore, the white paper must contain a clear and unambiguous statement that the ART may lose its value in part or in full, that it may not always be transferable, that it may not be liquid, and that the ART is not covered by investor compensation schemes and deposit guarantee schemes.

The white paper will need to be published on the issuer’s website. The information mentioned in the white paper should be fair, clear and not misleading and should be presented in a concise and comprehensible manner. If the issuer fails to do so, the management body of the issuer may be liable to a holder of the ART for any loss due to that infringement.

4.OBLIGATIONS FOR ART ISSUERS

In order to ensure the stable value of their ARTs, issuers must establish and maintain reserves of assets that support the value of their ARTs. There are also requirements regarding the own funds of the issuer of ARTs. These issuers are required to have own funds equal to an amount of at least the highest of the following:

  • EUR 350,000;
  • 2% of the average amount of the reserve of assets; or
  • a quarter of the fixed overheads of the preceding year.

The marketing communications relating to the issuance of ARTs also must comply with certain requirements.

Issuers of ARTs must carefully assess the financial requirements related to the issuance of their tokens, taking into account the reserve of assets and own funds requirements.

Reserve of assets and prudential requirements

Issuers of ARTs must establish and maintain an asset reserve at all times. The composition and management of the reserve should effectively mitigate the risks linked to the assets referenced by the ARTs and address the liquidity risks following from the ongoing redemption rights of the token holders. The reserve of assets should be separated from the issuer's assets and from the reserve of assets of other ARTs.

Furthermore, issuers should establish and implement custody policies, procedures and contractual arrangements regarding the reserve assets. These reserve assets may be invested by the issuer. However, a part of the reserve of assets must only be invested in highly liquid financial instruments with minimal risk.

As stated before, there are also requirements regarding the own funds of the issuer of asset-refences tokens. These issuers are required to have own funds equal to an amount of at least the highest of the following:

  • EUR 350,000;
  • 2% of the average amount of the reserve of assets; or
  • a quarter of the fixed overheads of the preceding year.

The CA of the home member state may require an issuer of an ART to hold an amount of own funds up to 20% higher than the amount if it considers that there is an increased risk in relation to the tokens or assets held.

Other obligations for ART issuers

The marketing communications relating to the issuance of ARTs must comply with certain requirements. The marketing must be clearly identifiable as such and provide accurate and transparent information that aligns with the white paper.

Furthermore, the marketing should clearly disclose the publication of a white paper and provide contact details for the issuer's website, telephone number, and email address. The marketing communications should be notified to the relevant CA upon request.

5.SIGNIFICANT ASSET REFERENCED TOKENS

Issuers of ARTs need to consider the criteria on significant ARTs in order to be prepared to comply with the related additional obligations set in MiCAR. Under any circumstance, if the ART complies with at least three of the characteristics of a significant token, it will be classified as such. The following are some of these characteristics:

  • The size of the client base of the asset referenced token is greater than 10 million;
  • The value of the ART issued, its market capitalisation (if any) or the size of the reserve of assets of the issuer of the ART exceeds EUR 5 billion;
  • The issuer of the ART is a central platform service provider designated as a gatekeeper under the Digital Markets Regulation.

The CAs have the obligation to report to the EBA the information about the significant ARTs at least twice a year. The EBA will make the final decision and will notify the issuers of such tokens.

The main consequences for the issuers of significant ARTs will be to comply with additional obligations related to the remuneration policy, assessment, and monitoring of liquidity needs or to hold an average amount of reserves of at least 3%.

Subsequently, issuers of ARTs must carefully assess the criteria that could classify ARTs as significant, taking into account the period during which the CA must report to the EBA.

ARTs may be classified as significant as long as they meet at least three of the following criteria:

  • The size of the client base of the asset-referenced token is greater than 10 million;
  • The value of the ART issued, its market capitalisation (if any) or the size of the reserve of assets of the issuer of the ART exceeds EUR 5 billion;
  • The average number and aggregate value of transactions in that ART per day during the relevant period, is higher than 2.5 million transactions and EUR 500 million respectively;
  • The issuer of the ART is a central platform service provider designated as a gatekeeper under the Digital Markets Regulation;
  • The importance of the activities of the issuer of the ART on an international scale, including the use of the ART for payments and remittances;
  • The interconnectedness of the ART or its issuers with the financial system;
  • The fact that the same issuer issues at least one additional ART or e-money token, and provides at least one crypto-asset service.

In this regard, ARTs will be classified as significant during two possible periods covered by:

  • The first report of information submitted by the CA to the EBA; or
  • At least two consecutive reports of information submitted by the CA to the EBA.

Therefore, if the EBA considers the ARTs to be significant, it will prepare a draft decision to that effect and notify the issuers, making its final decision within 60 working days.

The consequences to be classified as significant ARTs is that ARTs’ issuers will have the subsequent additional obligations:

  • Adopt a remuneration policy that promotes sound and effective risk management;
  • A duty on issuers to ensure that these ARTs can be held in custody by different crypto-asset service providers authorised for providing custody and administration of crypto-assets on behalf of clients;
  • A duty to assess and monitor the liquidity needs to meet potential redemption requests. Thus, issuers of significant ARTs must establish, maintain and implement a liquidity management policy and procedures;
  • Conduct liquidity stress testing on a regular basis; and
  • Increase of the average amount of reserve assets to 3%.

Additionally, it should be noted that issuers applying for authorisation should indicate in their application that they wish to classify their ARTs as significant tokens, and demonstrating, by providing their programme of activities, that the requirements to be considered significant tokens will be met.

6. Conclusion

MiCAR regulates for the first time the issuance of ARTs, which will change the entire EU crypto-asset market, including the need to comply with new regulatory obligations. Issuers of ARTs must take into consideration the requirements and obligations set out in this article.

For more information and legal support, contact your usual CMS professional or the CMS experts who contributed to this article: Jaime Bofill, María Luisa Ruiz Campos, Sara Piñero Mosquera, Rodrigo Pérez Gil, Karsten Bruinsma, Kilian Rowel, Katerina Hristova, Katarzyna Biszczanik, Marek Milwicz vel Delach, or send an email to crypto@cmslegal.com.

For other articles in the series “Legal experts on Markets in Crypto-Assets (MiCA) regulation”, click here: Legal experts on Markets in Crypto-Assets (MiCA) regulation (cms.law). For more information on crypto regulation before the introduction of MiCA, please visit CMS Expert Guide to European Crypto Regulation.