Classification of crypto-assets – providing legal opinions for MiCA and MIFID II purposes

Regulation (EU) 2023/1114 of the European Parliament and of the Council on markets in cryptoassets (“MiCA Regulation“) represents a significant step in the regulation of cryptoassets at the European Union level. The MiCA Regulation aims to ensure uniform rules for cryptoasset issuers and cryptoasset service providers, enhance investor protection and promote innovation and stability in financial markets.

Classification of crypto-assets under the MiCA Regulation

Cryptoassets represent a wide range of digital assets that can be classified based on different criteria, for example, depending on their characteristics, purpose or regulatory requirements.

The MiCA regulations are based on a basic classification of crypto-assets into:

• Crypto-assets other than asset-linked tokens or electronic money tokens;

• Asset-linked tokens (eng. asset-referenced tokens (“ART“) e.g. Pound); and

• Electronic money tokens (“EMTs“) e.g. USDT).

Such a classification of cryptoactives is not an end in itself. Indeed, from the issuer’s perspective, the correct classification of a cryptoasset into one of the three categories of cryptoassets mentioned above is a key element, as the MiCA Regulation provides separate regulation for each of these categories of cryptoassets, which also significantly affects the issuer’s overall obligations when issuing a cryptoasset. However, how does one properly classify a cryptoasset?

Tokenomics and its use in cryptoasset classification

Tokenomics is a term that originated from the English term tokenomics, which is a combination of the words token and economics. The essence of tokenomics is the study and analysis of the economic aspects of a cryptoasset, with a particular focus on how it functions and is distributed. Tokenomics examines a number of factors of cryptoassets, including, but not limited to:

• The supply of a cryptoasset – e.g. total, initial, current, or whether it is limited or unlimited;

• Utility ofthe cryptoasset – the actual use of the cryptoasset is assessed, for example whether it has different characteristics compared to competitors; or

• Distribution of the cryptoasset – takes into account, for example, whether the cryptoasset is primarily targeted at qualified investors or retail investors.

The above calculation is for illustrative purposes only and is far from definitive. The correct use of tokenomics already in the pre-release process of a cryptoasset can significantly enhance and even prove the correctness of its classification.

Why is the correct classification of cryptoactives important?

At first glance, the classification of cryptoassets may appear to be relatively straightforward. In our experience, the classification of cryptoassets can be more complex than it first appears, particularly given that some cryptoassets may also be classified as financial instruments under MIFID II[1], which has the effect of excluding them from the scope of the MiCA Regulation[2].

As the MiCA Regulation classifies cryptoassets into several categories, it is necessary to be able to classify the cryptoasset correctly in the first place, as the issuer’s next steps will depend on the classification of the cryptoasset.

For example, if a crypto-asset were classified as an ART, the MiCA Regulation would even require that the application for a licence to offer such a crypto-asset include a legal opinion confirming that the crypto-asset in question:

• not classifiable as an EMT; and

• is not excluded from the scope of the MiCA Regulation.[3]

The legal opinion is an obligatory part (or annex) of the application and in its absence the competent authority (which in Slovakia is the National Bank of Slovakia) could not grant the application and decide on the granting of the permit.

The legal opinion should be sufficiently technical, comprehensive, precise and persuasive and clearly address why the cryptoasset is not an excluded financial instrument or EMT. On the one hand, in order to have the sufficient and required argumentative force, the legal opinion should be drafted by experts with extensive experience in the field and expertise not only in cryptoassets but also in financial regulation, in order to ensure also the quality of the assessment of the potential classification of the cryptoasset as a financial instrument.

In the case of crypto-assets other than asset-linked tokens or electronic money tokens, although a legal opinion is not directly required, the MiCA Regulation imposes an obligation to notify the competent authority (the National Bank of Slovakia) of the so-called “crypto-assets”. The MiCA is obliged to impose a white paper on crypto-assets on the authority of the Financial Supervisory Authority, which must include (among other things) an explanation as to why the crypto-asset described in the white paper should not be considered:

• a crypto-agent excluded from the scope of the MiCA Regulation;

• an electronic money token; or

• an asset-linked token.

The MiCA Regulation in this case only speaks of an “explanation”, which is part of the so-called. However, in terms of content, such an explanation may be more akin to a legal opinion required for ART, and therefore it is reasonable to believe that the use of legal services would also be beneficial for the applicant in this case.

Finally, the National Bank of Slovakia itself recommends that applicants for a MiCA Regulation licence are represented by a reputable law firm with experience in licensing proceedings conducted by the National Bank of Slovakia.

Remember that the MiCA Regulation applies in the European Union from 30.6.2024 in relation to ART and EMT and from 30.12.2024 in the rest, especially in relation to cryptoasset service providers.

At Highgate Group, we have been dealing with the regulation of cryptoassets for a long time and comprehensively, whether in the framework of taxation, in the field of tokenised financial instruments, by presenting at NBS conferences or by organising a conference on crypto, where we will take a closer look at this issue.

Our know-how in the area of financial regulation and the licensing procedures successfully completed so far before the National Bank of Slovakia provide us with highly qualified prerequisites for successful representation of clients in licensing proceedings for the activity of cryptoassets service providers (so-called CASP), in the preparation of the so-called “cryptoassets”. We are also able to assist in the preparation of white papers, in the preparation of legal opinions and classifications of cryptoassets or in applications for public offerings of tokens or their admission to trading.

If you are interested in this topic, please do not hesitate to contact us:

• Peter Varga, e-mail: peter.varga@highgate.sk

• Roman Baranec, e-mail: roman.baranec@highgate.sk

[1] Directive (EU) 2014/65/EU of the European Parliament and of the Council of 15. on markets in financial instruments amending Directive 2002/92/EC and Directive 2011/61/EU

[2] Article 2(4)(a) of the MiCA Regulation

[3] Thus, it cannot be classified as one of the exhaustively listed types of crypto-assets referred to in Article 2(4) of the MiCA Regulation