How Tokens Project Can Survive Under MiCA

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by Ekaterina Anthony

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Being regulated can be beneficial. Decide today if you want to launch your token in a regulated entity. It’s not that bad to be regulated and could be fast and inexpensive. Follow the guidelines for the whitepaper — they are fair.

Last week was filled with discussions at the Crypto Valley Association conference, where the smart-shift team and I also participated. We were keen to understand the current concerns of the industry and where to focus. Naturally, MiCA was one of the hot topics, with discussions on new regulations and their impact on projects and tokenization.

Where to be Regulated and Tokenized Now?

Starting June 30, the EU Regulator will enforce amendments requiring standardised White Papers with investor information disclosures. From December 2024, all main MiCA regulatory provisions will be in effect, preventing projects issued outside the EU from being listed. Marketing and passporting issues will need to be addressed at the national level within the EU.

With the new regulations, projects issuing tokens outside the EU will face challenges in distributing and listing within the EU. This is not only due to regulatory compliance but also internal rules of financial institutions.

Many exchanges, such as Kraken and Coinbase, are likely to impose restrictions on certain jurisdictions, and tokens issued there will not be accepted (not an official statement, but highly likely to happen). For instance, LCX in Liechtenstein has published a list of jurisdictions they do not work with. These include jurisdictions preferred by many crypto projects like: BVI, Cayman Islands, and SVG. This highlights the growing cross-border issues and market fragmentation.

The question of where to base a project remains open. If you lack a user base in Europe, it is simpler and cheaper to operate through offshore companies. Asian exchanges currently do not impose jurisdictional requirements for token issuance and conduct their due diligence, meaning MiCA does not directly apply in these cases.

However, even if you issue a token offshore and market it to European users, questions arise regarding its marketing and promotion outside the countries listing these tokens. The issue of reverse solicitation and how much you can use this marketing principle becomes relevant. Who and how will evaluate compliance with the requirements is still an open and unclear question.

Follow these rules of thumb to be on the safe side

If you are in Europe and targeting a European audience, it makes sense to issue tokens within the European space.

I suggest the following best practices:

  1. Choose a jurisdiction in Europe where you can establish a substance and issue tokens. The company must comply with European regulatory standards. A nominal structure no longer works in Europe. You need at least a small office and good legal support.
  2. The new European regulation is aimed at protecting investors, so you must ensure your utility tokens are not financial instruments. This may depend on the economic function of the asset and the rights attached to owning the asset (e.g., company shares or dividends).
  3. You can use existing launchpads and exchanges for issuing tokens or do everything yourself if the regulation allows, as in Liechtenstein. For tokens issued in Liechtenstein, you can arrange passporting in the EU.
  4. Prepare a compliant iXBRL machine-readable White Paper.
  5. Offshores have always been attractive for their speed, but with the new regulation in the EU, the company registration process can take 1-3 weeks, and token issuance can be relatively simple and quick.

I use Liechtenstein as an example because I work with cases in this jurisdiction, but you can also consider other options.

Keep your whitepaper aligned with the requirements

It might look like a lot of points, but they are quite straightforward:

  1. General Information: Details about the issuer, offeror, or person seeking admission to trading.
  2. Details about the Crypto-Asset Issued: Description of the project to be carried out with the capital raised.
  3. Offer Details: Information on the offer to the public of the crypto-asset or its admission to trading.
  4. Rights and Obligations: Rights and obligations attached to the crypto-asset.
  5. Technology and Risks: Description of the underlying technology and disclosure of related risks.
  6. Environmental Impact: Information on the climate and other environment-related impacts of the consensus mechanism.
  7. Presentation and Language: The white paper must be clear, fair, and in at least one official EU language or English.
  8. Summary and Publication: A non-technical summary must be included and published on the relevant website.
  9. Management Statement: A statement confirming that the information is clear and not misleading.
  10. Marketing Consistency: Marketing communications must align with the white paper and be fair and clear.

Here are some helpful links to explore more:

MiCA law here.

There are many other nuances associated with token issuance and jurisdiction selection, such as KYC/AML — timely onboarding and user documentation, taxes. Share your experience and contact us if you need consultation or support in choosing a jurisdiction for tokenization. smart-shift, SMART-compliance

Read the full agenda of Crypto Valley Conference here.

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