EBA publishes Final Report on draft RTS on information of a proposed acquisition of qualifying holdings in issuers of ARTs under MiCAR

RegCORE Client Alert | EU Digital Single Market

QuickTake

On 7 May 2024, the European Banking Authority (EBA) published three sets of final draft regulatory technical standards (RTS) and one set of final draft implementing technical standards (ITS) relating to: (i) the authorisation as crypto-asset issuer (CAI) of asset-referenced tokens (ARTs), (ii) the information for the assessment of acquisition of qualifying holdings in issuers of ARTs and (iii) the procedure for the approval of white papers for ARTs issued by credit institutions under the EU’s Markets in Crypto-assets Regulation (MiCAR).Regulation (EU) 2023/1114.Show Footnote These technical standards are key to regulating access to the EU market by applicant crypto-asset issuers (CAIs) of ARTs and persons intending to exercise significant influence on these undertakings via the acquisition of qualifying holdings as well as in setting standards on the procedure for the approval of white papers for ARTs issued by credit institutions (i.e. banks). Each of the developments in points (i), (ii) and (iii) are assessed in dedicated Client Alerts, which should be read in conjunction with further analysis on MiCAR generally as well as specifically in context of further RTS/ITS as available from PwC Legal’s dedicated EU Regulatory Compliance Operations, Risk and Engagement (EU RegCORE) centre.

This specific Client Alert focuses on point (ii) above and the supervisory expectation in the EBA’s Final ReportAvailable here.Show Footnote on draft RTS on the detailed content of information necessary to carry out the assessment of a proposed acquisition of qualifying holdings in issuers of ARTs pursuant to MiCAR. This RTS and other principles detailed in the Final Report were developed in close cooperation with the European Securities and Markets Authority (ESMA) and are not only relevant for crypto-asset service providers (CASPs) but other financial services providers.

The Final Report marks an important milestone in delivering MiCAR’s full operationalisation by December 2024 in setting out how to applicant qualifying holdings in issuers of ARTs are to be assessed. A separate RTS on the assessment of qualifying holdings in respect of CASPs is conferred to ESMA.

Qualifying holdings: a recap on the rules and regulatory rationale

In the context of the EU’s financial regulatory and supervisory framework, the concept of qualifying holdings is a fundamental aspect of supervision of regulated firms. Ensuring who owns what type and level of qualifying holding in a regulated entity and what this means for the regulated entity’s prospects is important to ensure the stability and integrity of financial institutions and, by extension, the financial system as a whole. In the EU the qualifying holdings regime therefore aims to enable: 

• Prevention of undue influence: by monitoring qualifying holdings, regulators can prevent any single investor or group of investors from exerting undue influence over the strategic decisions and operations of a regulated firm. This is crucial to avoid situations where the interests of a few could potentially lead to decisions that are not in the best interest of the institution, its customers, or the financial system.
• Assessment of suitability and financial soundness: regulators assess the suitability of shareholders with qualifying holdings to ensure they meet certain standards of reputation and financial soundness. This is to prevent individuals or entities that may pose a risk to the proper functioning of the regulated firm from gaining significant influence.
• Financial stability and integrity: by requiring approval for significant acquisitions, regulators can evaluate the potential impact on the stability and integrity of the regulated firm and the financial system. This includes assessing the source of funds for the acquisition and the financial strength of the acquiring party to support the regulated firm’s ongoing operations.
• Transparency and market confidence: the regulatory oversight of qualifying holdings promotes transparency in the ownership structure of regulated firms. This transparency is essential for maintaining market confidence, as stakeholders can be assured that the institution is not subject to opaque or potentially harmful ownership practices.
• Compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) requirements: regulators need to ensure that the entities with qualifying holdings are not involved in money laundering or terrorist financing. This is part of a broader effort to prevent the financial system from being used for illicit activities.

Under existing EU rules, which the Final Report and draft RTS roll-out, with certain modifications, to issuers of ARTs, a qualifying holding refers to a direct or indirect holding in an entity that represents a certain percentage of the capital or voting rights, which could significantly influence the management of that entity. The specific percentage that constitutes a qualifying holding is set at a threshold of 10% or more of the capital or voting rights. 

Any natural or legal person intending directly or indirectly to acquire, whether alone or in concert, qualifying holdings in issuers of ARTs or to increase directly or indirectly such qualifying holding, to submit a prior notification to the competent authority of that issuer of ARTs (the target entity), and to be subject to a prudential assessment. Additional information is required when such qualifying holding exceeds 10% (i.e., up to 20%) and equally when it is more than 20% and up to 50% and lastly when it is more than 50%. The details on this, as applied to qualifying holdings in respect of issuers of ARTs are detailed in the Final Report and the draft RTS. 

In terms of process, a proposed acquirer of qualifying holdings must: 

• submit a complete and accurate notification of the proposed acquisition to the competent authority of the target ART issuer, at least 30 working days before the intended date of the acquisition. The notification must include the information specified in the draft RTS. The notification must also include any additional information that the competent authority may request, such as evidence of the source of funds, due diligence reports, or legal opinions. 
• The proposed acquirer must inform the competent authority of any material changes to the information provided in the notification, as soon as possible and no later than 10 working days before the intended date of the acquisition. The proposed acquirer must also cooperate with the competent authority and provide any further information or clarification that the competent authority may require, within the time limit specified by the competent authority. 
• The ART issuer must inform the competent authority of the receipt of the notification of the proposed acquisition, within two working days of the receipt. The ART issuer must also provide the competent authority with any information that the competent authority may request, within the time limit specified by the competent authority. The ART issuer must also inform the competent authority of any material changes to the information provided by the proposed acquirer, as soon as possible and no later than 10 working days before the intended date of the acquisition.
• The competent authority must acknowledge the receipt of the notification of the proposed acquisition, within two working days of the receipt. The competent authority must also inform the proposed acquirer and the ART issuer of the outcome of the assessment of the proposed acquisition, within 60 working days of the receipt of the complete notification. The competent authority may approve, oppose, or impose conditions on the proposed acquisition, based on the criteria set out in Article 42(1) of MiCAR. The competent authority must also cooperate and exchange information with other competent authorities involved in the assessment process, in accordance with the provisions of MiCAR and the draft RTS.

As with every qualifying holdings and/or change in control procedure, the success of the regulatory approval relies much on the devil being in the detail… and in this case as set out in the draft RTS.

Key takeaways from the Final Report and draft RTS

The Final Report provides context on the rationale and objectives of the RTS and indicates supervisory expectations on how the rules in the RTS are to be applied. The draft RTS is annexed to the Final Report as a Commission Delegated Regulation. The draft RTS will be submitted to the European Commission for its endorsement. Following that, it will be subject to the scrutiny of the European Parliament and Council and then move to publication in the EU’s Official Journal and thus apply, as a Commission Delegated Regulation, in full across the EU.

The draft RTS are relevant for both proposed acquirers of qualifying holdings in ART issuers and for competent authorities under MiCAR, as they specify the information (and granularity) that is necessary and sufficient to enable the competent authorities to thoroughly assess the reputation, suitability, financial soundness, compliance and money laundering or terrorist financing risk of the proposed acquirers, as well as the impact of the proposed acquisition on the target entity and its ability to comply with the prudential requirements under MiCAR. 

The draft RTS also serve to substantially harmonise the information to be submitted by the proposed acquirer of qualifying holdings in an ART issuer to the competent authority of the target entity, in order to enable the competent authority to perform a prudential assessment of the proposed acquisition against the five criteria set out in Article 42(1) of MiCAR. These criteria are: 

1. reputation of the proposed acquirer; 
2. suitability of the persons who will direct the business of the target entity; 
3. financial soundness of the proposed acquirer; 
4. compliance with prudential requirements of the target entity; and 
5. reasonable grounds to suspect an attempt or increase in the money laundering or terrorist financing risk by the proposed acquisition.

In terms of approach, the draft RTS are structured in four chapters, covering general provisions, information relating to the proposed acquirer, information relating to the financing of the acquisition, and information relating to the proposed acquisition. The general provisions define the scope and application of the draft RTS, as well as the terms and definitions used therein. 

The draft RTS specifies the general information relating to the proposed acquirer, such as identity, contact details, curriculum vitae, legal entity identifier, and corporate documents, depending on whether the proposed acquirer is a natural or a legal person, and whether it is a trust, an alternative investment fund (AIF), an undertaking for collective investment in transferable securities (UCITS), or a sovereign wealth fund. The draft RTS also requires additional information relating to the proposed acquirer that is a legal person, such as information on the ultimate beneficial owners, the persons who effectively direct the business, the financial statements, the anti-money laundering and counter-terrorist financing policies and procedures, and the certificate of good standing from the third country authority, where applicable. 

Furthermore, the draft RTS sets out the information on the persons that will direct the business of the target entity, the financing of the acquisition, the new proposed group structure and its impact on supervision, and the strategy and business plan of the proposed acquirer, depending on the size and nature of the proposed acquisition. The information relating to the proposed acquisition includes the information on the size and nature of the proposed acquisition, the information on the persons who will direct the business of the target entity, the information on the impact of the proposed acquisition on the supervision of the target entity, and the additional information for qualifying holdings of more than 20% and up to 50%, or more than 50%. 

Fortunately, the draft RTS preserves the established principle of proportionality by requiring different sets of information from indirect shareholders, depending on whether the proposed acquirer intends to gain control over an existing holder of qualifying holdings in the target entity, or if the existence of a qualifying holding is determined by multiplying the percentage of qualifying holdings held indirectly along the holding chain with the qualifying holding held in the target entity. In addition, the draft RTS also incorporates proportionality by permitting reduced information requirements for proposed acquirers in specific situations, such as where the proposed acquirer has been assessed by the same competent authority in the last two years, or where the proposed acquirer is an authorised undertaking and subject to the supervision of the same competent authority of the target entity. 

The draft RTS is based on the existing regulatory products on the same matter, such as Commission Delegated Regulation (EU) 2017/1946 on information for notification of acquisitions of qualifying holdings in investment firms, and the Annex to the Joint ESAs Guidelines on the prudential assessment of the acquisition or increase of qualifying holdings. While many long-established concepts may be familiar to seasoned market participants (and their advisors) care should be still drawn to the crypto-asset and more importantly the ART specific considerations that are set out in the draft RTS and supervisory expectations of competent authorities. 

The draft RTS reflects the specificities of the ART issuers and the crypto-asset market, by introducing some adaptations and updates to the information that would be provided under the aforementioned existing EU requirements. For instance, the draft RTS require information on the professional experience of the proposed acquirer and the persons who will direct the business of the target entity in relation to crypto-assets, other digital assets, distributed ledger technology (DLT), information and communication technology (ICT), cybersecurity, and digital innovation. 15 Moreover, the draft RTS require information on the wallet, the CASPs, and the address identifiers of the originator and the beneficiary on the DLT, where the financing of the acquisition involves the use or exchange of crypto-assets.

It should be noted that the draft RTS were subject to a public consultation, which ran between 12 July and 12 October 2023, and a public hearing, which was held virtually on 21 September 2023. The EBA received 12 responses from various stakeholders, such as industry associations, ART issuers, CASPs, and law firms. The EBA analysed the responses and amended the draft RTS where appropriate, taking into account the feedback received and the need to ensure coherence with the ESMA RTS for CASPs. The main amendments include the clarification of some definitions and concepts, such as the meaning of ‘wallet’ and ‘acting in concert’, the addition of some recitals reminding the obligation to comply with the regime on privacy requirements, and the alignment of some provisions with the ESMA RTS, such as the information on the persons who will direct the business of the target entity and the information on the impact of the proposed acquisition on the supervision of the target entity. 

Outlook

The draft RTS will contribute to the effective and consistent implementation of MiCAR, by enhancing the transparency and harmonisation of the information to be submitted by the proposed acquirers and by facilitating the prudential assessment of the proposed acquisitions by the competent authorities. While much in the process will be familiar to seasoned financial services and digital asset native firms (as well as their advisors), the required granularity of detail and a slightly MiCAR-modified administrative process for approving qualifying holdings and/or change in control in respect of issuers of ARTs, will warrant the need for dedicated legal and multidisciplinary advisory support for applications submission of white papers. 

It is also important to note that the requirements set out in MiCAR are supplemented by RTS/ITS beyond the issues analysed in this Client Alert. Consideration will need to be given to the breadth of other EU legislative and regulatory rulemaking instruments, as may apply directly or with MiCAR-modifications to issuers of ARTs, which are subject to specific supervisory expectations of each of the respective competent authorities involved in supervising the EU’s Single Market for crypto-assets. This includes a need to understand the differences and commonalities and thus best options to navigate the expectations of competent authorities both at the EU and accordingly at the respective Member State level. 

About us

PwC Legal is assisting a number of financial services firms, CAIs, CASPs along with other market participants in forward planning for changes stemming from relevant related developments. We maintain a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators for both their “build the business” and on-going “run the business” priorities. We couple our longstanding expertise in successful delivery of licensing applications, filing regulatory notifications and obtaining clearances as well as structuring, drafting and launching crypto-asset offerings, all with the help of a breadth of proprietary AI systems to streamline the preparation of applications and notifications as well as white papers to meet MiCAR and other EU as well as global standards. 

Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal’s Rule Scanner tool, backed by a trusted set of managed solutions from PwC Legal Business Solutions, allowing for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from more than 1,500 legislative and regulatory policymakers and other industry voices in over 170 jurisdictions impacting financial services firms and their business.

Equally, in leveraging our Rule Scanner technology, we offer a further solution for clients to digitise financial services firms’ relevant internal policies and procedures, create a comprehensive documentation inventory with an established documentation hierarchy and embedded glossary that has version control over a defined backward plus forward looking timeline to be able to ensure changes in one policy are carried through over to other policy and procedure documents, critical path dependencies are mapped and legislative and regulatory developments are flagged where these may require actions to be taken in such policies and procedures.

If you would like to discuss any of the developments mentioned above, or how they may affect your business more generally, please contact any of our key contacts or PwC Legal’s RegCORE Team via de_regcore@pwc.com or our website.