Utility tokens in the EU and MiCA regulation: rules and risks

In response to the rapid development of blockchain technology and the increasing use of crypto assets, which have created significant challenges for regulatory systems, the European Union has introduced the Markets in Crypto-Assets Regulation (MiCA). It aims to establish a harmonized regulatory framework among EU member states.

Among the various categories of crypto assets covered by MiCA, utility tokens hold a special place and present specific regulatory challenges for issuers and market participants. The regulation seeks to strike a balance between fostering technological innovation and ensuring consumer protection, market transparency, and financial stability. To this end, comprehensive rules regarding their issuance and use are introduced.

Understanding Utility Tokens

According to the definition in MiCA, a utility token is a type of crypto asset intended solely to provide access to a product or service offered by the issuer. Analyzing the text of the Regulation, it becomes clear that the legislator classifies utility tokens as crypto assets that are neither asset-backed tokens nor electronic money tokens.

In its clarifications, ESMA has specified the key characteristics of a utility token. Accordingly, national competent authorities and market participants must consider that a utility token must provide practical or functional use within an ecosystem based on DLT or a similar technological structure. While a utility token may include governance rights, it must not replicate rights associated with financial instruments, particularly those related to transferable securities under MiFID II.

Thus, the characteristics that a token must adhere to in order to avoid classification as a security include, in particular:

• it must not provide financial rights related to profit, capital, or liquidation value of the company and must not provide an equity stake

• it must not grant voting rights to investors that allow participation in the decision-making process of the company

• the asset also cannot be classified as a utility token if its sole purpose is to provide participation in the profitability of one or more underlying assets without direct investment in those assets

At the same time, assets that combine the functions of a utility token and a security are often referred to as hybrid tokens. ESMA emphasizes that competent authorities and market participants should apply a phased approach when classifying hybrid crypto assets. This should include a thorough assessment to determine whether the crypto asset is a financial instrument. If a hybrid token exhibits characteristics of a financial instrument, this characteristic should take precedence in determining its status. Only after this can other possible classifications, including utility tokens, be considered.

It is important to note that the expectation of future profit alone is not sufficient grounds for classifying a crypto asset as a financial instrument under EU law. However, this expectation, combined with other factors, may influence the determination of whether the crypto asset falls under the regulation of MiCA.

Public Offering of Tokens: Key Requirements

A legal entity intending to publicly offer utility tokens is not required to obtain a separate authorization from national authorities. It must prepare a white paper for the crypto asset, notify the competent authority in its state, and publish it on its website. In this case, obtaining approval from the authority is not required. This procedure is necessary to form a special register of white papers for tokens that are not asset-backed tokens or electronic money tokens, which is managed by ESMA.

However, MiCA does not apply to the offering of utility tokens that provide access to products or services that already existed or were operational before the Regulation came into force. This does not apply in cases where the issuer or another person on its behalf communicates in any way about the intention to allow the token to be traded. In such a situation, the entities must act in accordance with the requirements of MiCA.

Conclusion

The MiCA regulatory framework is a significant step towards creating transparent and harmonized rules regarding utility tokens in the European Union. It presents both challenges and opportunities for issuers who must combine innovation with compliance with regulatory requirements.

The requirements for issuers of utility tokens are aimed at ensuring transparency, consumer protection, and reducing risks associated with token offerings. At the same time, with the growth and development of the utility token market, the need for further clarifications becomes evident. Dialogue between market participants and regulators will be key to ensuring that MiCA fosters innovation while also providing consumer protection and market integrity.