【Exclusive from ChainDD】Analysis of 525-page EU Regulatory Regulations: Step-by-Step Guide to Writing White Papers, Only 3 Types of Cryptocurrencies Approved

Exclusive analysis by ChainDD of 525-page EU regulations: Only 3 types of cryptocurrencies approved. Learn how to write white papers with our step-by-step guide.

The “Regulation and Amendments on the Regulation of the Cryptocurrency Market by the European Parliament and the Council” has finally been finalized. The regulation lists the responsibilities and obligations of cryptocurrency transactions, issuers, participants, and regulators and includes 133 breach provisions. Compared to Hong Kong’s regulatory regulations, the EU appears more conservative.

Written by Mao Li Wulang

Last week, the European Union released the full text of the “Regulation and Amendments on the Regulation of the Cryptocurrency Market by the European Parliament and the Council” (hereinafter referred to as the “Regulation”). This 525-page document defines the definitions of all the keywords in the encryption industry, clarifies the rights and obligations of practitioners and participants in the encryption industry, and provides detailed introductions to regulatory agency responsibilities.

ChainDD brings you a deep interpretation and detailed breakdown of this regulatory regulation. This article has been translated by DeepL and edited by ChainDD for brevity and excerpted, and analysis is provided for readers as a reference. For evaluations of this regulation, please refer to ChainDD’s previous article: [ChainDD Exclusive] The EU Council has passed a cryptocurrency regulatory framework MiCA, but is it too late?

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The regulation is divided into 9 parts, and each chapter summarizes all the encryption-related fields (the page number in parentheses is the original PDF page number, not the EU file page number, and the EU annotated page number has a difference of 2 pages from the PDF page number), including:

• Part 1 (pp76-91): Main Issues, Scope and Definitions; mainly clarifies all the concepts mentioned in this regulation.

• Parts 2-4 introduce the 3 types of cryptocurrencies recognized by the EU.

• Part 2 (pp92-121): Cryptocurrencies other than asset-reference tokens or electronic currency tokens.

• Part 3 (pp122-223): Asset reference tokens, which, in terms of content, have a relatively rigorous definition of this type of cryptocurrency and further define the obligations and responsibilities of the listed exchanges and issuers.

• Part 4 (pp224-246): Electronic currency tokens.

• Part 5 (pp247-327): Authorization and operating conditions of cryptocurrency service providers. This is the core part of this regulation and should also be the most concerned part for practitioners and related parties. This section includes 28 regulations from Article 59 to Article 87, divided into six chapters, which need to be carefully studied, including the white paper and the extremely detailed part of the promotional distribution process.

• Part 6 (pp328-339): Preventing and Prohibiting Market Abuse in Cryptocurrencies, which defines terrorist and anti-money laundering and other illegal activities from Article 86 to Article 92.

• Part 7 (pp340-446): Regulatory agencies, economic bureaus, and the European Securities and Market Authority (ESMA), which define regulatory agencies from Article 93 to Article 138.

• There is only one content in Part 8 (pp447-448): Authorization of Delegate Bills in Article 139.

• Part 9 includes contents from Article 140 to Article 149 (pp449-469): Transitional and Final Terms.

The attachments include:

• Attachment 1: Disclosure items for white papers on encrypted assets other than asset reference tokens or electronic currency tokens;

• Attachment 2: Disclosure items for white papers on encrypted assets referencing tokens;

• Attachment 3: Disclosure items for white papers on electronic currency tokens;

• Attachment 4: Minimum capital requirements for encrypted asset service providers;

• Attachment 5: List of 87 violations against issuers of important asset reference tokens mentioned in Chapters 3 and 6;

• Attachment 6: List of 46 violations against issuers of important electronic currency tokens for violating the provisions mentioned in Chapters 3 and 4.

Which encrypted assets are recognized by the EU?

This regulation divides encrypted assets into three categories, which should be distinguished from each other and comply with different requirements based on the risks they pose. The classification is based on whether the encrypted asset seeks to stabilize its value by reference to other assets. These three categories are:

The first type includes encrypted assets that aim to stabilize their value by referencing only one official currency. The function of these encrypted assets is very similar to that of electronic currency as defined in Directive 2009/110/EC. Like electronic currency, this type of encrypted asset is an electronic substitute for coins and banknotes and may be used for payment. These encrypted assets should be defined as “electronic currency tokens” in this regulation.

The second type of encrypted asset involves “asset reference tokens,” which aim to stabilize their value by reference to another value or right, or a combination thereof, including one or several official currencies. This second type includes all other encrypted assets that are not electronic currency tokens and whose value is supported by assets to avoid evasion and make this regulation future-proof.

The third category includes encrypted assets other than asset reference tokens and electronic currency tokens and covers various encrypted assets, including utility tokens.

For NFTs and non-transferable encrypted assets

This regulation should not apply to unique crypto assets that cannot be exchanged for other crypto assets, including digital art and collectibles. The value of these unique, non-fungible crypto assets is attributed to the unique characteristics of each crypto asset and the utility it brings to token holders. This regulation should also not apply to crypto assets that represent services or tangible assets, such as product guarantees or real estate.

Digital assets that cannot be transferred to other holders are not within the definition of crypto assets. Therefore, digital assets that can only be accepted by the issuer or offeror and are not directly transferable to other holders should be excluded from the scope of this regulation.

Unregulated Crypto Sector Participants

Certain intra-group transactions and some public entities are not subject to regulation, such as the International Monetary Fund and the Bank for International Settlements. Similarly, crypto assets issued by central banks acting as monetary authorities, including digital forms of central bank currency, or other public authorities, including crypto assets issued by central, regional, and local administrative bodies, should not be subject to the framework of the alliance’s crypto asset market. These central banks acting as monetary authorities or other public authorities offering related services should also not be subject to this alliance framework.

Obligations of Crypto Asset Service Providers

This regulation covers the rights and obligations of crypto asset issuers, offerors, persons seeking entry into crypto asset transactions, and crypto asset service providers. All offerors or persons seeking to participate in transactions should be legal entities.

The issuer of a crypto asset is an entity that has control over the creation of the crypto asset. (It is necessary to establish specific rules for entities that provide services related to crypto assets. The first category of services includes ensuring the operation of crypto asset trading platforms, exchanging funds or other crypto assets with crypto assets, providing custody and management of crypto assets on behalf of clients, and providing transfer services of crypto assets on behalf of clients. The second category of services includes placing crypto assets, representing clients to receive or transmit orders for crypto assets, representing clients to execute orders for crypto assets, providing advice on crypto assets, and providing crypto asset portfolio management. Anyone who professionally provides crypto asset services under this regulation should be considered a “crypto asset service provider.”)

This regulation should apply to natural persons and legal entities as well as certain other enterprises, and should apply to crypto asset services and activities that they directly or indirectly engage in, provide, or control, including some such activities or services that are conducted in a decentralized manner. If crypto asset services are provided in a completely decentralized manner, without any intermediaries, they should not fall within the scope of this regulation.

Those cryptocurrency exchanges and issuers who claim to be “decentralized” and have no physical presence anywhere in the world should not be recognized by the European Union because the EU requires at least one director of a legal entity to be based in the EU. To ensure effective supervision and eliminate the possibility of evasion or circumvention of supervision, crypto asset services can only be provided by legal entities registered in member states that carry out substantial business activities (including providing crypto asset services). Non-legal entity enterprises, such as commercial partners, should also be allowed to provide crypto asset services under certain conditions. The effective place of management of the crypto asset service provider should be in the EU, and at least one director should reside in the EU.

Issuer and exchange white paper publication obligations

In the EU, when offering crypto assets other than asset reference tokens or electronic currency tokens to the public or seeking trading permits for such crypto assets, the offeror or person seeking trading permits should prepare, notify their supervisory authority and publish an information document containing mandatory disclosures (“crypto asset white paper”).

This regulation further stipulates that the crypto asset white paper should contain all of the following information: (a) information about the offeror or person seeking approval for the transaction; (b) information about the issuer if different from the offeror or person seeking approval for the transaction; (c) information about the operator of the trading platform if such operator prepares the crypto asset white paper; (d) information about the crypto asset project; (e) information about the provision of crypto assets to the public or allowing them to be traded; (f) information about the crypto asset; (g) information about the rights and obligations of the crypto asset; (h) information about the underlying technology; (i) information about risks; and (j) information about the major adverse effects of the consensus mechanism used to issue crypto assets on the climate and other environmentally-related adverse effects. If the crypto asset white paper is not drafted by the person mentioned in points (a), (b), and (c) of the first item, the crypto asset white paper should also include the identity of the person who drafted the crypto asset white paper and the reason why that particular person drafted it.

The regulation provides a comprehensive and detailed explanation of the drafting and content of the white paper, as well as many detailed provisions, such as the need for a disclaimer on the cover page stating “This crypto asset white paper has not been approved by the supervisory authority of any EU Member State. The offeror of the crypto asset assumes full responsibility for the content of this crypto asset white paper” and that dissemination marketing is not allowed before the white paper is published. For specific details, please refer to the content published on the official website of the European Union: “Regulation and Amendment of the European Parliament and Council on the Regulation of the Crypto Asset Market” Full Text PDF: https://data.consilium.europa.eu/doc/document/PE-54-2022-INIT/en/pdf

A whitepaper for cryptographic assets, including its summary and rules of operation for cryptographic asset trading platforms, should be drafted in at least one of the official languages of the home country and any host member countries, or in a commonly used language in the international financial sector. At the time of the passage of this regulation, English is the commonly used language in the international financial sector, but this may change in the future.

In order to avoid excessive burdens on small and medium-sized enterprises, the following cases may be exempted from the obligation to draft a whitepaper for cryptographic assets, but may choose to provide voluntarily:

(a) To offer to less than 150 natural persons or legal persons in each member state who act in their own name;

(b) Within 12 months from the start of the offer, the total value of cryptographic assets offered to the public within the alliance does not exceed 1 million euros or an equivalent amount in other official currencies or cryptographic assets;

(c) Cryptographic asset offers only for qualified investors, and these cryptographic assets can only be held by these qualified investors.

In addition, if a cryptographic asset has already obtained trading approval from a trading platform within the European Union, it does not need to submit a white paper again.

For the issuer, there is also an important content that there is sufficient asset reserve. The regulation stipulates that the issuer of electronic currency tokens should formulate a recovery and redemption plan (Chapter VI of the regulation is a redemption plan) to ensure that the rights of electronic currency token holders are protected when the issuer cannot fulfill its obligations. However, the regulation also states that reserves can be used for low-risk, highly liquid financial investments.

Chapter 5 of the regulation details the obligations of cryptographic asset service providers, including not granting interest when providing cryptographic asset services related to asset reference tokens, and the content of the evaluation of providers, which will not be repeated here.

Stricter requirements for exchanges

Members of the management body of cryptographic asset service providers should be appropriate, especially without having been convicted of any crime related to money laundering or financing terrorism or any other crimes that may affect their good reputation. It is also necessary to consider whether shareholders and members have engaged in illegal activities or are under the control of third-country governments. Cryptographic asset service providers should employ management and staff with sufficient knowledge, skills and expertise.

For cryptocurrency service providers operating cryptocurrency trading platforms, more is required in addition to maintaining transaction transparency. They must also ensure that transactions executed on the trading platform are settled on the chain and off the chain, and ensure timely settlement. Settlement of transactions should be initiated within 24 hours of execution on the trading platform.

EU’s Defensive Conservative Regulatory Framework

The contents of the document are extremely detailed. ChainDeDe learned that just a week later, the Securities and Futures Commission (SFC) of Hong Kong, China issued a “Consultation Summary on Proposed Regulatory Rules for Operators of Virtual Currency Trading Platforms Licensed by the Securities and Futures Commission” , ChainDeDe also broke it down in detail, please refer to ChainDeDe’s previous article: [ChainDeDe Exclusive] Interpretation of Hong Kong’s 324-page encryption transaction regulatory regulations: one currency, one investigation, and stable currency cannot be traded.

Compared with Hong Kong, the European Union mainly regulates the obligation of regulatory agencies, issuers, and service providers such as issuance and trading, but does not have detailed regulations for investors, which is significantly different from Hong Kong’s “compliant investors” and also reflects the fundamental difference in the nature of the two regulatory regulations.

Hong Kong’s regulatory framework is overall more conducive to the development of encryption technology and encourages innovation, but it is more inclined to the content due to restrictions from various parties involved in providing advice (receives more advice from investment institutions and exchanges). The EU is more comprehensive, but as ChainDeDe previously mentioned, EU regulation took 3 years from filing to approval, and this regulatory regulation also includes continuous revisions. However, overall, it is a very conservative defensive regulatory framework, which is why the EU regulatory framework has been ridiculed as “lagging behind before it was announced.”

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