BULGARIA Law and Practice Contributed by: George Chisuse, Ivelin Vassilev, Stephany Valcheva and Daniel Kolev, VC Law
Regulators are likely to look closely at whether there is a real reserve, if holders have redemption rights, who is responsible for maintaining the peg, and how the risks are disclosed. The consequence is that an issuer cannot describe a token as “algorithmic” to avoid regulation. If the token is marketed as stable, payment-like or linked to the value of money or other assets, it will need classi- fication under MiCA. For Bulgarian issuers or firms offering such tokens into Bulgaria, the safer approach is to carry out a token classification analysis before launch, because the regulatory treatment may range from an ordinary crypto-asset to an ART, EMT, finan- cial instrument or even an arrangement that is difficult to approve in practice. 6.2.2 Stablecoin Regulation Fiat-backed stablecoins are also regulated under MiCA, as supplemented by the Bulgarian Markets in Crypto-Assets Act. The classification states that a token seeking to maintain a stable value by reference to one official currency will be treated as an e-money token, while a token referencing several assets, cur- rencies or rights may be treated as an asset-refer- enced token. The treatment depends on the structure: e-money tokens are closely connected to the existing frame- work and may be issued only by a credit institution or an electronic money institution. Asset-referenced tokens are subject to a bespoke MiCA regime, includ- ing authorisation, White Paper, reserve, custody, own funds and redemption requirements. This means that stablecoins are not treated as ordinary crypto-assets, as they sit in a more heavily regulated part of MiCA. Compared with the pre-existing payments framework, MiCA does not classify all stablecoins as payment services or electronic money. Instead, it creates a crypto-specific stablecoin regime while preserving the link with e-money law where the token referenc- es one official currency. In Bulgaria, this means that stablecoin projects need to consider both the MiCA framework and, depending on the model, the rules supervised by the Bulgarian National Bank on pay- ment services, electronic money and banking activity.
The result of the regime is that an issuer using stable- coins in Bulgaria should consider whether the token is an EMT, an ART or a financial instrument. The answer will affect who may issue it, what authorisa- tion is required, how reserves must be held, and what redemption rights holders have. The regulatory focus is especially strong where the stablecoin is used for payments, settlement, client balances or as a substi- tute for money. 6.2.3 Backing Assets The requirements for backing assets for fiat-backed stablecoins come primarily from MiCA. If the stable- coin references one official currency, it will be treated as an e-money token. In that case, the issuer must be a credit institution or an electronic money institu- tion. The issuer must safeguard the funds received in exchange for the token. At least 30% of those funds must be deposited in separate accounts with credit institutions, while the remaining funds may only be invested in secure, low-risk assets that qualify as highly liquid financial instruments and are denomi- nated in the same official currency as the token. This is intended to reduce currency mismatch, liquidity and credit risk. If the token is structured as an asset-referenced token, the issuer must maintain a reserve of assets. The reserve must be composed and managed so that it covers the risks linked to the referenced assets and addresses liquidity risks connected with hold- ers’ redemption rights. It must also be operationally segregated from the issuer’s own estate and from the reserves of any other tokens issued by the same issuer. If part of the reserve is invested, it may only be invested in highly liquid financial instruments with minimal market, credit and concentration risk. The reserve also has to be held through appropriate custody arrangements. This means that the issuer must be able to show where the reserve is held, who holds it, how it is segregated, whether it is protected if the issuer becomes insolvent, and how quickly it can be used to meet redemption requests. For a Bul- garian issuer, these arrangements would be reviewed through the MiCA framework and the local supervisory process.
140 CHAMBERS.COM
Powered by FlippingBook