Law & crypto - The right of withdrawal in the markets in cryptoasset regulation (MiCA)

The right of withdrawal in MiCA

The regulation concerning crypto asset markets (the "MiCA") contains a particularly important provision with considerable impact in Article 13, dedicated to the right of withdrawal. This consists of the right recognized to the purchaser of a token other than asset-referenced tokens and electronic money tokens - e.g. a utility token - to recover what was paid at the time of purchasing the token, including expenses (e.g. gas fees).

This right can be exercised within 14 days from date of the agreement of the retail holder to purchase those crypto-assets. From the date of communication of the intention to withdraw by the purchaser, the offeror or service provider placing the token has a maximum period of 14 days to return the amounts paid by the purchaser.

Limitation of negotiability

The right of withdrawal does not apply where the crypto-assets have been admitted to trading prior to their purchase by the retail holder. In such case the token price is subject to fluctuations due to changes in the market.

(Crypto)currency and amount of refund

Article 13, paragraph 2 of MiCA provides that the refund must be carried out using the same means of payment used by the retail holder to execute the initial transaction. While this provision appears clear in distinguishing between bank transfers and payments by card, the distinction between payments in fiat currency and in virtual currency is more complex. In particular, the problem related to the exact amount of the reimbursement. It could be argued, as suggested by some, to refer to the currency in which the original price of the asset (i.e., the token) is denominated. If the original price is denominated in fiat currency but the payment was made using a virtual currency of equivalent value, it could be argued that the refund amount in the withdrawal should be calculated considering the price expressed in fiat currency, even if the refund is made in virtual currency.

More typically, however, the price of tokens is expressed in virtual currency (usually a native currency of the chain on which the token is based). In this case, accepting the proposed approach as an interpretative solution still poses an additional complexity related to the volatility of virtual currencies.

Let's consider the purchase of a utility token at a price of 1 ETH. After 14 days (or even 28), the value of ETH could have decreased or increased, affecting its purchase power. The consequence is that, at the time of refunding the price (in our example, 1 ETH), the purchaser and the offeror or service provider placing the token essentially bear the risk associated with the fluctuation of ETH.

Now, the issue arises as follows: does the offeror or service provider placing the token have an obligation to return the same amount denominated in the virtual currency spent for the purchase, or an amount equivalent to the purchase power of such virtual currency calculated at the time of token purchase?

Rethinking what normally happens with fiat currencies, it would be logical to think that the offeror or promoter is required to reimburse the exact amount paid by the purchaser at the time of purchase and in the same virtual currency, regardless of its purchase power. In our example above, therefore, there would be an obligation to pay 1 ETH, regardless of its market value.

However, in this case, an important element of risk for the parties remains unresolved. At the time of refunding the price, indeed, the purchaser may receive an amount with a greater or lesser purchase power than the amount spent originally, effectively suffering a loss that the withdrawal mechanism should typically nullify (indeed, MiCA provides that the purchaser is also reimbursed for costs, precisely in order to make them completely immune from losses resulting from the purchase of the token).

Duty to inform about risk

European consumer protection law pays particular attention to the information obligations of sellers and promoters. These duties are particularly justified by the fact that the consumer is essentially at an informational disadvantage regarding the product being exchanged. The same approach is adopted in MiCA regarding the offer, placement, and promotion of cryptoassets. Consider, among others, the obligations relating to marketing communications (e.g., Article 7 of MiCA).

In this context, there is the fundamental obligation of drafting, transmitting to supervisory authorities, and publishing the white paper. This essentially consists of a descriptive document of the offered cryptoasset, providing multiple pieces of information regarding the product, the offeror or issuer, the related project, the offering, etc.

The white paper should also contain several disclaimers regarding the risks that purchasers may face when acquiring the token. Among these, the risk of loss of token value (or part of it) is a relevant one, about which the offeror has an information obligation under Article 5, paragraph 5, letter a) of MiCA. The rationale is based precisely on the strong volatility of tokens, especially those newly introduced to the market, which often suffer from low liquidity.

Considering the above, alongside a risk related to market fluctuations, there also seems to be a risk at the moment of withdrawal according to Article 13 of MiCA due to the virtual currency fluctuations. As the offeror or service provider placing the token has an obligation to inform the purchaser about the risks relating the purchase of tokens, it may be reasonable to interpret this obligation extensively, including also the information about the risk of loss of value of virtual currency at the time of the refund.

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