Issuing stablecoins

As a general rule, a person may not offer an ART to the public in the European Union or seek its admission to trading unless that person is the issuer of the crypto-asset and is either authorised under MiCA, or a credit institution that complies with the specific requirements for credit institutions.

Several exemptions may apply when offering or seeking admission to trading of an ART:

• Upon the written consent of the issuer of an ART, other persons may offer to the public or seek the admission to trading of the ART if they comply with specific requirements set out in MiCA.
• When the average outstanding value over 12 months never exceeds EUR 5 million and the issuer is not linked to a network of other exempt issuers, the issuer does not require authorisation.
• Where the offer is solely addressed to qualified investors and the ART can only be held by such qualified investors, the issuer does not require authorisation.

Licensed credit institutions do not require a separate licence under MiCA to offering or seeking admission to trading of ARTs. However, the credit institution must obtain approval for an ART white paper and must notify the competent authority at least 90 days before the first issuance. This notification must be accompanied by a programme of operations, a legal opinion, governance and policy documentation, a business continuity plan, information on internal control arrangements, and data-security arrangements.

The competent authority shall assess the notification within 20 working days of receipt of the information. Where the competent authority concludes that a notification is not complete because information is missing, it shall immediately information the credit institution.

Credit institutions may not offer or seek admission to trading of the ART while the notification is incomplete.

For ART issuers, MiCA requires robust governance arrangements, including a clear organisational structure, well-defined and transparent lines of responsibility, effective risk identification and monitoring, and adequate internal control mechanisms including sound administrative and accounting procedures.

The European Banking Authority (EBA) has issued dedicated guidelines on internal governance arrangements for issuers of ARTs. These can be found in our Level 2 and Level 3 measures tracker.

For ART issuers, the documentation burden is substantial. Various documents are required to be provided in the application for authorisation, including:

• a programme of operations;
• a detailed description of the applicant’s governance arrangements;
• policies and procedures on the functioning of the ART, the reserve of assets, and issuance and redemption;
• policies on complaints handling;
• policies of the prevention of conflicts of interest;
• a description of the business continuity policy;
• a description of the internal control mechanisms and risk management procedures;
• a description of the systems and procedures in place for prudent data retention; and
• a recovery and redemption plan.

These policies and procedures are examples of the various documentation required for the application for authorisation to issue ARTs. A substantive analysis should be made to ensure all required documentation is included in an application package.

An ART issuer must have a real operating model, not just a token concept. ART issuers need sufficient legal, compliance, risk, finance, treasury and technology capacity to run their product in a controlled way and to support reserve management, disclosure, redemption and incident handling. The EBA expressly highlights internal governance, financial resilience, technology risk management and financial crime risk management as the core areas of supervisory focus.

Operational resilience is also important for ART issuers. ART projects depend heavily on DLT infrastructure, wallets, smart-contract logic, data integrity and third-party dependencies. The EBA specifically highlights technology risk management, DLT risk and contingency planning as supervisory priorities, which means that ART issuers should be able to explain not only how the ART works in theory, but how the project will continue to operate under stress and disruption.

ART issuers need an effective compliance and internal control framework around the entire issuance model. This includes conflicts of interest, complaints handling, governance, reserve monitoring, redemption procedures, marketing governance, outsourcing oversight and ongoing reporting. The EBA places particular emphasis on clear governance lines, management suitability, conflict controls, complaints procedures, outsourcing and financial crime risk management.

For ART issuers, MiCA sets out a standalone prudential regime. MiCA requires own funds equal to at least the highest of:

• EUR 350.000;
• 2% of the average reserve of assets; or
• One quarter of the fixed overheads of the preceding year.

The competent authority may require up to 20% more than the reserve-based limb where the issuer’s risk profile justifies this. ART issuers must also maintain a reserve of assets at all times, and that reserve must be legally and operationally segregated. This is one of the most distinctive prudential features of the ART regime.

ART holders also have a permanent right of redemption. That right may be exercised at all times against the issuer and, in certain circumstances, in respect of the reserve assets. Issuers must establish clear and detailed redemption policies, including thresholds, timeframes, valuation principles, settlement conditions and measures to manage increases and decreases in the reserve. Redemption may not be subject to a fee.

ART issuers are required to draft an ART white paper. In contrast to the crypto-asset white papers that only have to be notified to the competent authority, ART white papers also require approval from the competent authority. This approval is part of the assessment of the licence application of ART issuers.

The ART white paper is a central disclosure document for the offer and admission to trading of ARTs. The white paper shall contain information on:

• the issuer;
• the ART itself;
• the offer or admission to trading;
• the rights and obligations attached to the ART;
• the underlying technology;
• the associated risks;
• the reserve of assets;
• the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the ART.

In cases where the ART white paper is not drawn up by the issuer, the ART white paper shall also include the identity of the person that drew up the ART white paper and the reason why that particular person drew it up.

Several key principles govern the drafting of an ART white paper:

• The ART white paper should be fair, clear and not misleading. It shall not contain material omissions and shall be presented in a concise and comprehensible form.
• The ART white paper shall not contain any assertions as regards the future value of the ART.
• The ART white paper shall contain several predetermined risk warnings.
• The ART white paper shall contain a statement on compliance by the management body of the issuer.
• The ART white paper shall contain a summary.
• The ART white paper shall be drawn up in an official language of the home Member State and any host Member State, or in a language customary in the sphere of international finance.

Annex II MiCA clearly sets out all data to be included in the ART white paper.

ART white papers shall be made available in a machine-readable format. The European Supervisory authority ESMA, in cooperation with EBA, has drafted Implementing Technical Standards (ITS) with regard to forms, formats and templates for ART white papers. These can be found in our Level 2 and Level 3 measures tracker.

Issuers of ARTs must notify the competent authority of any intended change of their business model likely to have a significant influence on the purchase decision of any holders or prospective holders of ARTs. Such changes include, amongst others, any material modifications to:

• Governance arrangements;
• Reserve assets and custody thereof;
• Rights granted to the holders of the ART;
• Mechanisms for issuance and redemption;
• Protocols for validating transactions;
• Functioning of the issuers’ proprietary DLT;
• Mechanisms to ensure the liquidity of the ART;
• Arrangements with third-party entities;
• Complaints-handling procedures; and
• Money laundering and terrorist financing risk assessments, policies and procedures.

When any intended change has been notified, the issuer of the ART shall draw up a draft modified ART white paper and notify that draft. Any modification to the white paper requires approval from the competent authority.

ART white papers must be published on the website of the issuer. The approved ART white paper must be publicly accessible by the starting date of the offer to the public or admission to trading of the ART. The approved ART white paper and any modifications thereof shall remain available on the issuer’s website for as long as the ART is held by the public.

Where the estimated quarterly average number and average aggregate value of transactions per day associated to an ARTs uses as a means of exchange within a single currency area is higher than 1 million transactions and EUR 200.000.000, respectively, the issuer must stop issuing that ART, and within 40 working days of reaching that threshold submit a plan to the competent authority to ensure that the numbers are kept below those thresholds.

Issuers of ARTs are not allowed to grant interest in relation to ARTs. Similarly, CASPs shall not grant interest when providing crypto-asset services related to ARTs. Any remuneration or any other benefit related to the length of time during which a holder of ARTs holds such ARTs is treated as interest. That includes net compensation or discounts, with an effect equivalent to that of interest received by the holder of ARTs, directly from the issuer or third parties, and directly associated to the ARTs or from the remuneration or pricing of other products.

This prohibition has been introduced to limited risks associated with ‘shadow banking’ that could occur if non-banking institutions behave like banks by offering yields on stablecoins.

Some ARTs may be classified as significant ARTs. Where an ART is classified as significant, the supervisory responsibilities with respect to the issuer shall be transferred from the competent authority of the home Member State to the European Banking Authority (EBA).

The following criteria apply for the classification of ARTs as significant:

• The number of holders of the ART is larger than 10 million.
• The value of the ART issued, its market capitalisation or the size of the reserve of assets is higher than EUR 5.000.000.000,-.
• The average number and average aggregate value of transactions in the ART per day during the relevant period is higher than 2.5 million transactions and EUR 500.000.000 respectively.
• The issuer is a provider of core platform services designated as gatekeeper in accordance with the Digital Markets Act.
• The interconnectedness of the ART or its issuers with the financial system.
• The significance of the activities of the issuer on an international scale, including the use of the ART for payments and remittances.
• The fact that the same issuer issues at least one additional ART or EMT, and provides at least one crypto-asset service.

At least three of these criteria should be met during the period covered by the first report of information following authorisation or approval of the ART white paper, or during the period covered by at least two consecutive reports of information.

ART issuers may voluntarily ask for a classification as a significant ART during their application, if they are able to demonstrate that they are likely to fulfil at least three of the criteria.

An application for a licence as an issuer of ARTs is typically a multi-stage process rather than a one-off filing. In practice, an applicant must first determine whether the relevant crypto-asset qualifies as an ART. Once that has been established, the applicant must prepare a robust application file covering its business model, governance arrangements, internal controls, prudential framework, business continuity arrangements, complaints handling framework and ART white paper.

In the Netherlands, the application must be submitted to DNB. This filing should be approached as a substantial regulatory application rather than as a white paper exercise only. Once the application has been submitted, the first phase of the procedure concerns the completeness of the file. MiCA requires the competent authority to acknowledge receipt promptly and in any event within two working days. The authority then assesses, within 25 working days, whether the application contains all required information. If the application is incomplete, the applicant will be asked to provide missing or additional information before the substantive assessment can start. In practice, this means that the legal review period does not begin until the file is considered complete.

After the application has been deemed complete, the substantive supervisory review starts. Under MiCA, the competent authority has 60 working days to assess whether the applicant complies with the Title III requirements and to prepare a fully reasoned draft decision granting or refusing the licence. During this phase, additional questions may still be raised and further information may be requested. In practice, this part of the process is often marked by alternating periods of relative quiet and concentrated peaks in workload, particularly when the regulator requests clarifications, updated drafts or further substantiation. Applicants should therefore ensure that sufficient staff and decision-making capacity are available throughout the process.

For ART issuers, the procedure includes an additional European layer. DNB states that, once it has prepared a draft decision, the EBA, ESMA and the ECB have the opportunity to issue an opinion on that draft within 20 working days. DNB then communicates the final decision on the application within 30 working days. This means that the ART licensing process is not only a national supervisory process, but also one that involves European supervisory input.

The overall duration of the process depends on the complexity and quality of the application. DNB states that the statutory consideration period for an ART licence application is 110 working days after receipt of a fully completed application. In practice, however, the full process will often take longer. DNB expressly notes that the consideration period may be suspended if information is missing or if additional questions arise, and that the better and more complete the file is when submitted, the more efficiently the process can be completed.