MiCAR – four important questions for retailers with NFT/token projects

In the recent years, we have seen many retailers and their consumer brand NFT or token projects. It has been reported that Nike’s NFT had scored the highest revenue, exceeding $ 185 million. Also, other sports and fashion companies like Dolce & Gabbana, Tiffany or Gucci, completed their NFT projects successfully. Now, the regulatory landscape for token projects in the European Union is on the verge of materially changing.

Already in summer 2023, the EU Regulation on markets in crypto-assets (Regulation (EU) 2023/1114 – short “MiCAR”) entered into force. Yet, it will only start to apply in two stages: the first important date is 30 June 2024; the second one 30 December 2024. If you want to learn more about MiCAR in general, please take a look at our Road to MiCAR. In short: MiCAR will introduce regulation on token issuers and service providers.

Based on this changing environment for NFT and token projects, it is worth taking a look at four important questions for retailers:

1. I did my legal checks when I started my NFT project. My NFTs were not qualified as financial instruments. Why do I need to bother with regulation?

It was important to verify that the start of the NFT project was compliant with regulation at that time. If it’s revealed that the NFT was not a financial instrument, then MiCAR might be relevant. For background: MiCAR applies to those token (or, as the regulation says, crypto-assets) that are not previously covered by EU financial sector regulation. Meaning, when the legal advice at the start of the NFT project was that the token is not regulated, this is the entry point for MiCAR.

To be more precise: If the NFT was qualified as a financial instrument under national laws, but not based on EU harmonised laws like MiFID II, there is still a chance of MiCAR application. It should be considered to verify the status of the token under MiCAR.

2. But our NFT is a non-fungible token and MiCAR does not apply to non-fungible crypto-assets.

It is true that MiCAR does not apply to crypto-assets that are unique and not fungible with other crypto-assets. However, the question of what should be regarded as NFTs is seen differently by the market and the regulators.

The market usually qualifies a token as an NFT if it is technically unique, like an ERC-721 token. Due to the ERC-721 protocol, each token can be clearly separated from another. However, the characteristics or rights attached to those tokens can be the same and, then, the NFT owner has no particular interest in owning a specific token.

The regulators, based on their pre-MiCAR regulation as well as based on the text of MiCAR, have a different view on this question. While MiCAR clearly says that it shall not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectibles, the question is whether a certain token is actually unique and not fungible.

Retailers’ NFT projects are usually scalable. There is an issuance of tokens in a large series or collection. In some cases, there is only a unique identifier attributed to each token to call it non-fungible. The underlying rights represented by the token are, however, all the same (at least for a particular series). Therefore, a review of the qualification of the NFT is important and it can be still covered by MiCAR.

3. I have my NFTs in the market, no further issuance is planned. Why should I care?

MiCAR will in the first place apply to those issuances done after the regulation becomes fully applicable, i.e., at the end of 2024. However, there might also be some obligations on the issuers of tokens that are already in the market.

Firstly, most obligations on issuers will not apply if the offer of the token ended before 30 December 2024. However, if the token was admitted to trading before 30 December 2024, there are restrictions on marketing communications published after 30 December 2024. These restrictions include, inter alia, that the marketing communications must be clearly identifiable as such, and must be fair, clear and not misleading. The information in the marketing communications must be consistent with the information in the crypto-asset white paper, where such crypto-asset white paper is required. The marketing communications must clearly state that a crypto-asset white paper has been published and clearly indicate the address of the website of the offeror, the person seeking admission to trading, or the operator of the trading platform for the token concerned, as well as a telephone number and an email address to contact that person. Finally, the marketing communications must contain the following clear and prominent statement:

“This crypto-asset marketing communication has not been reviewed or approved by any competent authority in any Member State of the European Union. The offeror of the crypto-asset is solely responsible for the content of this crypto-asset marketing communication.”

Marketing communications must also be notified to the competent regulator upon request.

In addition to this, operators of trading platforms must ensure by 31 December 2027 that – subject to the general exemptions under MiCAR – a crypto-asset white paper is drawn up, notified to the competent regulator, and published as well as updated if required.

4. I want to continue to issue my NFT or have another NFT project planned. What do I need to do?

If the token shall also be offered after 30 December 2024, or a new project shall be started, MiCAR – if applicable – puts some requirements on the offeror. Those requirements range from a limitation on the person of the offeror (only a legal person may do so) to the requirement of a white paper and restrictions on marketing communications (as set out above).

The white paper obligation includes: to draw up a crypto-asset white paper; to notify it to the competent regulator; and to publish it.

In addition, there are conduct requirements like acting honestly, fairly and professionally. The offeror has to communicate with holders and prospective holders of the token in a fair, clear and not misleading manner and to identify, prevent, manage and disclose any conflicts of interest that might arise. The offeror also has to maintain all of its systems and security access protocols in conformity with the appropriate EU standards.

There are of course also exemptions which an NFT project can consider utilising. In particular the white paper requirement does not apply in the following cases:

• ·offers of tokens to fewer than 150 natural or legal persons per EU Member State where such persons are acting on their own account;
• ·over a period of 12 months, starting with the beginning of the offer, the total consideration of an offer to the public of tokens in the EU does not exceed EUR 1,000,000, or the equivalent amount in another official currency or in crypto-assets;
• ·offers of tokens addressed solely to qualified investors where the tokens can only be held by such qualified investors;
• the tokens are offered for free;
• the tokens are automatically created as a reward for the maintenance of the distributed ledger or the validation of transactions;
• ·offers concerning a utility token providing access to a good or service that exists or is in operation;
• the holder of the token has the right to use it only in exchange for goods and services in a limited network of merchants with contractual arrangements with the offeror.

Whether such an exemption can be applied needs to be assessed on a case-by-case basis.

Summary

MiCAR has become important for all consumer brands with an NFT/token project. The changed perimeters of regulation need to be assessed and verified, however the good news is that MiCAR brings a harmonised approach to the EU.