Classifying a token under MiCA

Before a token is offered or admitted to trading in the European Union, its regime must be settled: the MiCA Regulation, and in which category, or financial instruments law. ORWL Avocats has provided legal opinions on token classification since 2018, to issuers and to platforms, within a few days to a few weeks. Issuers established outside the Union rely on them too: the analysis applies EU criteria, whichever authority receives the white paper.

Classification decides everything that follows: the document to publish, the competent authority, the status the issuer must hold and the checks the platform must carry out. A mistake at this stage cannot be put right later without cost: it makes the offer or the admission irregular and exposes everyone who took part in it.

Why have a token classified?

The request rarely comes from the issuer alone. Most often it comes from a third party that needs a written analysis before acting:

• a trading platform authorised under MiCA, when it admits the token to trading;
• a partner financial institution, bank or payment institution, before opening an account or processing flows linked to the token;
• the issuer itself, when preparing its issuance;
• investors, during a fundraising, an equity investment or an acquisition due diligence;
• a regulator that questions the issuer or the platform on the nature of the token.

For the issuer, classification sets its obligations: draw up and notify a white paper, obtain an authorisation, or fall under an entirely different body of rules. For the platform, it conditions admission: MiCA requires the operator to assess a token before admitting it, and the operator’s own compliance depends on that assessment. Both readers therefore need the same thing: a reasoned conclusion they can rely on before the regulator.

A service provided in a fully decentralised manner, without any intermediary, also falls outside MiCA. Only genuine decentralisation has that effect (DeFi and protocols).

Which classifications can a token receive?

MiCA distinguishes three families of crypto-assets: e-money tokens, asset-referenced tokens and a residual category covering all other crypto-assets, including utility tokens. It leaves outside its scope financial instruments, crypto-assets that are unique and not fungible, and services provided in a fully decentralised manner. Each classification carries distinct obligations for the issuer and for the platform.

The utility token: a narrower category than many assume

MiCA defines a utility token as a crypto-asset only intended to provide access to a good or a service supplied by its issuer. Many projects use the name for a token that also confers voting rights, rewards or exposure to the growth of the project. Such a token goes beyond the strict definition. The label itself matters little: the token remains a crypto-asset under MiCA, and what counts is its actual function and the way it is presented to the public.

Being a utility token does not take a token outside MiCA either. It remains subject to the white paper and to the rules on marketing communications. It is exempt from the white paper only where the good or service already exists or is in operation at the time of the offer.

The risk of classification as an EMT or an ART

A token presented as a utility token can fall into one of the two stablecoin categories as soon as it aims at a stable value: a price pegged to a currency, a guaranteed buy-back at a fixed rate, backing by a basket of assets. The consequence is serious, because the issuer must then hold a status that most projects do not have. The firm also advises projects that choose this route deliberately on issuing a stablecoin.

Financial instrument or crypto-asset: where is the line?

Our position is clear: most governance or revenue-backed tokens risk falling under financial instruments law rather than MiCA. A vote limited to the parameters of a protocol is generally not enough on its own; the risk comes from rights to the project’s revenue and from influence over the entity behind it. We address this point first, before any work on the white paper, because it shapes the whole project.

MiCA does not apply to crypto-assets that qualify as financial instruments under MiFID II. To harmonise the analysis across Member States, the European Securities and Markets Authority (ESMA) has published Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments. They rest on three principles: substance over form, technological neutrality, and a case-by-case assessment of each token.

The ESMA test

The Guidelines examine the token against each category of financial instrument:

• transferable security: the token belongs to a class of interchangeable securities, is negotiable on the capital market and confers rights comparable to those of a share or a bond, such as a right to profits, a vote on the company or a right of repayment;
• unit in a collective investment undertaking: the project raises capital from investors and invests it in accordance with a defined policy, for their common benefit, without the investors having day-to-day control;
• money-market instrument: the token has the features of a short-term debt instrument;
• derivative: the value of the token depends on an underlying asset and settlement takes place at a future date.

The Guidelines also address hybrid tokens. Where only one of the token’s functions falls within financial instruments, the token as a whole in principle receives that classification.

What our practice adds to the test

We apply ESMA’s Guidelines, together with the lessons of our files and the market practice we observe. Some mechanisms recur and call for close analysis:

• redistribution of part of the project’s revenue to holders, directly or through a buy-back mechanism;
• holders voting on the treasury or the strategy of the entity behind the project;
• staking rewards funded by the project rather than by the protocol;
• promises of value growth in the project’s communications.

These mechanisms do not all lead to classification as a financial instrument. They move the line, and it is the combination of rights, documentation and communications that decides.

The consequences of reclassification

A token reclassified as a financial instrument makes the offer or the admission irregular:

• the offer to the public may have taken place without a prospectus or an exemption, and services may have been provided on the token without the required authorisations;
• purchasers may seek to challenge the transactions concluded on the token, with a heavy financial risk for the issuer;
• the intermediaries involved, whether platform, service providers or financial partners, put their own compliance at stake and are exposed to sanctions.

Where a project instead opts for securities law, ORWL Avocats also advises on the tokenisation of real-world assets.

Exclusions and exemptions: the borderline cases

Two mechanisms are often confused. Exclusions take the token outside MiCA. Exemptions keep it within MiCA but release it from the white paper for the offer to the public. The firm advises at both levels.

What falls outside MiCA

• Financial instruments and other products governed by financial law, such as deposits and insurance products.
• Crypto-assets that are unique and not fungible. The exclusion has limits: an issuance in a large series or a fractionalised NFT may be treated as fungible. The firm also advises issuers and platforms of NFTs.
• Services provided in a fully decentralised manner, without any intermediary. The decentralisation test looks at actual governance, administrator keys and the existence of an entity that profits from the protocol. The firm also advises DeFi protocols.

What stays within MiCA without a white paper

• Offers made for free. A distribution is not free where recipients must provide personal data or the offeror receives fees from third parties; many airdrops do not meet this condition.
• Mining and validation rewards, created automatically for maintaining the distributed ledger or validating transactions, which covers some staking operations.
• Tokens giving access to an existing good or service, or one in operation at the time of the offer.
• Limited networks: the token can only be used with merchants bound to the offeror by contract.
• Small offers: fewer than 150 persons per Member State, a total consideration of no more than EUR 1 million over twelve months, or an offer addressed solely to qualified investors.

These exemptions apply only to the offer to the public. An application for admission to trading requires a white paper, even for a token exempt at the offer stage.

Tokens without an identifiable issuer

Where a token stems from a protocol without an identifiable issuer, the disclosure obligations fall on the platform that admits it. Classification then becomes the platform’s first task, and the platform must be able to justify its analysis to its competent authority: the AMF (Autorité des marchés financiers, the French financial markets regulator), for a platform authorised in France.

Legal opinions on token classification for platforms

Platforms authorised under MiCA must assess every token before admitting it to trading. Their banking partners and auditors ask them to document that assessment. The legal opinion on token classification meets that need: it is an offer distinct from supporting an issuance, designed around the timetable of a listing.

Each opinion covers:

• a description of the token, its rights and its technical operation, based on the documents provided;
• the analysis under ESMA’s Guidelines and the categories of MiCA;
• a reasoned conclusion, with its assumptions and reservations.

We can prepare the opinion on behalf of an issuer established outside the European Union that seeks admission with a European provider. We update it on request, when the features of the project or the token change.

On the issuer side, the notification of the white paper of a crypto-asset other than an EMT or an ART comes with an explanation: the offeror sets out why its token is neither excluded from MiCA, nor an e-money token, nor an asset-referenced token. The Guidelines of the European Supervisory Authorities (ESAs) on templates for explanations and opinions, and the standardised test for the classification of crypto-assets, set its template. We draft this explanation for the issuers we advise, as well as the legal opinions on qualification required for the authorisation of an ART issuer.

The firm has provided token classification opinions since it was founded in 2018: several dozen to date, first under the earlier French regime, the optional AMF visa for token offerings introduced by the PACTE Act, then under MiCA.

How does a classification engagement work?

Depending on the need, the engagement leads to one of three deliverables: a classification memorandum for the client, a legal opinion for a third party, or the explanation accompanying the white paper. It takes days, sometimes weeks, depending on the complexity of the token and the state of its documentation.

We can contact the AMF to discuss the classification of a token. This dialogue, held before notification, prevents a disagreement over the nature of the token from emerging once the timetable of the issuance or the listing has been set.

Classification often opens the issuance engagement: drafting the white paper, contractual documentation, compliance of marketing communications. The firm also handles the tax classification of the token, for the issuer and for holders (Tax).

Why work with ORWL Avocats?

Since 2018, the firm has advised issuers of utility tokens and stablecoins, exchanges and crypto-asset service providers, partner financial institutions and funds investing in token projects, in France and outside the Union. It has classified tokens since the first French regimes and has a long-standing dialogue with the AMF on these questions. The firm is ranked in Chambers FinTech and Leaders League.

A lawyer brings to classification what a consultant cannot: a legal analysis for which the lawyer is professionally liable, legal professional privilege over the project’s documents and the ability to defend that analysis before the AMF on the client’s behalf. For a platform or a banking partner, an opinion signed by a lawyer is a document they can produce.

A partner leads every matter, from the first reading of the white paper to the delivery of the opinion.