The Regulation on Markets in Crypto-assets (MiCAR) seeks to regulate a broad range of crypto-related products and services that do not currently fall within the scope of existing EU financial services legislation. It does not apply, for example, to crypto-assets that qualify as financial instruments, as defined in the second Markets in Financial Instruments Directive (MiFID II) (as amended). As such, MiCAR is complementary to existing EU financial services legislation.

MiCAR aims to create a dedicated and harmonised EU regulatory framework for in scope crypto-assets and related activities and services. Persons that are engaged in providing these in scope activities and services in the European Union fall within the scope of MiCAR, unless specifically exempted. Digital assets that do not fall within the definition of crypto-assets, such as central bank digital currencies or digital representations of fiat currencies, are not covered by MiCAR.

This second instalment of our '”MiCAR under the microscope”' bulletin series provides a more in-depth analysis of the scope of MiCAR and how it applies to different types of crypto-assets and activities. In future bulletins in this series, we will be looking at the licensing requirements of crypto-asset service providers (CASPs), the issuance and marketing of crypto-assets, and the market abuse and AML regimes applicable to crypto-assets.

What crypto-assets are in and out of scope?

In scope assets

MiCAR applies to a wide range of currently unregulated crypto-assets. It clarifies the definition and classification of crypto-assets to ensure fair competition, consistent regulation, and high protection for the EU crypto-asset market and its participants, including crypto-asset issuers, CASPs, investors, and consumers. The EU legislator has adopted a flexible definition of crypto-assets that can adapt to future innovation and technology. Pursuant to article 3(1)(5) of MICAR:

‘crypto-asset’ means ‘a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology’.

This definition has three key elements:

1. A digital representation of value or rights, means an electronic, non-tangible representation of a value or a right, meaning that crypto-assets can serve various economic, legal or social purposes, such as a medium of exchange, a store of value, a unit of account, a claim on an issuer or a network, or a way of accessing a service or a platform. This includes external, non-intrinsic value attributed to a crypto-asset by the parties concerned or by market participants, meaning the value is subjective and based only on the interest of the purchaser of the crypto-asset;
2. Able to be transferred and stored electronically, which means crypto-assets can be exchanged, held or moved between parties (e.g. across different platforms, networks or jurisdictions, and with varying levels of liquidity, interoperability and regulation); and
3. Using Distributed ledger technology (DLT) (or similar technology) which means a technology that enables the operation and use of a distributed ledger, such a distributed ledger being an information repository that keeps records of transactions and that is shared across and synchronised between a set of DLT network nodes using a consensus mechanism).

This flexible definition encompasses a wide range of tokens, coins and other digital assets that all fall within the scope of MiCAR.

Three types of crypto-assets in MiCAR are subject to specific requirements depending on their risks:

• Asset-referenced tokens (ARTs), which aim to keep a stable value by referencing another value or right or a combination thereof, including one or more official currencies.

ARTs are a type of crypto-asset that aim to preserve a stable value by referencing specific assets, such as commodities, financial instruments (including transferable securities) or other crypto-assets. They can also reference other rights, such as claims, obligations, or a combination of assets and rights, which may include more than one fiat currency. However, a crypto-asset that references only one fiat currency is not an ART, but an EMT, as it falls under the definition of electronic money. The treatment of an ART referencing to exclusively one financial instrument should be considered carefully so as to ensure it would not become an excluded crypto-asset (falling instead under the scope of MiFID). Therefore, ARTs can have various forms and features, depending on their underlying references;

• Electronic money tokens or e-money tokens (EMTs), which are crypto-assets, the main purpose of which is to be used as a means of exchange, and that purport to maintain a stable value by referencing the value of a fiat currency.

EMTs are a type of digital token that mimic the role of coins and banknotes for making payments (like traditional e-money). Unlike ARTs, which represent a claim on a basket of assets or rights, EMTs are pegged to a single official currency. To qualify as an EMT, a token must (i) reference the value of one – and only one – official currency, such as the euro or the dollar and (ii) enable payment transactions with counterparties other than just the issuer; and

• Utility tokens (Utility Tokens), are crypto-assets which are intended to provide digital access to a good or service, available on DLT, and accepted only by the issuer of that token.

Utility Tokens are a type of crypto-asset that do not fall under the categories of EMTs or ARTs, but rather serve as a means of accessing a specific good or service offered by the issuer. For instance, utility tokens can be used to buy tickets, vouchers or memberships.

These three sub-categories do not encompass the entire scope of ‘crypto-asset’, as defined in MiCAR. Crypto-assets that do not fit into any of these sub-categories, but still meet the general definition of ‘crypto-asset’ as set out above, will fall within the scope of MiCAR.

Out of scope assets

As mentioned above, MiCAR does not cover crypto-assets that are already regulated by existing EU laws, such as those that qualify as financial instruments, deposits, funds, securitisations, or insurance and pension products.

Other digital assets that are out of scope are:

• Non-transferable digital assets (recital 17 MiCAR). Digital assets that cannot be transferred to other holders do not qualify as crypto-assets under MiCAR. Therefore, digital assets that are accepted only by the issuer or the offeror and that are technically impossible to transfer directly to other holders are excluded. An example of such digital assets includes loyalty schemes where the loyalty points can be exchanged for benefits only with the issuer or offeror of those points.
• Free crypto-assets (recital 26 MiCAR). Free crypto-assets and crypto-assets (other than ARTs or EMTs) that are automatically generated as a reward for contributing to a distributed ledger or validating transactions in a consensus-based system. This includes crypto-assets generated as staking rewards for verifying and securing transactions on a proof of stake blockchain. The granting of loans in crypto-assets is also not included MiCAR, however in practice these custody or payments services in connection with the granting of such loans will be subject to regulation.
• NFTs. MiCAR also largely excludes non-fungible tokens (NFTs), which are unique and non-fungible crypto-assets (we discuss this in more detail below).

Close up: Non-fungible Tokens

NFTs have found a wide range of uses in the Web 3 environment, representing everything from art and collectibles (both digital and physical) to digital identities and legal/contractual rights. Article 2(3) of MiCAR states that:

This Regulation does not apply to crypto-assets that are unique and not fungible with other crypto-assets.

The recitals of MiCAR provide commentary on how this exclusion (the NFT Exclusion) should apply. Recital 10 of MiCAR states that:

• Unique and not fungible crypto-assets include digital art and collectibles. “The value of such unique and non-fungible crypto-assets is attributable to each crypto-asset’s unique characteristics and the utility it gives to the holder of the token”;
• “Crypto-assets representing services or physical assets that are unique and non-fungible, such as product guarantees or real estate” are also within scope of the NFT Exclusion; and
• Unique and non-fungible crypto-assets may be traded and accumulated speculatively, but “are not readily interchangeable and the relative value of one such crypto-asset in relation to another, each being unique, cannot be ascertained by means of comparison to an existing market or equivalent asset”.

Conversely, Recital 11 of MiCAR states that:

• Fractions of a unique and non-fungible crypto-asset do not benefit from the NFT Exclusion;
• “The issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered an indicator of their fungibility”;
• “The mere attribution of a unique identifier to a crypto-asset is not, in and of itself, sufficient to classify it as unique and non-fungible. The assets or rights represented should also be unique and non-fungible in order for the crypto-asset to be considered unique and non-fungible”;
• A crypto-asset which benefits from the NFT Exclusion may still qualify as a financial instrument and therefore be subject to other EU regulations; and
• The NFT Exclusion does not apply to crypto-assets that appear to be unique and non-fungible, if their “de facto features” or the “features that are linked to their de facto uses, would make them either fungible or not unique”. Regulators “should adopt a substance over form approach whereby the features of the crypto-asset in question determine the classification and not its designation by the issuer.”

Despite the framing of the NFT Exclusion, it is not clear from the recitals that ‘unique’ and ‘not fungible’ are independent tests. Additionally, the recitals suggest that a crypto-asset’s features as a whole, and its practical use, will determine whether it benefits from the NFT Exclusion. Together, these features of the test make it difficult to apply with certainty in practice, but it appears that the following attributes of a crypto-asset will affect whether the NFT Exclusion applies:

• Is the crypto-asset or the off-chain asset it represents truly unique? ‘Uniqueness’ does not appear to apply simply on the basis of a technical distinction from other crypto-assets (like a unique identifier), and appears to require the crypto-asset or off-chain asset to be regarded as unique and held for that reason, like digital art or collectibles.
• Is the crypto-asset readily interchangeable with others of the same or equivalent kind? A crypto-asset is interchangeable if, in practice, an obligation to present that crypto-asset can be satisfied by the presentation of any one of its kind.
• Are there enough crypto-assets of that kind in circulation that they can be given a ‘market value’? If a ‘large series or collection’ of a crypto-asset is in circulation, it is more likely that each is regarded as being interchangeable with one another.
• Has the NFT been fractionalised? If so, the fractions of the NFT will not be regarded as NFTs themselves.

Importantly, Utility Tokens are not subject to the NFT Exclusion, unless the service is unique and not fungible. This may be the case even where each crypto-asset representing the holder’s right to receive the service is unique, so as to function as a log-in credential. MiCAR has a small number of rules which apply specifically to Utility Tokens.

A crypto-asset that is described as an NFT can fall within scope of regulation in a number of ways:

• It may be within scope as a generic ‘crypto-asset’, which has the broad definition set out above;
• As noted in this section, MiCAR applies a small number of additional rules to crypto-assets which are Utility Tokens;
• Where a crypto-asset purports to maintain a stable value by referencing another value or right (and where neither the crypto-asset nor the reference asset/right are unique and non-fungible), the crypto-asset may be regulated as anART, as explained above;
• Beyond MiCAR, an NFT may be subject to other EU financial services regulation, for example, if it is deemed to constitute a unit in a collective investment scheme – this is a particular risk for ‘fractionalised’ NFTs.

Of course, it is worth remembering that the mere use of software to mint a crypto-asset (e.g. for personal use) does not necessarily constitute an offer or the provision of a crypto-asset service within the scope of MiCAR. Perhaps in recognition of the continued uncertainty as to how EU regulation applies to NFTs, the European Securities and Markets Authority (ESMA) will issue guidelines on where crypto-assets that are otherwise considered unique and not fungible with other crypto-assets might qualify as financial instruments.

What activities are in scope and out of scope?

In scope activities

MiCAR regulates the provision of services of crypto-assets, which can only be provided by authorised legal persons established in the EU or certain financial institutions.

MiCAR covers the following crypto-asset services:

• Providing custody and administration of crypto-assets on behalf of clients: storing or controlling crypto-assets or the access keys to them, such as private cryptographic keys, on behalf of clients (Article 3(1)(17) MiCAR).
• Operation of a trading platform for crypto-assets: operating one or more systems that allow or facilitate the connection of multiple crypto-asset buyers and sellers, and enable them to trade according to the system’s rules, either by exchanging crypto-assets for money or for other crypto-assets (Article 3(1)(18) MiCAR).
• Exchange of crypto-assets for funds or other crypto-assets: buying or selling crypto-assets from or to clients for money or other crypto-assets using the firm’s own funds (Article 3(1)(19) and 20) MiCAR).
• Execution of orders for crypto-assets on behalf of clients: entering into contracts, on behalf of clients, to buy or sell one or more crypto-assets or to subscribe for one or more crypto-assets, and includes selling crypto-assets when they are offered to the public or admitted to trading (Article 3(1) (21) MiCAR).
• Crypto-asset placement: involves promoting crypto-assets to potential buyers on behalf of, or for the benefit of, the issuer or a related party (Article 3(1)(22) MiCAR). Unlike the placement of financial instruments under MiFID II, which can be done with or without a firm commitment from the intermediary, crypto-asset placement is a purely marketing service that is offered to the issuer of crypto-assets.
• Reception and transmission of orders for crypto-assets on behalf of clients: taking an order from a person to buy or sell one or more crypto-assets or to subscribe for one or more crypto-assets and passing that order to a third party for execution (Article 3(1)(23) MiCAR).
• Providing advice on crypto-assets: offering, giving or agreeing to give personalised recommendations to a client, either at the client’s request or on the CASP’s own initiative, about one or more transactions involving crypto-assets, or the use of crypto-asset services (Article 3(1)(24) MiCAR).
• Crypto-asset portfolio management: involves managing client portfolios on a discretionary basis, according to the client’s mandate, when the portfolios include one or more crypto-assets (Article 3(1)(25) MiCAR).
• Crypto-asset transfer services: involves transferring crypto-assets from one distributed ledger address or account to another on behalf of a natural or legal person (Article 3(1)(26) MiCAR).

CASPs must be authorised by obtaining a licence from the relevant national supervisory authority to offer their services in a specific jurisdiction and the EU. Persons that already hold a licence as a credit institution, central securities depositary, investment firm, market operator, electronic money institution, UCITS manager or alternative investment fund manager, require a registration with their home Member State competent authority instead of a full licence (subject to certain restrictions and requirements).

The licence requires CASPs to meet high standards of fitness, propriety, governance and prudence, including minimum capital requirements. CASPs must also have qualified managers and robust anti-money laundering and counter-terrorist financing measures. Furthermore, CASPs must follow conduct of business rules that ensure transparency, fairness, honesty and professionalism towards their clients, and avoid or manage conflicts of interest. Lastly, CASPs must have sound organisational practices, such as effective risk management, internal control and security systems, and safeguards for clients’ funds and crypto-assets. We will discuss the licensing and registration of CASPs in more detail in our “MiCAR under the microscope” bulletin that will be published in September 2023.

MiCAR does not (yet) contain an equivalence regime for entities providing crypto-asset services, issuers of ARTs or issuers of EMTs from third countries. Consequently, each person – irrespective of their place of residency – providing crypto-asset services or offering ARTs or EMTs in the European Union falls within the scope of MiCAR (unless specifically exempted).

Nevertheless, where a third-country firm provides crypto-asset services at the own initiative of a client, such crypto-asset services and the relationship specifically relating to the provision of that crypto-asset service, the third-country firm may benefit from the reverse solicitation exemption under Article 61 of MiCAR. A few observations on this reverse solicitation exemption under MiCAR:

• A service is not considered to be provided on the client’s own initiative where a third‐country firm (including through an entity acting on its behalf or having close links with such third‐country firm or any other person acting on behalf of such entity) solicits clients or prospective clients in the European Union, regardless of the means of communication used for the solicitation, promotion or advertising.
• We would expect that in practice every communication means used such as press releases, advertising on the internet, brochures, phone calls or face-to-face meetings will be relevant to determine if the client or potential client has been subject to any solicitation, promotion or advertising in the European Union.
• The client’s own exclusive initiative shall be assessed in concreto on a case by case basis, regardless of any contractual clause or disclaimer purporting to state otherwise, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client.
• A client’s own exclusive initiative shall not entitle a third‐country firm to market new types of crypto-assets or crypto-asset services to that client. The reverse solicitation exemption is based on the premise that the product or service is marketed at the client´s own exclusive initiative and can only be applied to the specific crypto-asset service requested. A third-country firm cannot market new categories of crypto-asset services to the client. With due regards to ESMA’s views on reverse solicitation under MiFID II, we would expect that when providing a one-off crypto-asset service to a client, the third-country firm may not sell to that client a service from the same category. This may be different if requested to do so by the client at its own exclusive initiative and only at the time the client asks for an investment product or service.
• Firms may want to put in place arrangements enabling them to retrace and keep records of the steps of their interaction with clients, to be able to demonstrate whether the services provided were indeed on the client’s own initiative.

By 30 December 2024, ESMA will issue guidelines to specify the situations in which a third-country firm is deemed to solicit clients established or situated in the European Union. ESMA’s consultation paper on reverse solicitation is expected in Q1 2024.

Out of scope activities

As set out above, MiCAR aims to create a common EU framework for crypto-asset services, but it does not cover all activities or services involving crypto-assets.

Some services or activities involving crypto-assets are outside the scope of MiCAR, such as:

• Offers of Utility Tokens that can only be used to buy existing goods or services, or that are restricted to a small network of agreed merchants (limited network exemption, LNE). The LNE does not apply to (i) crypto-assets representing stored goods that are not intended to be collected by the purchaser following the purchase; and (ii) crypto-assets that are typically designed for a continuously growing network of service providers.
• Offers of crypto-assets, other than asset-referenced tokens or e-money tokens, that meet certain conditions, such as targeting fewer than 150 people or entities per Member State, raising less than EUR 1,000,000 in a year, or being only for and held by qualified investors. In these cases, the offeror must be a legal entity and follow some conduct rules, but does not need to publish a whitepaper.
• Crypto-asset services that are fully decentralised, meaning that no intermediary is involved at any stage. As recital 22 of MiCAR explains: “Where crypto-asset services are provided in a fully decentralised manner without any intermediary, they should not fall within the scope of MiCAR”. However, if an intermediary is part of the service, even if the rest is decentralised, MiCAR applies. As such, interface providers or other actors operating in a decentralised environment (e.g. Web3) may not necessarily be out of scope of MiCAR, though this very much depends on the services and activities these persons in fact carry out.
• Although MiCAR does not contain a specific exemption for services provided by technical service providers (as there is under the second Payment Services Directive), according to recital 83, MiCAR does not regard hardware and software providers of non-custodial wallets (i.e. cold wallets), which are tools that let users store and manage their crypto-assets themselves without entrusting their private keys to a third-party intermediary, as CASPs. Therefore, they do not have to comply with the regulatory requirements and obligations that MiCAR imposes on CASPs. This is because non-custodial wallet providers do not carry out any of the activities that MiCAR lists as crypto-asset services in Article 3(1)(16) of MiCAR, such as custody, exchanging, trading, or advising on crypto-assets. Instead, they only offer technical solutions that enable users to access and use their own crypto-assets securely and conveniently.

Crypto-asset services that are provided within the same group of entities are exempted, as are crypto-asset services provided by the ECB an central banks of EU Member States when acting in their capacity as monetary authorities, or crypto-asset services provided by other public authorities, the European Investment Bank and its subsidiaries, the European Financial Stability Facility and the European Stability Mechanism and public international organisations (Article 2(2) MiCAR).

What is next?

The scope of MiCAR is a key aspect of the EU’s attempt to create a harmonised and innovation-friendly framework for crypto-assets and their service providers. However, the legislator is aware that the crypto-asset market is dynamic and evolving, and that the scope of MiCAR may need to be adjusted in the future to reflect new developments and risks. Therefore, MiCAR envisages a regular assessment of its scope and effectiveness.

Specifically, MiCAR requires the European Commission to provide a report by 30 December 2024 on the latest developments with respect to crypto-assets, accompanied, where appropriate, by a legislative proposal. This report will contain:

• An assessment of the development of decentralised finance in markets in crypto-assets and of the appropriate regulatory treatment of decentralised crypto-asset systems without an issuer orCASP, including an assessment of the necessity and feasibility of regulating decentralised finance;
• An assessment of the development of markets in unique and non-fungible crypto-assets and of the appropriate regulatory treatment of such crypto-assets, including an assessment of the necessity and feasibility of regulating offerors of unique and non-fungible crypto-assets, as well as providers of services related to such crypto-assets; and
• An assessment of the necessity and feasibility of regulating lending and borrowing of crypto-assets.

By 30 June 2025, the European Commission must present an interim report on various other subjects under MiCAR, including:

• An assessment of whether the scope of crypto-asset services covered by MiCAR is appropriate and whether any adjustment to the definition of crypto-asset services is needed or any additional innovative crypto-asset forms need to be included in the scope of MiCAR; and
• An assessment of whether an equivalence regime should be established under MiCAR for entities providing crypto-asset services, issuers of ARTs or EMTs from third countries.

Recently the European Banking Authority and ESMA have published their first consultation papers on MiCAR. The second consultation package is expected in October 2023 and the third package in Q1 2024. This consultation process is an opportunity for stakeholders to provide feedback and input on the design and implementation of MiCAR, and to contribute to the development of a sound and resilient crypto-asset sector in the EU.