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An analysis of 525 pages of EU regulatory regulations: Only 3 types of encrypted assets are approved
Written by: Mori Goro
The full text of the "Regulations and Amendments of the European Parliament and Council on the Encrypted Asset Market" (hereinafter referred to as the "Regulations") issued by the European Union last week was published. This 525-page document defines the definitions of all keywords in the encryption industry. , and clarified the rights and obligations of all parties involved in the encryption industry and participants, and also introduced the responsibilities of regulatory agencies in detail.
ChainDD brings you an in-depth interpretation and detailed disassembly of this regulatory regulation. This article has been translated by DeepL, edited by ChainDD to condense the excerpts, and put forward analysis for readers and provide reference. For the evaluation of this regulation, please refer to the previous article of ChainDD: [ChainDD Exclusive] The European Council passed the encryption regulatory framework MiCA, but it is already too late?
The regulations are divided into 9 parts, and each chapter sorts out all encryption-related fields (the page numbers in brackets are the original PDF page numbers, the page numbers in non-EU documents, and there is a 2-page difference between the EU marked page number and the PDF page number), including:
Accessories part includes:
**Which encrypted assets are recognized by the EU? **
The regulation divides encrypted assets into three categories, which should be distinguished from each other and subject to different requirements according to the risks they pose. Classification is based on whether a crypto asset seeks to stabilize its value with reference to other assets. The three categories are:
The first type includes crypto assets that aim to stabilize their value by referencing only one official currency. The function of this crypto-asset is very similar to that of electronic money as defined in Directive 2009/110/EC. Like e-money, this crypto-asset is an electronic alternative to coins and banknotes and may be used for payments. These encrypted assets shall be defined as "electronic currency tokens" for the purposes of this Regulation.
The second category of crypto-assets concerns "asset reference tokens" whose purpose is to stabilize their value by reference to another value or right, or a combination thereof, including one or several official currencies. The second type includes all other crypto assets other than e-money tokens whose value is backed by assets to avoid circumvention and make the regulation future-proof.
The third category includes cryptoassets other than asset reference tokens and e-money tokens, and covers a variety of cryptoassets, including utility tokens.
For NFT and non-transferable cryptoassets
This Regulation shall not apply to cryptographic assets that are unique and not interchangeable with other cryptographic assets, including digital artwork and collectibles. The value of this unique, non-fungible crypto asset is due to the unique characteristics of each crypto asset and the utility it brings to token holders. The regulation should also not apply to cryptographic assets representing services or physical assets, such as product warranties or real estate.
Digital assets that cannot be transferred to other holders do not fall within the definition of encrypted assets. Therefore, digital assets that are only accepted by the issuer or offeror and that are technically impossible to transfer directly to other holders should be excluded from the scope of this regulation.
Unregulated Encryption Field Participants
Exclude certain intra-group transactions and some public entities, such as the International Monetary Fund and the Bank for International Settlements. At the same time, digital assets issued by central banks acting in the capacity of monetary authorities, including central bank currency in digital form, or encrypted assets issued by other public authorities, including central, regional and local administrations, shall not be subject to the Union’s encrypted asset market frame. Nor should the related services provided by these central banks when acting in their capacity as monetary authorities or by other public authorities be subject to the Union framework.
Encrypted Asset Service Provider Obligations
This Regulation covers the rights and obligations of crypto asset issuers, offerors, persons seeking to enter into crypto asset transactions, and crypto asset service providers. All Offerors or persons seeking to accept a Transaction shall be legal persons.
An issuer of a crypto asset is an entity that has control over the creation of a crypto asset. (It is necessary to establish specific rules for entities providing services related to crypto-assets. The first category of services includes ensuring the operation of crypto-asset trading platforms, exchanging crypto-assets for funds or other crypto-assets, providing custody and management of crypto-assets on behalf of customers, and providing transfer services of encrypted assets on behalf of clients. The second category of services includes placing encrypted assets, receiving or transmitting orders for encrypted assets on behalf of clients, executing orders for encrypted assets on behalf of clients, providing advice on encrypted assets and providing investment portfolios of encrypted assets Administration. Any person who professionally provides crypto-asset services under this Regulation shall be considered a "crypto-asset service provider".
This Regulation shall apply to natural and legal persons and certain other businesses, and to cryptoasset services and activities which they directly or indirectly engage in, provide or control, including where some such activities or services are conducted in a decentralized manner. If cryptoasset services are provided in a fully decentralized manner without any intermediaries, they should not fall within the scope of this regulation.
Those exchanges and coin-issuing institutions that claim to be "decentralized" and "without offices around the world" should not be recognized by the European Union, because the European Union stipulates that at least one director of a legal person needs to settle in the European Union. In order to achieve effective supervision and eliminate the possibility of evading or circumventing supervision, crypto-asset services can only be provided by legal persons having a registered office in the Member State in which they carry out substantive commercial activities, including the provision of crypto-asset services. Unincorporated businesses, such as business partners, should also be allowed to provide crypto asset services under certain conditions. The place of effective management of an encrypted asset service provider shall be in the EU, and at least one director shall reside in the EU.
Obligations of currency issuers and exchanges to publish white papers
In the EU, when making an offer to the public of encrypted assets other than asset reference tokens or electronic currency tokens, or when seeking permission to trade in such encrypted assets, the offeror or the person seeking permission to trade shall formulate and notify its supervisor Department and publishes an information document ("Crypto Asset White Paper") containing mandatory disclosures.
The regulation further provides that a cryptoasset white paper shall contain all of the following information: (a) information about the offeror or person seeking admission to the transaction; (b) information about the issuer, if different from the offeror or person seeking admission to the transaction;( c) information about the trading platform operator, if the operator has developed a crypto asset white paper; (d) information about crypto asset projects; (e) information about making crypto assets available to the public or allowing them to be traded; (f) about information on crypto-assets; (g) information on the rights and obligations of crypto-assets; (h) information on the underlying technology; (i) information on risks; (j) information on the climate impact of consensus mechanisms used to issue crypto-assets; Information on key adverse effects and other environment-related adverse effects. If the encrypted asset white paper was not drafted by the person mentioned in the first point (a), (b) and (c), the encrypted asset white paper should also include the identity of the person who drafted the encrypted asset white paper and the reason for drafting by that particular person.
The regulations provide a comprehensive and detailed explanation of the drafting and content of the white paper, and there are many detailed regulations. For example, the title page needs to be marked with a statement that "this encrypted asset white paper has not been approved by the competent authority of any member state of the European Union. shall be fully responsible for the content of the website”, and shall not carry out dissemination and marketing before the publication of the white paper. For details, please refer to the content published on the official website of the European Union: "Regulations and Amendments of the European Parliament and Council on the Encrypted Asset Market" full text PDF: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/
The encrypted asset white paper, including its summary, and the operating rules of the encrypted asset trading platform shall be drafted in at least one of the official languages of the home country and any host member state, or in a language commonly used in the international financial field. At the time of the adoption of this Regulation, English was the commonly used language in the international financial arena, but this may change in the future.
In order not to overburden small and medium-sized enterprises, the following circumstances can be exempted from the obligation to draft a white paper on encrypted assets, but they can choose to provide it voluntarily:
(a) an offer to fewer than 150 natural or legal persons per member state acting in their own name;
(b) within 12 months from the start of the offer, the total consideration for offering cryptoassets to the public within the Union does not exceed EUR 1,000,000, or an equivalent amount in other official currencies or cryptoassets;
*(c) An offer of a crypto-asset to accredited investors only, and the crypto-asset may only be held by such accredited investors. *
And if a certain encrypted asset has already been approved by the trading platform in the EU, there is no need to submit the white paper again.
Another important thing for the currency issuer is to have sufficient asset reserves. The regulations stipulate that issuers of electronic currency tokens shall have a recovery and redemption plan (Chapter VI of the Regulations is a redemption plan) to ensure that the rights of electronic currency token holders are protected when the issuer fails to meet its obligations . However, the regulations also stated that the reserves can be used for financial investments with low risk and high liquidity.
Chapter 5 of the regulations is a detailed description of the obligations of encrypted asset service providers, including not granting interest when providing encrypted asset services related to asset reference tokens, and the evaluation of providers, etc. repeat.
Stricter requirements for exchanges
Membership of a governing body for a crypto-asset service provider should be appropriate, in particular not to have been convicted of any offenses related to money laundering or financing of terrorism or any other offense that would affect its good reputation. And it is also necessary to consider whether the shareholders and members have previously had illegal activities or were controlled by the government of a third country. Encrypted asset service providers should employ management and staff with sufficient knowledge, skills and expertise.
For encrypted asset service providers operating encrypted asset trading platforms, there are more requirements. In addition to maintaining transaction transparency, they must also ensure on-chain and off-chain settlement of transactions executed on the trading platform, and ensure timely settlement. Settlement of trades shall be initiated within 24 hours of execution of the trade on the trading platform.
The European Union's defensive conservative regulatory framework
The content of the document is extremely detailed, and ChainDD learned that only a week later, the Hong Kong Securities and Futures Commission (SFC) issued the "Proposal for Operators of Virtual Currency Trading Platforms Licensed by the Securities and Futures Commission" "Consultation Summary of Regulatory Regulations", ChainDD has also dismantled it in detail. For details, please refer to the previous article of ChainDD: [ChainDD Exclusive] This article interprets the 324-page new regulation of Hong Kong's encryption transaction supervision regulations: one currency, one due diligence, Stablecoins are not tradable.
Compared with Hong Kong, the EU mainly regulates the obligations of service providers such as encrypted asset regulators, issuance and trading, but does not provide detailed regulations for investors, which is very different from Hong Kong's "compliant investors". It also reflects the fundamental difference in the nature of the two regulations.
Hong Kong’s regulatory framework generally promotes the development of encryption technology and encourages innovation, but is limited by the various participants who provide suggestions (received more suggestions from investment institutions and exchanges), and the content is more biased. The European Union is more comprehensive, but as ChainDD mentioned before, it took three years for the EU’s regulation to pass from filing to approval. In fact, this regulatory regulation also includes constant revisions, but overall, it is still a kind of An extremely conservative defensive regulatory framework, which is why the EU regulatory framework has been ridiculed as "before it is announced, it is already behind."