Classification of crypto-assets: key aspects to consider

Regulatory treatment of crypto-assets pre-MiCAR in Spain

Up until the introduction of MiCAR, the offering of crypto-assets in Spain was mainly unregulated. The CNMV issued warnings to investors about the risks associated with unregulated crypto-assets offering. The CNMV identified various forms of commercialisation, including the direct commercialisation (now regulated under MiCAR) and other forms that should be supervised by CNMV by the nature of the offering.

In the context of ICOs, CNMV stated that some operations structured as an ICO should be regarded as the issuance or public offering of financial instruments (in particular, transferable securities). The CMNV provided criteria to determine if crypto-assets offered through an ICO could be classified as financial instruments, such as if they present or grant similar rights to those of shares, debentures or other financial instruments or if they grant purchasers or investors access to services or goods with the expectation of benefiting from their potential value appreciation.

Later, following the approval of MiCAR, the Spanish laws implementing MiFID II were amended to explicitly cover financial instruments issued and registered using distributed ledger technology DLT or similar technology. This ensured that investors were protected against the offering of crypto-assets that should qualify as a financial instrument, even if these were being excluded from the scope of MiCAR.

Regulatory status of crypto-assets post-MiCAR

MiCAR provided for harmonised rules for the direct commercialisation of crypto-assets. That said, crypto-assets that qualify as financial instruments under MiFID II were excluded from the scope of MiCAR. Therefore, properly identifying whether a crypto-asset can qualify as a financial instrument is key to ascertain the applicable legal regime. To this end, ESMA has issued a consultation paper seeking input from stakeholders on the conditions and criteria for the qualification of crypto-assets as financial instruments. The final guidance document is expected to be published by December 2024.

ESMA adopts a "substance-over-form" approach when assessing the classification of crypto-assets, focusing on their actual nature and characteristics rather than their technological form or denomination. Issuers and crypto-asset service providers should carefully consider the criteria and conditions outlined by ESMA when determining the qualification of crypto-assets as financial instruments. 

ESMA's criteria for the qualification of crypto-assets as financial instruments

According to the consultation, the following aspects should be considered when analysing whether a crypto-asset qualifies as a financial instrument:

Technological Structure:

• The technological structure of the crypto-assets resembles that of traditional financial instruments. The focus should be on the specific characteristics, design, and rights attached to the crypto-assets.

Financial Instrument Characteristics:

• The crypto-assets have been issued in a way that they resemble transferable securities (e.g., the crypto-asset represents a class of securities that is negotiable on the capital market), money-market instruments (e.g., the crypto-asset exhibits characteristics similar to treasury bills, certificates of deposit, and commercial papers), units in collective investment undertakings (e.g., the crypto-asset represents the rights of investors in pooled capital), or derivative contracts (e.g., the crypto-asset derives its value from an underlying asset or reference rate).
• The crypto-assets represents ownership rights, governance rights, or other characteristics associated with traditional financial instruments.

Purpose and Functionality:

• The crypto-assets' purpose and functionality should be clearly defined, ensuring that they serve a specific function within the issuers’ activity or ecosystem.
• The crypto-assets have been designed to provide investment opportunities or financial returns to holders.

Utility tokens

MiCAR classifies crypto-assets within three categories: asset reference tokens (ART), e-money tokens (EMT), and those that don't fit into either category, including utility tokens. Crypto-assets other than ARTs or EMTs are broadly defined as digital representations of value or rights that can be electronically transferred and stored using distributed ledger technology (DLT) or similar technology. Utility tokens, specifically, focus on providing practical utility within a platform rather than a return of yield on an investment. However, if the practical utility of these tokens extends beyond accessing benefits within the DLT ecosystem, they may be subject to additional regulations. Firstly, it could be considered a virtual currency under Spanish legislation if it can also be electronically transferred, stored, or traded (for example, if the utility token can be stored in an electronic wallet). Also, if it provides access to lootboxes, one of the requirements that characterizes gambling activities may be met, which is that participation requires a monetary payment. Therefore, there is a possibility that the activity would fall under Spanish gambling legislation.

Can crypto-assets fall under multiple legal categories?

When a crypto-asset can fall under multiple legal categories, additional challenges arise in its classification. These "hybrids" that combine various characteristics, components, and purposes, may lead to a classification not conclusive, even if their initial classification, as financial instruments or utility tokens, provides an indication of their nature. The classification process should prioritise the identification of financial instrument features, and alternative classifications should be considered only if the asset does not meet the criteria of a financial instrument. National competent authorities and market participants should consider that if a financial instrument exists for hybrid crypto-assets, said classification should prevail.

Uniqueness as a key factor when classifying NFTs

When determining whether a crypto-asset could qualify as an NFT, the ESMA focuses on the uniqueness of the digital asset. There are certain indicators that allow the identification of crypto-assets as unique:

• Their characteristics and rights distinguish them from other tokens. Simply relying on technical identifiers or standards is not enough to establish uniqueness. The value of the crypto-assets should be intrinsically connected to their individual attributes and the specific utility they provide to their holders.
• In the context of series or collections of NFTs and in the case that they were to be divided into multiple crypto-assets, each asset within the series or fraction (respectively) has unique attributes that differentiates it from others and its value is not influenced by other comparable and interchangeable assets. 
• Their specific attributes provide distinct utility or access rights, not being functionally interchangeable.

Conclusion

Misclassification of crypto-assets can result in non-compliance with European and Spanish regulations, potentially leading to severe sanctions for companies operating with crypto-assets. It is critical for companies to allocate resources and conduct thorough analyses to ensure the proper classification of the crypto-assets they involve in their operations.