How did we confirm the compatibility of the LSK token with MiCA for the Onchain Foundation?

The introduction of the revolutionary MiCA (Markets in Crypto-Assets) regulation put an end to regulatory uncertainty in Europe, but at the same time raised a fundamental question for all Web3 projects: what are my token’s obligations?

For the Onchain Foundation, the organization behind the Lisk platform, what was at stake was maintaining its operations in the EU. It was necessary to demonstrate precisely that the LSK token was a utility token, not one burdened by the stringent requirements of ART (asset-linked token) or a financial instrument. Our task at dotlaw was to conduct a tailor-made analysis that combined an in-depth understanding of blockchain technology with MiCA dogma to provide the project with legal certainty and a foundation for further expansion.

1. Confirmation of the status of the utility token: We confirmed LSK’s classification as a utility token under MiCA law. This avoided complicated and costly legal obligations.
2. Eliminating risk: We ensured compliance with new regulations across the EU, minimizing the risk of financial penalties and legal problems in a key market.
3. Foundation for further development: We have laid a solid legal foundation for the further expansion of the Lisk token in Europe, giving the project certainty and security of operation.

The Onchain Foundation is a Swiss non-profit organization that promotes the global use of blockchain technology, particularly in emerging markets. The foundation is a continuation of the Lisk Foundation, a testament to its maturity and long-term vision. Its main project is Lisk, one of the longest-running blockchain platforms in the industry, which successfully conducted one of its first ICOs back in 2016.

The Lisk project recently underwent a key technological transformation, becoming an advanced Layer 2 (Layer 2) solution in the Ethereum ecosystem. This change shows that the Onchain Foundation is a mature organization, capable of carrying out complex strategic maneuvers. Lisk’s focus on real-world applications of the technology underscores that the LSK token has a fundamental utility role, rather than a purely speculative one. Therefore, a conscious approach to legal analysis was a key element of the development strategy.

The year 2024 brought a revolution to the European cryptoasset market with the entry into force of the MiCA regulation. The new law ended an era of regulatory uncertainty and forced all projects operating in the EU, including the Onchain Foundation, to precisely define the legal status of their tokens. The answer to the question “what is an LSK token under the new law?” was crucial for the future of the project in Europe.

The stakes were enormous. Misclassification of the LSK – for example, as an asset-linked token (ART) or a financial instrument – would expose the project to extremely onerous requirements. These would include among others. the need to obtain expensive licenses, maintain high capital reserves and submit to constant financial supervision. Such obligations fundamentally contradict the decentralized utility token model and could force Lisk out of the EU market. A precise, tailor-made analysis was therefore needed, taking into account Lisk’s unique technology and development plans.

Our approach at dotlaw went beyond standard legal analysis. We began with an in-depth understanding of the technology and economics of the LSK token, analyzing the operation of smart contracts, staking mechanisms and the role of LSK in the Ethereum ecosystem. Then, through a process of elimination, we systematically evaluated LSK against each of the key definitions in MiCA and MiFID II.

We have shown that LSK is neither an asset-linked token (ART) nor an e-money token (EMT), since its value is not tied to any external assets or fiat currencies. We also proved that it is not a financial instrument, as its main function is utility, not investment. Having ruled out these options, we provided a detailed rationale for why LSK fits perfectly into the definition of a Utility Token. The key arguments are that it is necessary to use services in the Lisk ecosystem, such as network management (DAO) and staking.

For maximum clarity, the results of our analysis are summarized in the table below.

The result of our cooperation is a set of tangible business benefits that provide the Lisk project with security and potential for further growth:

• Regulatory certainty: The Onchain Foundation can now safely develop the project throughout the European Union with clarity on its regulatory obligations.

• Increased credibility: A professional legal opinion confirming compliance with MiCA significantly increases the credibility of the project in the eyes of partners, exchanges and investors.

• A foundation for expansion: Utility token status removes regulatory barriers, allowing grant programs to grow freely and achieve the foundation’s mission.
  
  
• Resource savings: By taking a proactive approach, the client avoided potentially lengthy and costly proceedings with regulators and the need to revamp its business model.

The value we brought to dotlaw was based on a unique combination of three competencies. First, a deep understanding of blockchain technology, which allowed for precise fact-based analysis. Second, strategic thinking that took into account not only the current state of the project, but also its future development plans. Third, the ability to translate complex regulations into understandable business implications, which enabled the Onchain Foundation’s board to make informed decisions.

The dotlaw firm specializes in providing legal services to companies in the new technology sector. Our team combines legal expertise with a passion for innovation, offering strategic advice for blockchain, FinTech and AI projects. We understand the challenges entrepreneurs face and provide solutions that ensure legal compliance and support business growth.