The European Supervisory Authorities (ESAs) have recently issued guidelines on the standardised test for the classification of crypto-assets under MiCAR, while ESMA has also just issued guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments.
Under Malta’s Virtual Financial Assets (VFA) framework, the Financial Instrument Test (FIT) served as a tool to determine whether a cryptocurrency was classified as a virtual token, financial instrument, e-money, or a virtual financial asset. This test operated through a process of exclusions, automatically designating any crypto-asset that did not fit into the first three categories as a regulated VFA under Maltese Law.
To guarantee a consistent categorisation of crypto-assets within the EU, the ESAs have created their own version of a classification mechanism, which largely emulates Malta’s FIT. This is a significant change and move towards an improved harmonised approach as MiCAR seeks to improve uniformity and lessen regulatory trade among EU Member States by streamlining the regulatory framework.
The new standardized test (hereinafter referred to as the ‘Test’) is designed to determine the regulatory classification of crypto-assets. This Test is particularly relevant for issuers, offerors, and operators of trading platforms who need to determine the classification of their crypto-assets to national regulators.
The Test works through a structured process, ensuring that each crypto-asset is strictly evaluated against key criteria to establish its classification under MiCAR.
The guidelines released by the ESAs also include templates for compliance to ensure transparency. These templates were introduced to further emphasise on the standardisation within the EU and are intended for issuers and offerors to accompany their submissions to national regulators. The standardised templates ensure that competent authorities receive consistent, detailed, and justified assessments.
Even though the MiCAR standardised test provides much needed clarity and harmonisation within the EU, crypto-asset issuers, offerors, and trading platforms still face certain challenges.
The requirement to conduct a case-by-case analysis and complete the standardised templates introduces additional compliance obligations.
Crypto-assets frequently include traits from several different categories, such as utility tokens, stablecoins, and security tokens. Deeper legal and technological assessments might be necessary for these so-called hybrid tokens. Indeed, the ESAs’ guidelines specify that a legal opinion is required in certain cases, and this must thus either be prepared by an in-house legal advisor or by external legal counsel.
Furthermore, despite the Test's efforts to standardise classification within the EU, some elements, such as exclusions for financial instruments, continue to be based on national interpretations of EU law. The different approaches to the national transposition of MiFID across EU Member States mean that there is no commonly adopted application of the definition of ‘financial instrument’ under MiFID in the EU.
Whilst this issue has been noted as a concern since the implementation of MiFID/MiFID II, practical consequences may emerge with the implementation of MiCAR regarding the classification of crypto-assets as financial instruments. Thus, ESMA has also issued specific guidelines in this regard in order to provide guidance on the qualification of crypto-assets as financial instruments that national competent authorities and financial market participants should consider.
There is no doubt that the Test will reshape the regulatory landscape for crypto-assets across the EU, particularly impacting the majority of EU Member States that did not have such a classification tool in place. MiCAR eliminates uncertainty for issuers and service providers by offering a precise and organised classification scheme. In a more stable regulatory environment, this enhanced regulatory certainty will support innovation and draw in investment.
Companies' ability to take advantage of regulatory differences among Member States is lessened by the harmonised framework. This reduction in regulatory arbitrage not only improves overall market integrity but also levels the playing field across the EU.
Crypto-assets are classified to guarantee that the proper protections and transparency mechanisms are in place. Better consumer protection for consumers will come from increased protections and more transparent disclosures.
MiCAR creates stringent compliance requirements, but it also offers a regulatory environment for creative thinking. A well-defined legal framework gives developers and innovators more assurance about the regulatory status of their crypto-assets.
These guidelines' overarching goal is to encourage classification convergence so that MiCAR can be applied consistently throughout the EU. Consequently, this is meant to mitigate the dangers of regulatory arbitrage, secure a level playing field, and improve protection. Issuers and service providers already operating under Malta’s VFA regime will certainly benefit from the previous experience and knowledge gained from classifying cryptocurrencies under the FIT.
The publication of the Test and its alignment with Malta’s well-established standards, continues to confirm that Malta is a jurisdiction of choice for issuers and service providers seeking to be regulated under MiCAR.
For information or assistance, please contact us at info@gtg.com.mt
Author: Sarah M. Vella