Electronic transfer of digital representations

Introduction

The crypto-asset definition provides cumulative conditions of ‘transfer’ and ‘storage’ that apply to all relevant crypto-assets falling within MiCA’s scope (note the coordinating conjunction “and” in the definition between ‘transfer’ and ‘storage’).

A) Transferable digital representation

Crypto-assets must be more than just a simple digital representation.

They must also possess the inherent capability to be transferred electronically. Typically, digital assets that cannot be transferred to other holders do not fall within MiCA’s crypto-asset definition (Recital (17) MiCA). As a result, MiCA refers to them as ‘digital assets’ and not as crypto-assets (Recital (17) MiCA).

Digital assets that can only be accepted by their own issuer or offeror and that cannot, subsequently, be transferred to other holders are explicitly excluded from MiCA’s application scope (Recital (17) MiCA). Such assets might include certain airline miles, credit card awards or similar loyalty schemes/programs (FATF, Virtual assets, §84) where loyalty points can only be exchanged for benefits with the issuer or offeror of these points (Recital (17) MiCA) and where the holder cannot, therefore, sell them onward in a secondary market outside of a closed-loop system (FATF, Virtual assets, §84). Such digital assets are considered non-transferable, non-exchangeable, and are not used for payment or investment purposes (FATF, Virtual assets, §84).

The rationale for such exclusion is rather straightforward: assets that lack the technical ability to be transferred also do not permit the transfer of any value or right that they represent. They cannot be traded or exchanged in marketplaces and be accumulated speculatively and, hence, they have no market value. These assets are not readily interchangeable and do not represent any value or rights that could potentially be in the market, expose other holders to risks or threat market integrity (by analogy Recital (10) MiCA).

On the other hand, while some crypto-assets are transferable, their ability to be transferred might also be contingent upon certain conditions. This could be the reason why an individual seeking the admission of a crypto-asset is required to publish a white paper containing a clear and unambiguous statement that “the crypto-assets may not always be transferrable” (Article 6-5(b) MiCA).

B) Electronic transfer

The term “electronically” implies that the crypto-asset must be transferred, in the form of digital data, using distributed ledger technology (DLTs) or similar technology (Article 3-1(5) MiCA). It is unclear whether MiCA would apply to theoretical digital representations that could be transferred using other technologies or methods than a DLT (e.g., through a cold storage in a usb-key).

A DLT is a technology that enables the operation and use of information repositories that keep records of transactions and that are shared across, and synchronised between, a set of DLT network nodes using a consensus mechanism (Article 3-1(1) to (4) MiCA, which incorporates the definitions of Article 2(1) to (4) of Regulation (EU) 2022/858 of 30 May 2022 on a pilot regime for market infrastructures). The terms 'distributed ledger technology’ aim exclusively the DLT technology itself, such as the blockchain technology (Bitcoin Blockchain, Ethereum Blockchain, etc.) (Recital (1) MiCA; PE, Cryptocurrencies and blockchain, p. 15) but also Hedera Hashgraph (HBAR) or Tangle (IOTA).

Therefore, an electronic transfer using a DLT is a transfer made from one distributed ledger address/account (such as a Blockchain address), to another distributed ledger address/account (Recital (93) MiCA; Article 3-1(26) MiCA). A distributed ledger address is uniquely identified by a public key composed of alphanumeric characters that serve a purpose similar to a user account number (PE, Cryptocurrencies and blockchain, p. 17; CE, impact assessment, p. 4).

Interestingly, the definition of crypto-assets also allows the possibility for crypto-assets to be transferred using “similar technologies” to DLTs. This term appears however to be an attempt to make MiCA future-proof (Recital (1) MiCA; Recital (16) MiCA), targeting potential new technologies that could emerge in the near future. It does not seem to refer to any existing technology and MiCA provides no example of such “similar technology”.

Furthermore, some provisions of MiCA exclusively pertain to DLTs which appears to exclude the application of these provisions to “similar technologies” to DLT (Recital (93) MiCA; Article 4-3(b) MiCA; Article 25-1(f) MiCA; Article 34-5(f) MiCA). This raises several questions:

• MiCA’s provisions regarding the “consensus mechanism” (Article 3-1(3) MiCA), which concern specifically DLT network nodes - in particular the “consensus mechanism” obligations weighing on different actors regarding their adverse environmental and climate impact (Recital (7) MiCA; Recital (110) MiCA; Article 6-1(f) MiCA; Article 19-1(h) MiCA; Article 51-1(g) MiCA; Article 66-5 MiCA). This does not seem to concern network nodes of “similar technologies” to DLTs that, incidentally, are not DLTs;
• Most MiCA’s provisions applicable to the offer crypto-assets to the public in the EU do not apply to offers to the public where the crypto-assets are automatically created as a reward for the maintenance of the DLT or the validation of transactions (Article 4-3 MiCA). It is unclear whather this exemption is extendable to the “validation of transactions” in similar technologies to DLTs.