Payment tokens are those crypto-assets that are primarily used for payment purposes. The Markets in Crypto-Assets Regulation (“MiCAR”) regulates, inter alia, payment tokens in the form of e-money tokens. However, e-money tokens (and other types of payment tokens) also fall within the scope of the E-Money Directive 2 (“EMD2”) and the Payment Services Directive 2 (“PSD2”) (upcoming Payment Services Directive 3 (“PSD3”) and Payment Services Regulation (“PSR”). This creates a regulatory tension between the provisions of MiCAR and those of EMD2/PSD2 (to be replaced by PSD3/PSR). In this article, we take a closer look at this tension. It raises a number of questions and creates practical difficulties.
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MiCAR
With the MiCAR, which entered into force on 29 June 2023 and is partially applicable as of 30 June 2024, the EU legislator aims to regulate the market for crypto-assets.
In practice, crypto-assets are typically divided into three types:
- Payment/Currency Token
- Utility Token
- Security/Investment Token
The classification of a token into one of the above categories is based on the purpose of the respective token.
The MiCAR itself divides crypto-assets into three categories:
- E-money tokens
- Asset-referenced tokens
- other crypto-assets
Payment tokens are primarily categorised by MiCAR as e-money tokens, but asset-referenced tokens can also be used for payment purposes.
EMD2/PSD2 (upcoming PSD3/PSR)
Under current legislation, payment services are governed by PSD2 and e-money businesses by EMD2.
PSD2 and EMD2 will be followed by PSD3 and PSR in the near future. PSD3 and PSR are currently available as drafts from the EU Commission and have not yet been adopted by the EU legislator.
PSD3 will regulate the prudential rules applicable to the provision of payment services and e-money services. PSR will also contain prudential provisions (in particular, the catalogue of exemptions from the authorisation requirement), but will primarily regulate the civil law relevant to the provision of payment services and e-money services (rights and obligations of payment service providers and payment service users or e-money holders; transparency and information obligations of payment service providers). PSD3 and PSR will bring some significant innovations compared to PSD2 and EMD2 (see, for example, our articles The EU Commission’s proposals for PSD3 and PSR – a first overview and Innovations in PSD3 and PSR from the ECON Reports ).
E-money tokens in the regulatory tension
MiCAR principle: No overlap with other EU legislation
In regulating crypto-assets through MiCAR, the EU legislator follows the principle of avoiding overlap with other EU legislation.
According to Art. 2 (4) MiCAR, MiCAR does not apply to crypto-assets that belong to categories already regulated by other EU legislation. Examples include:
- financial instruments (these are subject to the Markets in Financial Instruments Directive 2 )
- deposits (these are covered by the Deposit Guarantee Scheme Directive)
- securitisation positions (covered by the Securitisation Regulation)
- funds, except if they qualify as e-money tokens.
Exception to the MiCAR principle: Coexistence of MiCAR and EMD2 (upcoming PSD3/PSR) for e-money tokens
The principle of avoiding an overlap between MiCAR and other EU legislation is already broken when it comes to e-money tokens. MiCAR has separate provisions in its Title IV and allows MiCAR and the EMD2 to coexist.
Art. 48 para. 3 MiCAR says that Title II and Title III of the EMD2 apply to e-money tokens, unless Title IV of MiCAR says otherwise. Title II and Title III of EMD2 contain, in particular, requirements for the taking up, pursuit and prudential supervision of the business of electronic money institutions and on the issuance and redeemability of electronic money.
The fact that MiCAR and EMD2 (upcoming PSD3/PSR) overlap in the regulation of e-money tokens creates some tricky demarcation issues and raises a lot of questions (see below).
Qualification of e-money tokens as funds
In future, e-money tokens will be included under the definition of “funds” within the meaning of Art. 2 No. 23 PSD3 and Art. 3 No. 30 PSR.
The fact that e-money tokens are classed as “funds” also creates some difficulties and raises a few questions that haven’t been answered yet (see below).
Demarcation difficulties…
As outlined above, e-money tokens are subject to both MiCar regulatory framework and EMD2 (upcoming PSD3/PSR) regulatory framework.
In order to figure out which regulatory framework applies to an e-money product, it is therefore necessary to check whether the respective e-money product is its “classic” e-money that is only subject to EMD2 (upcoming PSD3/PSR), or it its an e-money token that falls under both EMD2 (upcoming PSD3/PSR) and certain MiCAR regulations.
The definition of e-money in EMD2 (upcoming PSD3/PSR) and e-money tokens in MiCAR differ. As a result, it can be challenging to distinguish between the different types of e-money and determine which regulatory framework applies to a particular e-money product.
… & open questions
The disagreement between MiCAR and PSD2/EMD2 (upcoming PSD3/PSR) raises many questions. Here are a few examples:
- If e-money tokens are also considered as “funds” within the meaning of the PSD3/PSR in future, will this result in double regulation of crypto-asset service providers by MiCAR and PSD3/PSR?
- Given that Art. 48 para. 3 MiCAR makes a reference, do CRR credit institutions that issue e-money tokens also have to meet the requirements of EMD2 (upcoming PSD3/ PSR)? These requirements in principle only apply to e-money institutions (or payment institutions) (e.g. safeguarding requirements)?
- Is there an obligation for strong customer authentication when carrying out transactions with e-money tokens?
- What regulatory requirements apply to asset-backed tokens that can (also) be used for payment purposes?
Bottom line
The relationship between MiCAR and PSD2/EMD2 (upcoming PSD3/PSR) with regard to e-money tokens (and other types of payment tokens) is difficult to navigate and leads to demarcation difficulties and open questions. Clarification by the EU legislator is therefore highly welcome. It remains to be seen whether the EU legislator will make corresponding adjustments, e.g. as part of the ongoing legislative process for PSD3/PSR.
