Tokenisation is becoming an increasingly popular phenomenon that attracts innovators. Today’s market encompasses various categories of tokens – from utility tokens, through payment tokens and stablecoins (including EMTs and ARTs within the meaning of MiCA), to investment tokens. The latter may incorporate proprietary or corporate rights and, as a result, be subject to a significantly more restrictive regulatory regime applicable to the capital markets. Due to the lighter regulatory burden, project founders often seek to classify their tokens as utility tokens. However, a token may look like a “utility” token but behave like an investment, and that may trigger the application of the MiFID II regulatory regime. How can this moment be identified? Below are key questions and practical guidelines to help startups and blockchain projects avoid costly mistakes.
Technology Under Regulatory Scrutiny
In certain cases, a token may be deemed a financial instrument, which fundamentally alters the issuer’s legal obligations. When conducting a legal assessment of a token, reference must be made to the MiFID II Directive and the MiCA Regulation, which governs the crypto-asset market in the European Union.
Who Does This Apply To?
Primarily blockchain startups, DeFi projects (although in certain cases fully decentralised models may remain outside the scope of MiCA), and token issuers – even where their tokens are not formally structured as shares or bonds.
MiCA – New Rules for Crypto-Assets
MiCA is the key regulation governing crypto-assets in the European Union. It covers three main categories of crypto-assets:
- ARTs (asset-referenced tokens), i.e. tokens intended to maintain a stable value by referencing another value or right (or a combination thereof), e.g. fiat currencies, commodities or crypto-assets (including baskets of assets),
- EMTs (e-money tokens), i.e. tokens linked to a single fiat currency,
- other crypto-assets, in particular utility tokens.
In the case of offers of utility tokens, MiCA generally requires the preparation and publication of a crypto-asset white paper. This document must not contain misleading information, should meet the content-related and formal requirements set out in MiCA, and is subject to a civil liability regime in respect of its content. As a rule, the white paper does not require prior approval by the supervisory authority, but it must be notified to the competent authority before publication (generally at least 20 working days prior to publication). MiCA also provides for specific exemptions where the obligation to prepare a white paper may not apply, so it is always worth verifying whether a given offering model falls within an exemption
If a token meets the criteria of an ART or an EMT, additional and more stringent requirements apply. In particular:
- in the case of ARTs, it is generally necessary for the issuer to obtain the relevant authorisation, and the white paper is subject to a review and approval procedure;
- in the case of EMTs, a public offer or admission to trading may be carried out only by an issuer that is a credit institution or an electronic money institution, which has notified and published the white paper in accordance with MiCA.
MiCA also introduces a harmonised regime for crypto-asset service providers (CASPs). This regime covers, among other things, the custody of crypto-assets, the operation of trading platforms, exchange services, the execution of orders, and advisory services. A CASP must obtain authorisation, meet organisational requirements, and ensure transparency of its operations. An important feature is the European passporting principle, which allows services to be provided across the EU on the basis of a licence obtained in a single Member State.
MiFID II – What Is a Financial Instrument?
Many blockchain project founders assume that simply labelling a token as a “utility” token exempts it from the capital markets regulatory regime. The problem is that supervisory authorities, including national regulators and ESMA – do not assess declarations or initial project assumptions, but instead focus on the token’s actual function. Does the token enable the generation of profits? Can it be resold on an exchange? Does it grant influence over the project?
Under the MiFID II Directive (Markets in Financial Instruments Directive II), financial instruments are defined in Annex I, Section C of the Directive, which contains a catalogue of instruments subject to its regulatory framework. These include, among others, transferable securities, money-market instruments, units in collective investment undertakings, derivative instruments, and other categories that may be subject to specific qualification depending on their legal and economic structure.
As noted by Wojciech Ługowski, attorney-at-law and managing partner at Lawarton, what matters is not only the formal structure of a given instrument, but above all its economic function. Accordingly, the analysis should focus on the functional characteristics of the asset, rather than relying solely on formal assumptions. The key issue is whether the instrument can be traded on the capital market and whether it involves a defined investment risk aimed at generating profit, in particular as a result of fluctuations in its market value.
When Does a Token Become a Financial Instrument?
In the context of tokens based on distributed ledger technology (DLT), and in particular so-called utility tokens, a significant difficulty arises in clearly determining whether a given token qualifies as a financial instrument under MiFID II. A utility token is a token which, by design, primarily serves as a means of access to a specific service, functionality, or product offered within a given blockchain ecosystem, for example, a token that enables a user to access a particular digital platform, obtain discounts, or carry out microtransactions. As a rule, such tokens do not have an investment character, and their value derives from supply and demand for access to a given service rather than from expectations of future capital gains.
This understanding of utility tokens was also present in supervisory practice even before the entry into force of MiCA. In its position issued prior to the adoption of the EU regime, the Polish Financial Supervision Authority (KNF) indicated that utility tokens are crypto-assets that enable users to acquire goods or services offered – either currently or in the future by the token issuer, or that entitle users to discounts on such goods or services. This intuition was subsequently reflected in EU legislation. Under MiCA, a utility token is a crypto-asset whose sole purpose is to provide access to a good or service offered by its issuer.
However, if a utility token – regardless of its declared function – meets the economic criteria characteristic of financial instruments, it may be classified as such.
What is decisive here is an analysis of the token’s features (including the issuance documentation and marketing communications) and its actual function. In particular, it must be assessed whether the token grants rights typical of financial instruments (such as equity-type rights, claims for redemption or interest, participation in revenues or profits, or exposure to the performance of a portfolio of assets), and whether it is designed to be transferable and negotiable on the market. A mere “promise of profit” or an expectation of an increase in value does not, in itself, determine the classification, but it may constitute an important factor in an overall assessment.
By way of example, if a token is offered as part of an ICO (Initial Coin Offering), accompanied by an investment-oriented narrative, and its structure provides for mechanisms typical of collective investment schemes (such as pooling of funds, management in accordance with a defined investment policy, and a common return for participants), it may be classified as units in collective investment undertakings.
Ultimately, the classification of a token as a financial instrument does not depend on its label or the classification assigned to it by the issuer, but on its actual characteristics, purpose, and manner of use. In this context, the principle of substance over form is key – that is, the primacy of economic substance over legal form. This means that even a token marketed as a “utility” token may be regarded as a financial instrument if it performs an investment function, is transferable, traded, and entails market risk. Where doubts arise, a detailed legal analysis and consultation with the competent national authority are required, taking into account ESMA guidelines on the delineation between the application of MiFID II and MiCA.
Obligations of an Issuer of a Token Classified as a Financial Instrument
If, as a result of the analysis, a given token is found to qualify as a financial instrument subject to the MiFID II regime, the rules applicable to the capital markets will apply. In practice, this may entail the need to comply with licensing requirements on the part of entities involved in the offering or distribution of the token, to fulfil disclosure obligations, and to implement AML and investor protection procedures – even where the token does not take the traditional form of shares or bonds.
Where it is determined that a token qualifies as a financial instrument within the meaning of MiFID II, the capital markets law regime applicable to the relevant type of instrument and the model of its offering and trading will apply. Depending on the role performed by the issuer and other entities within the ecosystem (in particular with respect to offering, placing, distribution, or the organisation of trading), this may require the involvement of an appropriately authorised entity (such as an investment firm or a credit institution) and compliance with disclosure obligations applicable to a public offering or admission to trading. If the project’s activities include the provision of regulated investment services, additional organisational requirements will also arise, including corporate governance arrangements, compliance policies, risk management mechanisms, and (where applicable) AML/CFT and investor protection procedures.
These obligations may also include the preparation and publication of an offering document in the form of a prospectus compliant with the Prospectus Regulation. This applies where the token qualifies as a transferable security and the offer constitutes a public offer or involves an application for admission to trading on a regulated market. However, this requirement will not apply if the issuer is able to rely on one of the exemptions or exclusions provided for in that regulation, in particular in the case of offers addressed exclusively to qualified investors or offers falling below certain value thresholds. The prospectus must contain fair, complete, and accurate information enabling investors to make an informed investment decision, and it must be approved by the competent supervisory authority.
Where, by contrast, the token (as a financial instrument) is admitted to trading or traded on a regulated market or on a multilateral or organised trading facility (MTF/OTF) – or otherwise meets the conditions for the application of MAR – the issuer may also become subject to the regime of the Market Abuse Regulation (MAR). This includes, in particular, obligations relating to the disclosure of inside information, the maintenance of insider lists, and the prevention of market manipulation. It should be borne in mind that, for crypto-assets covered by MiCA (i.e. those that are not financial instruments), MiCA introduces a separate market abuse regime applicable to crypto-asset markets.
The classification of a token as a financial instrument may also trigger the application of MiFID II investor protection standards, including the best execution principle, disclosure obligations, client categorisation (retail, professional, and eligible counterparties), and – depending on the type of service – the requirement to conduct an appropriateness or suitability assessment of the product for the client. In practice, requirements relating to the safekeeping of client assets and the management and disclosure of conflicts of interest may also arise. If a project envisages the organisation of secondary market trading in such a token, it may be necessary to ensure that trading takes place within authorised market infrastructure (such as a regulated market or an MTF, and in certain cases also an OTF), and to comply with organisational, technical, and operational requirements designed to ensure transparency and integrity of trading.
It is also significant that the provision of services relating to tokens classified as financial instruments generally requires appropriate authorisation. This applies in particular to investment advice, brokerage, and portfolio management services. Such authorisation is held by investment firms or credit institutions, or alternatively these services may be provided through such entities. Regulatory requirements may constitute a substantial administrative, financial, and operational burden. This is particularly acute for issuers originating from the startup environment, which may not previously have operated under strict financial supervision. In practice, this may deter projects from conducting offerings in the European Union without first ensuring compliance with MiFID II and the related EU regulatory regimes.
Startups in the Risk Zone
If you are developing a project in which the token is intended to provide purchasers with financial benefits, is designed to be transferable, or over time begins to perform an investment function, you must take into account the risk of falling within the MiFID II regime.
Misclassifying a token as a utility token when, in reality, it meets the criteria of a financial instrument can lead to serious regulatory consequences. Depending on the operating model and the jurisdiction, these may include sanctions for carrying out regulated activities without the required authorisation, as well as supervisory measures such as a ban on offering, suspension of distribution, or administrative fines. Where the offer is public in nature or the token is traded within an organised system, additional risks may also arise under the prospectus regime and market abuse rules, including obligations relating to inside information.
A number of factors affect the assessment. In particular, it matters whether the token:
- grants a right to participate in the project’s profits or revenues,
- gives rise to a claim against the issuer, for example for redemption or cash payments,
- provides exposure to the performance of an undertaking or a portfolio of assets,
- is designed to be transferable and intended for trading on the secondary market,
- is offered or marketed in a manner that emphasises the expected increase in value and investment returns.
The more of these features are present cumulatively, the higher the risk that the token will be classified as a financial instrument.
Different Regulatory Regimes for Crypto-Asset Projects
The boundary between the MiCA and MiFID II regimes can be difficult to draw with precision. MiCA does not apply to crypto-assets that qualify as financial instruments. Article 2(4) of MiCA expressly excludes from its scope crypto-assets that are recognised as financial instruments within the meaning of MiFID II. As a result, in principle, a single crypto-asset should not be subject to both regimes at the same time.
This clarification helps structure the regulatory division, but it does not always simplify the licensing model for an entire project. Blockchain companies often conduct several types of activities in parallel and offer multiple products. In practice, this may mean that within a single group – or even within a single ecosystem – obligations arising under both MiCA and MiFID II may apply, even though individual tokens are allocated to only one of the regimes.
For example, a platform enabling the trading of both utility tokens and tokens classified as financial instruments may be required to comply with separate regulatory requirements. Services relating to tokens falling under the MiCA regime will generally require CASP authorisation. By contrast, trading in tokens that constitute financial instruments will be subject to capital markets regulation, including the requirements arising under MiFID II and, depending on the model, also requirements relating to trading infrastructure, such as the operation of an MTF.
Where a token is genuinely a utility token and does not meet the criteria of a financial instrument, MiCA will generally apply. The period during which many projects operated at the edge of regulation is coming to an end. Today, blockchain projects must anticipate higher regulatory burdens and take them into account already at the stage of product design and the structuring of their operations.
Summary and Recommendations
The classification of a token is a key stage in any tokenisation project. The mere label of “utility” does not determine its legal status. What is decisive are the token’s actual characteristics and the manner in which it is offered and used. In particular, relevance attaches to the rights granted to holders, such as participation in revenues or profits, claims against the issuer (e.g. redemption or interest), exposure to the performance of an undertaking, and the design of the token as transferable and intended for trading. These elements may shift a project into the MiFID II regime, even where the creators’ intention was to issue a simple utility token.
MiCA also imposes specific obligations on issuers and crypto-asset service providers. Depending on the type of token and the operating model, these will primarily include disclosure obligations, in particular the preparation of a white paper, and – in the case of certain categories of tokens – more stringent organisational and licensing requirements. In practice, the correct distinction between MiFID II and MiCA affects the choice of operating model, the scope of documentation, and whether the project must involve entities holding the relevant authorisations.
We recommend that every tokenisation project begin with a legal analysis already at the concept or tokenomics design stage. This helps to mitigate regulatory risks, avoid costly changes at a later phase, and reduce the likelihood of supervisory actions, suspension of an offering, or sanctions.
As emphasised by W.Ługowski – compliance with regulations does not have to be an obstacle – it can become a source of competitive advantage and a signal of the project’s maturity.
Steps for a Tokenisation Project
- Start with an audit of the token’s structure and the rights of holders. Focus on function and documentation, not on the label.
- Determine whether the token qualifies as a financial instrument. If so, the capital markets regime applies. If not, MiCA will generally be the applicable regime.
- Define the operating model and the roles of the entities within the ecosystem. Assess whether it is necessary to involve a licensed entity (e.g. an investment firm, a credit institution, or a CASP).
- Plan operational compliance. Take into account disclosure and organisational obligations and, where required, AML/CFT requirements.
- Prepare documentation and processes. Depending on the model, this may include a white paper, terms and conditions, compliance policies, conflict-of-interest management, and client procedures.