In response to the rapid growth of blockchain technology and the increasing adoption of crypto-assets, which posed significant challenges for regulatory systems, the European Union introduced the Markets in Crypto-Assets Regulation (MiCA) to establish a harmonized regulatory framework across its Member States.
Among the various categories of crypto-assets covered by MiCA, utility tokens occupy a unique position, raising specific regulatory challenges for issuers and market participants alike. The Regulation aims to strike a balance between fostering technological innovation and ensuring consumer protection, market transparency, and financial stability introducing comprehensive guidelines for their issuance and use.
Understanding utility tokens
According to the definition provided by MiCA, utility token should be understood as a type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer. While examining the text of the Regulation, it becomes evident that the legislator has categorized utility tokens as crypto-assets other than asset-reference tokens or e-money tokens.
In its explanation, ESMA clarified the essential traits defining the token’s utility. Therefore, national competent authorities and market participants should consider that a utility token must enable practical or functional use within a DLT-based ecosystem or similar technological framework. While a utility token may include governance rights , it should not replicate the rights attached to financial instruments, particularly those linked to transferable securities as defined under MiFID II.
Thus, the characteristics that a token must meet to avoid being classified as a security include in particular:
At the same time, assets that integrate the functions of both a utility token and a security are often referred to as “hybrid tokens”. ESMA emphasises that national competent authorities and market participants should apply a tiered approach when classifying hybrid crypto-assets. This should involve a thorough evaluation to determine whether the crypto-asset qualifies as a financial instrument. If the hybrid token displays characteristics of a financial instrument, this feature should take priority in its classification. This evaluation should be the main consideration before exploring other potential classifications, such as utility tokens.
It is important to note that the expectation of a future profit is not in itself sufficient to qualify a crypto-asset as a financial instrument under EU law. However, this expectation, in conjunction with other relevant factors, could play a role in determining whether the crypto-asset falls within the scope of MiCA.
Offering tokens to the public: key requirements
The legal person willing to offer its utility token shall not obtain any special authorisation or permission from its national authorities. Instead, they are obliged to draw up a crypto-asset white paper, notify it to the competent authority in their Member State and publish it on their website. Yet, in doing so, offerors do not need to obtain any approval from competent governing bodies. Thus, this notification is required to form a special register of white papers of crypto-assets other than asset-reference or e-money tokens, governed by ESMA.
However, MiCA excludes from its regulation the offer of utility tokens providing access to a good or service that has already existed or has been in operation before the Regulation came into force. On the contrary, this provision does not apply where the offeror, or another person acting on the offeror’s behalf, makes known in any communication its intention to seek admission to trading of a crypto-asset other than an asset-referenced token or e-money token. In this case, the mentioned entities shall carry out their activities in accordance with the requirements set forth by MiCA.
Conclusion
The regulatory framework established by MiCA represents a significant step forward in creating clarity and consistency for utility tokens within the European Union. As such, MiCA presents both challenges and opportunities for utility token issuers, who must balance innovation with the potential regulatory risks.
The requirements imposed on utility token issuers aim to promote transparency, protect consumers, and mitigate risks associated with token offerings. At the same time, in this evolving context, the need for further clarification and guidance from regulatory authorities becomes apparent. As the utility token market grows and diversifies, continued dialogue between stakeholders and regulators will be essential to ensure that MiCA serves its intended purpose of fostering innovation while safeguarding consumer protection and market integrity.
Among the various categories of crypto-assets covered by MiCA, utility tokens occupy a unique position, raising specific regulatory challenges for issuers and market participants alike. The Regulation aims to strike a balance between fostering technological innovation and ensuring consumer protection, market transparency, and financial stability introducing comprehensive guidelines for their issuance and use.
Understanding utility tokens
According to the definition provided by MiCA, utility token should be understood as a type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer. While examining the text of the Regulation, it becomes evident that the legislator has categorized utility tokens as crypto-assets other than asset-reference tokens or e-money tokens.
In its explanation, ESMA clarified the essential traits defining the token’s utility. Therefore, national competent authorities and market participants should consider that a utility token must enable practical or functional use within a DLT-based ecosystem or similar technological framework. While a utility token may include governance rights , it should not replicate the rights attached to financial instruments, particularly those linked to transferable securities as defined under MiFID II.
Thus, the characteristics that a token must meet to avoid being classified as a security include in particular:
- it must not grant any financial rights related to profit, capital, or liquidation surplus of the company, thereby providing no ownership stake in the company’s equity.
- it must not grant voting rights to investors that would enable them to participate in the company’s decision-making process.
- an 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 integrate the functions of both a utility token and a security are often referred to as “hybrid tokens”. ESMA emphasises that national competent authorities and market participants should apply a tiered approach when classifying hybrid crypto-assets. This should involve a thorough evaluation to determine whether the crypto-asset qualifies as a financial instrument. If the hybrid token displays characteristics of a financial instrument, this feature should take priority in its classification. This evaluation should be the main consideration before exploring other potential classifications, such as utility tokens.
It is important to note that the expectation of a future profit is not in itself sufficient to qualify a crypto-asset as a financial instrument under EU law. However, this expectation, in conjunction with other relevant factors, could play a role in determining whether the crypto-asset falls within the scope of MiCA.
Offering tokens to the public: key requirements
The legal person willing to offer its utility token shall not obtain any special authorisation or permission from its national authorities. Instead, they are obliged to draw up a crypto-asset white paper, notify it to the competent authority in their Member State and publish it on their website. Yet, in doing so, offerors do not need to obtain any approval from competent governing bodies. Thus, this notification is required to form a special register of white papers of crypto-assets other than asset-reference or e-money tokens, governed by ESMA.
However, MiCA excludes from its regulation the offer of utility tokens providing access to a good or service that has already existed or has been in operation before the Regulation came into force. On the contrary, this provision does not apply where the offeror, or another person acting on the offeror’s behalf, makes known in any communication its intention to seek admission to trading of a crypto-asset other than an asset-referenced token or e-money token. In this case, the mentioned entities shall carry out their activities in accordance with the requirements set forth by MiCA.
Conclusion
The regulatory framework established by MiCA represents a significant step forward in creating clarity and consistency for utility tokens within the European Union. As such, MiCA presents both challenges and opportunities for utility token issuers, who must balance innovation with the potential regulatory risks.
The requirements imposed on utility token issuers aim to promote transparency, protect consumers, and mitigate risks associated with token offerings. At the same time, in this evolving context, the need for further clarification and guidance from regulatory authorities becomes apparent. As the utility token market grows and diversifies, continued dialogue between stakeholders and regulators will be essential to ensure that MiCA serves its intended purpose of fostering innovation while safeguarding consumer protection and market integrity.