MiCAR Series – Week 5: Future proofing MiCAR

Crypto assets are digital representations of value which can be stored or transferred electronically and can be broken into three categories: ARTs, EMTs and Utility tokens. The EBA issued its final guidelines addressing the maintenance of recovery plans by issuers of ARTs and EMTs. This report specifically focuses on strategies to rebound from potential downturns below the reserve threshold of assets.

The guidelines are directed at competent authorities as well as issuers of ARTs and EMTs. The competent authority for Ireland is the Central Bank of Ireland (CBI). Issuers of ARTs and EMTs are obliged to draw up and maintain recovery plans under articles 46 and 55 of MiCAR, and these standards are created to provide harmonised supervision across the EU.

A recovery plan is a strategic framework designed to ensure that there are plans in place if an organisation’s resources fall below a certain indicator. When determining which indicators to incorporate into recovery plans for issuers of ARTs and E-money tokens, issuers should thoroughly evaluate potential events that could result in a violation of regulatory requirements. Subsequently, they should include distinct indicators derived from their internal risk assessment. They must also include the methods in which they will monitor and update such indicators to adjust for a change in their risk appetite.

Issuers must also be aware of their obligations to update the information provided at least when there is a material change in the business or profile of the issuer or the token issued. Issuers of significant tokens should include notice that they will update the information annually at minimum. There are non-exhaustive, illustrative lists accompanying the paper outlining recovery plan indicators, items to be included in the description of the recovery options and possible recovery options to aid issuers in the creation of their plans.

The EBA has put a great level of detail into the construction of these guidelines as they are aware that all issuers may not be familiar with recovery planning. They have provided a high-level overview as opposed to the creation of a single template for recovery plans. The principle of proportionality seeks to ensure that all action taken by European Union institutions are fair, relative to the specific institute it applies to. As a result, when deciding the contents for submission, this method will ensure recovery plans are tailored to risks specific to the issuers size, while also providing enough information to ensure all relevant information is included. Although there is no set template, the EBA have still included a number of elements which should be included in all recovery plans. These elements are:

1. Governance information.
2. A description of the appropriate recovery options.
3. A communication and disclosure plan.

It’s recommended that recovery plans should also include the business model, some stress testing and recovery plan scenarios to test the viability of the recovery plan. This gives issuers more flexibility when creating their recovery plans while ensuring an adequate level of consistency on the key elements to be included in these plans. This approach was decided upon as EBA is keen to consider the principle of proportionality when proposing such guidelines.

You can recap on our previous MiCAR Series articles below: 

Week 1: Navigating the regulatory framework for ARTs

Week 2: CBI guidance for VASPs transitioning to CASPs

Week 3: Navigating the crypto asset whitepaper process 

Week 4: Remuneration policy governance for ARTs

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We recognise that regulations are a pivotal driver for the strategic priorities of financial institutions. Our Prudential Risk experts help clients within the financial services sector to navigate the intricate web of regulations, working in partnership with them to identify their regulatory responsibilities and develop strategies for full compliance.