MiCA's Right of Redemption for Asset-Referenced Tokens and E-money Tokens

The Markets in Crypto-Assets Regulation (MiCA) provides holders of asset-referenced tokens and e-money tokens a permanent right of redemption against the issuer. This article summarizes the scope of the right of redemption and provides an overview of the associated requirements for issuers.   

Redemption of Asset-Referenced Tokens

Asset-referenced tokens are a type of crypto-asset that purport to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies. Issuers of asset-referenced tokens are required to constitute and at all times maintain a reserve of assets backing their asset-referenced tokens. 

Article 39 MiCA establishes a right of redemption for holders of asset-referenced tokens against the issuer. This redemption right extends to the reserve of assets, which is the basket of reserve assets securing the claim against the issuer.

Upon request by a holder of an asset-referenced token, the issuer must redeem the token by either (i) paying an amount in funds, other than electronic money, equivalent to the market value of the assets referenced by the asset-referenced token held; or (ii) delivering the assets referenced by the token. 

Issuers must also establish a policy on the permanent right of redemption setting out:

• conditions, including thresholds, periods and timeframes, for holders to exercise the right of redemption;
• mechanisms and procedures ensuring the redemption of tokens, including in stressed market circumstances;
• the valuation, or the principles of valuation, of the asset-referenced tokens and the reserve assets when the right of redemption is exercised;
• the conditions for settlement of the redemption; and 
• measures to manage increases or decreases in the reserve of assets to avoid any adverse impacts on the market of the reserve assets.

Preparation of a Redemption Plan

Under Article 47 MiCA, issuers must draw up and maintain an operational plan to support the orderly redemption of each asset-referenced token in the event that the competent authority decides that the issuer is unable to or likely to be unable to fulfil its obligations, including instances like the issuer's insolvency or withdrawal of authorization. The redemption plan should: 

• demonstrate the ability of the issuer to carry out the redemption without causing undue economic harm to its holders or to the stability of the markets of the reserve assets;
• include contractual arrangements, procedures and systems, including the designation of a temporary administrator in accordance with applicable law, to ensure the equitable treatment of all holders of asset-referenced tokens and to ensure that holders of asset-referenced tokens are paid in a timely manner with the proceeds from the sale of the remaining reserve assets; and
• ensure continuity of critical activities needed for an orderly redemption.

Issuers must notify the redemption plan to the competent authority within six months of either the date of authorization or the approval of the crypto-asset white paper. Moreover, the issuer shall regularly review and update the redemption plan. 

Redemption of E-Money Tokens

E-money tokens are similar to asset-referenced tokens, except that they reference the value of only one official currency. E-money tokens can only be issued by authorized credit institutions or e-money institutions. Holders of e-money tokens must also have a right of redemption for funds denominated in the official currency that the e-money tokens reference at par value and at any time. Similarly to issuers of asset-referenced tokens, e-money token issuers must establish a redemption plan pursuant to Article 55 MiCA. This redemption plan is to be notified to the competent authority within six months of the date of the public offer or admission to trading. 

Conclusion

In conclusion, the right of redemption introduced by MiCA gives tokenholders legal certainty with regard to their right of redemption. However, this right of redemption comes with significant obligations for issuers. They are required to establish and maintain reserves of assets, formulate detailed policies, and develop operational plans. These obligations demand careful consideration from issuers to ensure compliance, as failure to do so could result in economic harm and regulatory consequences. As a law firm specializing in crypto law, we are well positioned to assist you in drafting redemption plans to ensure that it complies with MiCA's requirements and withstands regulatory scrutiny.