As crypto-assets and tokenised business models become increasingly established, new opportunities are opening up for companies, investors and service providers. At the same time, the question of which regulatory framework applies to these innovations is becoming increasingly pressing. The European Securities and Markets Authority (“ESMA”) has clarified in its guidelines under which circumstances crypto-assets are to be classified as financial instruments within the meaning of the Markets in Financial Instruments Directive (“MiFID II”). At the same time, the Regulation on Markets in Crypto-Assets (“MiCAR”) brought into force a new, specific legal framework for crypto-assets that are not regulated as financial instruments. MiCAR is also directly applicable in Liechtenstein – as an EEA state.
Substance over form: technology neutrality as a guiding principle
At the heart of the ESMA guidelines lies the principle of “substance over form”. Neither the technical design of a crypto-asset nor the designation chosen by the issuer is decisive for its regulatory classification. Rather, the actual economic functions and the rights granted to the holder are decisive. Tokenised financial instruments therefore remain financial instruments, regardless of whether they are issued and transferred on a blockchain or not.
When does a crypto-asset become a financial instrument?
In ESMA’s view, the classification of a crypto-asset as a financial instrument depends on its specific design. The decisive factor is whether the token meets the characteristics of a financial instrument under MiFID II and confers economically comparable rights to those of traditional financial instruments. Classification is always carried out on a case-by-case basis, with the focus on the actual characteristics and functions of the token.
This classification is particularly important for issuers, platform operators and service providers, as the applicable regulatory requirements and authorisation obligations depend on it.
Classification as a transferable security is particularly relevant. A crypto-asset may be considered a financial instrument if it:
- does not serve a purely payment function,
- belongs to a class of securities and
- is tradable on the capital market.
Of particular relevance is whether the crypto-assets are standardised and interchangeable (belonging to a class) and confer rights comparable to those of shares, bonds or similar securities. The crypto-assets must also be freely tradable on the capital market.
Tokens with share- or bond-like rights
The situation is particularly clear-cut in the case of tokens that are associated with corporate holdings. If, for example, a token confers:
- rights to a share in the company’s capital,
- dividend entitlements,
- voting rights in corporate decisions or
- claims to liquidation proceeds,
this suggests that it qualifies as a transferable security under MiFID II.
ESMA expressly distinguishes between corporate voting rights and mere governance rights within a blockchain protocol. Mere voting on technical parameters or protocol changes is generally not sufficient to make a utility token a financial instrument.
Crypto-assets comparable to bonds or other securitised debt instruments are also of practical relevance. These include, for example, tokens that grant a claim to the repayment of a sum of money and corresponding interest (fixed or variable).
Utility tokens generally remain outside the scope of MiCAR
Utility tokens that merely grant access to services, platform functions or discounts are generally not financial instruments under the guidelines. This applies even if investors speculate on capital gains.
ESMA expressly clarifies that the holder’s expectation of a profit alone is not sufficient to classify a crypto-asset as a financial instrument. The specific structure of the rights conferred remains decisive.
Other financial instruments
In addition to transferable securities, crypto-assets may also qualify as other types of financial instruments, in particular as:
- money market instruments,
- units in UCITS or alternative investment funds,
- derivatives or
- emission allowances.
ESMA pays particular attention to tokenised derivatives. Tokens whose value is derived from an underlying asset or which replicate futures, options or swap structures may be classified as financial instruments regardless of their technical design. In the case of structures that reference an underlying asset, a detailed examination of the distinction from asset-referenced tokens (“ARTs”) and e-money tokens (“EMTs”) within the meaning of MiCAR is required.
NFTs and fractionalised NFTs
ESMA also takes an economic approach to non-fungible tokens (“NFTs”). Mere technical distinguishability (e.g. through the assignment of unique identification numbers) is not sufficient to meet the exception for NFTs.
If NFTs are genuinely unique and non-fungible, they generally do not fall within the scope of MiCAR. However, if they meet the criteria of a financial instrument, they may still be subject to the relevant capital markets regulations.
Particular caution is required with regard to fractionalised NFTs. ESMA makes it clear that dividing an NFT into numerous tradable fractions may result in the requirements of uniqueness and non-fungibility no longer being met.
Hybrid tokens: financial instrument takes precedence
Of particular practical relevance are hybrid tokens, which combine both utility and investment elements. For these tokens, the ESMA guidelines provide for a clear order of assessment: first, it must be determined whether a financial instrument within the meaning of MiFID II is present. If this is the case, the token does not fall within the scope of MiCAR.
ESMA thus confirms the principle of systematic demarcation between the two regulatory regimes laid down in the recitals of MiCAR. The rules for financial instruments therefore take precedence. If a crypto-asset is classified as a financial instrument within the meaning of MiFID II, MiCAR does not apply.
Conclusion
The ESMA guidelines establish a uniform European standard for classifying crypto-assets as financial instruments. For issuers, crypto-asset service providers and investors, this means greater legal certainty and easier classification of innovative token models within the European regulatory framework. The technical implementation on the blockchain takes a back seat.
ESMA consistently follows the principle of “same activity, same risk, same rules”: economically comparable functions should be subject to the same regulatory requirements regardless of the technology used. Certain challenges remain, however, as EEA member states still have a degree of discretion in implementing the concept of financial instruments. A thorough examination of the legal framework is therefore essential. In many cases, MiCAR also requires a legal classification in the form of a statement by the issuer or a qualified legal opinion.
The correct regulatory classification is often the crucial starting point for the successful implementation of tokenisation and crypto projects. We would be happy to assist you with the legal classification of crypto-assets as well as with all matters relating to MiCAR, MiFID II and digital financial instruments.
Authors:
Dr Giuseppina Epicoco; Mag Laura Hödl