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 crypto-assets (“MiCA”) represents a significant step in the regulation of crypto-assets at the European Union level. MiCA aims to ensure uniform rules for crypto-asset issuers and service providers, enhance investor protection, and promote innovation and stability in financial markets.

Classification of crypto-assets under MiCA

Prior to MiCA, crypto-assets represented a wide range of digital assets classifiable by different criteria including purpose and regulatory requirements.

MiCA sought to bring some order to the marketplace and establish basic crypto-asset classification categories:

• asset-referenced tokens (“ART”), e. g. Libra;

• e-money tokens (“EMT”), e. g. USDT; and

• crypto-assets other than ART or EMT.

For each of the above categories, MiCA sets different regulatory requirements. Applicable in the European Union from 30^th June 2024 in relation to ARTs and EMTs, MiCA shall apply for all other crypto-assets from 30^th December 2024.

Crypto-asset issuers are advised to proceed with caution when determining which category their crypto-asset falls in and how MiCA treats it.

Why is the correct classification of crypto-assets important?

It is essential to classify crypto-assets correctly. Failure to do so can result, at best, in wasted time re-classifying and reforming documentation. At worst, regulatory authorities may dismiss a crypto-asset issuer authorization. To further complicate matters, to the average layman, the classification process seems relatively straightforward. In our experience, it usually is not. For example, some crypto-assets may also be classified as financial instruments under MIFID II[1], meaning they are excluded from MiCA[2].

Thus, crypto-asset issuers should resolve the classification question as early in the process as possible as subsequent steps will depend on which category a crypto-asset falls into.

For example, if a crypto-asset is classified as an ART, MiCA requires a legal opinion confirming that the crypto-asset:

• is not an EMT; and

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

Such a legal opinion is an obligatory part of the application, without which the competent authority cannot grant the application.

Further, the legal opinion must be sufficiently professional, comprehensive, precise, and persuasive, and clearly address why the crypto-asset is not an excluded financial instrument or EMT.  It should be drafted by experts with extensive experience in the field and expertise not only with crypto-assets but also in financial regulation. The latter is to ensure the correct classification of the crypto-asset as a financial instrument.

In the case of crypto-assets other than ART or EMT, although a legal opinion is not directly required, MiCA requires crypto-asset issuers create a white paper explaining why that crypto-asset is not:

• a crypto-asset excluded from the scope of MiCA;

• an EMT; or

• an ART.

While MiCA merely requires an “explanation” included in the white paper, it likely will be more effective if that explanation is in the form of a legal opinion as well.

After all, the competent authorities themselves recommend that applicants for a MiCA licence should be represented by a reputable law firm with experience in licensing proceedings conducted by the regulatory authority.

But how should crypto-asset issuer properly classify a crypto-asset? The answer is tokenomics

Tokenomics is the study and analysis of a crypto-asset’s economic aspects particularly focusing on its functions and distribution. Specifically, tokenomics evaluates crypto-assets based upon numerous factors, including:

• supply  – e. g. initial, currently circulating, or total number of tokens for a given crypto-asset and whether it has a capped or uncapped total number;

• utility – what the crypto-asset is actually used for and how that use compares to its competitors; and

• distribution – whether sale of the crypto-asset is primarily targeted at qualified or retail investors.

Correctly using tokenomics even as early as a crypto-asset’s pre-issue stages is essential for ensuring correct classification and saving yourself a lot of time and headaches later in the process.

How can we help you

Highgate Group have extensive experience with crypto-asset regulation and can assist clients comprehensively whether in a taxation framework, in the field of tokenized financial instruments, presenting at conferences of Slovak national regulator, or organizing a crypto conferences.

Our know-how in the field of financial regulation and our successful licensing proceedings before the regulatory authority provide us with a highly qualified background for successful representation of clients in licensing proceedings for cryptp-asset service providers (CASP) activities, in the preparation of white papers, legal opinions and classifications of crypto-assets, 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 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU

[2] Section 2 (4) (a) of MiCA

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