Response to consultation on Regulatory Technical Standards on the use of ARTs and EMTs denominated in a non-EU currency as a means of exchange (MiCAR)
Question 1: Do you agree with the EBA’s proposals on how issuers should estimate the number and value of transactions associated to uses of an ART or of an EMT denominated in a non-EU currency “as a means of exchange”, as reflected in Article 3 of the draft RTS? If not, please provide your reasoning and the underlying evidence, and suggest an alternative approach for estimating the number and value of these transactions.
Our understanding of the EU Commission’s policy intention in the Level 1 text was not to capture EMT transactions carried out on crypto platforms eg in relation to trading or custodial activity and was only meant to capture pure payment use cases eg for goods and services. However given there is a degree of ambiguity around the definition of “means of exchange” we would welcome the EBA’s further clarification on scope and would respectfully ask that EBA clarify that only true payments for goods and services are captured. We agree that the concept of “a means of exchange” should exclude: (i) transfers between accounts/addresses of the same person; and (ii) the exchange of these tokens for funds or other crypto-assets with the issuer or with a CASP, unless where the token is used for settlement of transactions in other crypto-assets. The EBA should also reiterate Article 22(1) of MiCAR which states that a transaction must involve a change in the natural or legal person entitled to the ART/EMT. For example, this could be added to the recitals or to Article 3(4) of the draft RTS.
In addition, the EBA should clarify that the concept of a “means of exchange” should be limited to transactions where there is an obvious “payments” use case. Obvious payments use cases should exclude: (i) the exchange of ART / EMT for funds or other crypto-assets with another person (as this is simply swap of one property for another); (ii) transfer of the ART / EMT to third parties free of payment, for example by way of a “gift”; (iii) transactions where the ART / EMT is used to physically settle a derivative contract; (iv) use of the ART / EMT as collateral connected with derivative contracts or for margin trading, and the associated posting / removing of the tokens as collateral. We understand that the intention of the Level 1 text was that EMT/ART transactions occurring or settling on an exchange shouldn’t be categorised as a payment or means of exchange.
As it currently stands, most transactions in ARTs / EMTs relate to custody or trading and therefore it should not be assumed that they are being used as a means of exchange. Doing so would inflate the number and value of transactions reported under Article 22(1)(d) of MiCAR. Therefore, an obvious payments use case will require the CASP or issuer to have knowledge, or a reasonable belief, that the purpose of the transaction is for the ART/EMT to be used as means of exchange (e.g. payment for a good or service). Without the requisite knowledge or reasonable belief, the CASP/issuer should not be expected to report the transactions.
Question 3: Do you agree with the EBA’s proposals regarding the geographical scope of the transactions covered by Article 22(1), point (d) of MiCAR, as reflected in Article 3(5) of the draft RTS? If not, please provide your reasoning and the underlying evidence.
We disagree with the EBA’s proposals regarding the geographical scope of the reporting obligation. Please refer to our comments at Question 4.
Question 4: Do you agree with the EBA’s proposals on how issuers should assign the transactions in scope of Article 22(1)(d) of MiCAR to a single currency area, as reflected in Article 4 of the draft RTS? If not, please provide your reasoning and the underlying evidence.
We disagree with the EBA’s interpretation that the scope of the reporting obligation includes transactions where only one of the payer or payee is located within the Union or a single currency area. In particular, the reporting obligation in Article 22(1)(d) and 22(6) refers to reporting transactions “within a single currency area” (our emphasis). This implies that both parties to the transaction (i.e., the payer and the payee) must be in the single currency area, otherwise the transaction would not be ‘within’ the area but partly outside. The same analysis applies to transactions within the Union.
Alternatively, if we accept that the reporting obligation applies to transactions wholly within the Union, regardless of whether the payer and payee are in the same or different currency areas, the RTS as currently drafted requires cross-currency area transactions to be reported twice. This double reporting would inflate the number of transactions for a specific ART/significant EMT. To mitigate this, we suggest that issuers only report the transaction once, for example by only reporting the payer or the payee leg but not both.
Question 6: In your view, does the transactional data to be reported by CASPs to the issuer, as described in paragraph 43 above, cover the data needed to allow the issuer to reconcile the information received from the CASP of the payer and the CASP of the payee before reporting the information in Article 22(1), point (d) to the competent authority? If not, please provide your reasoning with details and examples of which data should be added or removed.
We do not agree with the proposal for issuers to report transactions with non-custodial (or self hosted wallets). Further, the reporting by CASPs of transactional information and the public distributed ledger addresses used for making transfers on behalf of their clients, will not allow issuers to definitively identify whether an on-chain transaction involves a non-custodial wallet and therefore to comprehensively reconcile reported data. This is because a wallet address may belong to a CASP that is not within the scope of MiCAR or the TFR e.g., a non-EU CASP. (See response to Qn 9 below)
Question 7: Do you agree that, based on the transactional data to be reported by CASPs to the issuer as described in paragraph 43 above, issuers will be able to reconcile the data received from the CASP of the payer and the CASP of the payee on a transactional basis and in automated manner? If not, what obstacles do you see and how could these be overcome?
We support the reporting of unique identifier information for each holder by the CASP to the issuer for the purpose of avoiding the double counting of transactions reported by the CASP of the payer and the CASP of the payee. However, this unique identifier should be pseudonymous. Requiring CASPs to provide issuers with the personally identifiable information (PII) of their customers such as the originators address, personal document number, date and place of birth serves no net benefit over a unique pseudonymous identifier and would create significant data privacy concerns and be at odds with EU data minimisation principles.
Question 8: In your view, how can an issuer estimate, in the case of transactions between noncustodial wallets, or between other type of distributed ledger addresses where there is no CASP involved: (i) whether the transfer is made between addresses of different persons, or between addresses of the same person, and (ii) the location of the payer and of the payee? Please describe the analytics tools and methodology that could be used for determining such aspects, and indicate what would be, in your view, the costs associated to using such tools and the degree of accuracy of the estimates referred to above?
We are supportive of estimations. Issuers can use the data available on the distributed ledger coupled with distributed ledger analytics tools to estimate transactions.
Question 9: Do you consider the EBA’s proposals set out in recital 3 of the draft RTS and further explained in paragraphs 48-55 above as regards the reporting of transactions between noncustodial wallets and between other type of distributed ledger addresses where there is no CASP involved to be achieving an appropriate balance between the competing demands of ensuring a high degree of data quality and imposing a proportionate reporting burden? If not, please provide your reasoning and the underlying evidence.
We strongly oppose reporting requirements in relation to non-custodial wallets or between other types of distributed ledger addresses where there is no CASP involved, as data quality is likely to be poor and create false volumes (for example an individual could be sending assets to their own wallet address) and will divert resources away from other critical programs. Further, this proposal risks undermining the value of non-custodial wallets for users. These wallets are software tools that enable users to securely interact with blockchain networks by empowering whoever controls the private key to interact with the data related to the respective public key address. Non-custodial wallets are used as a convenient way to interact with blockchain networks, just as web users tend to use web browsers to access the Internet. With a self-hosted wallet, users are able to hold their private keys and digital assets, as well as send and receive digital assets in a peer-to-peer manner. Neither the provider of the self-hosted wallet software, nor the self-hosted wallet itself “effectuate” transactions on a user’s behalf.
If the EBA continues to favour non-custodial transaction reporting requirements, a more balanced standard of conduct such as commercially reasonable efforts would be more appropriate and manageable. The EBA suggests at paragraph 50 of its consultation that issuers should be required to comply with their reporting obligations under Article 22(1) on a best-efforts basis which we consider too high a bar. Some courts have previously stated that this standard requires the obliged person to “leave no stone unturned”, essentially requiring issuers to do everything in their power to ensure they can identify, for example whether a transaction is between non-custodial wallets or between other type of distributed ledger addresses where no CASP is involved, or whether a transaction was associated to an ART/EMT being used as a means of exchange.