Article 37

Custody of reserve assets

1. Issuers of asset-referenced tokens shall establish, maintain and implement custody policies, procedures and contractual arrangements that ensure at all times that:

(a)

the reserve assets are not encumbered nor pledged as a financial collateral arrangement as defined in Article 2(1), point (a), of Directive 2002/47/EC of the European Parliament and of the Council (39);

(b)

the reserve assets are held in custody in accordance with paragraph 6 of this Article;

(c)

the issuers of asset-referenced tokens have prompt access to the reserve assets to meet any requests for redemption from the holders of asset-referenced tokens;

(d)

concentrations of the custodians of reserve assets are avoided;

(e)

risk of concentration of reserve assets is avoided.

1. Issuers of asset-referenced tokens that issue two or more asset-referenced tokens in the Union shall have a custody policy in place for each pool of reserve of assets. Different issuers of asset-referenced tokens that have issued the same asset-referenced token shall operate and maintain a single custody policy.

2. The reserve assets shall be held in custody by no later than five working days after the date of issuance of the asset-referenced token by one or more of the following:

(a)

a crypto-asset service provider providing custody and administration of crypto-assets on behalf of clients, where the reserve assets take the form of crypto-assets;

(b)

a credit institution, for all types of reserve assets;

(c)

an investment firm that provides the ancillary service of safekeeping and administration of financial instruments for the account of clients as referred to in Section B, point (1), of Annex I to Directive 2014/65/EU, where the reserve assets take the form of financial instruments.

1. Issuers of asset-referenced tokens shall exercise all due skill, care and diligence in the selection, appointment and review of crypto-asset service providers, credit institutions and investment firms appointed as custodians of the reserve assets as referred to in paragraph 3. The custodian shall be a legal person different from the issuer.

Issuers of asset-referenced tokens shall ensure that the crypto-asset service providers, credit institutions and investment firms appointed as custodians of the reserve assets as referred to in paragraph 3 have the necessary expertise and market reputation to act as custodians of such reserve assets, taking into account the accounting practices, safekeeping procedures and internal control mechanisms of those crypto-asset service providers, credit institutions and investment firms. The contractual arrangements between the issuers of asset-referenced tokens and the custodians shall ensure that the reserve assets held in custody are protected against claims of the custodians’ creditors.

1. The custody policies and procedures referred to in paragraph 1 shall set out the selection criteria for the appointment of crypto-asset service providers, credit institutions or investment firms as custodians of the reserve assets and the procedure for reviewing such appointment.

Issuers of asset-referenced tokens shall review the appointment of crypto-asset service providers, credit institutions or investment firms as custodians of the reserve assets on a regular basis. For the purpose of that review, issuers of asset-referenced tokens shall evaluate their exposures to such custodians, taking into account the full scope of their relationship with them, and monitor the financial conditions of such custodians on an ongoing basis.

1. Custodians of the reserve assets as referred to in paragraph 4 shall ensure that the custody of those reserve assets is carried out in the following manner:

(a)

credit institutions shall hold in custody funds in an account opened in the credit institutions’ books;

(b)

for financial instruments that can be held in custody, credit institutions or investment firms shall hold in custody all financial instruments that can be registered in a financial instruments account opened in the credit institutions’ or investments firms’ books and all financial instruments that can be physically delivered to such credit institutions or investment firms;

(c)

for crypto-assets that can be held in custody, the crypto-asset service providers shall hold in custody the crypto-assets included in the reserve assets or the means of access to such crypto-assets, where applicable, in the form of private cryptographic keys;

(d)

for other assets, the credit institutions shall verify the ownership of the issuers of the asset-referenced tokens and shall maintain a record of those reserve assets for which they are satisfied that the issuers of the asset-referenced tokens own those reserve assets.

For the purposes of point (a) of the first subparagraph, credit institutions shall ensure that funds are registered in the credit institutions’ books on a segregated account in accordance with the provisions of national law transposing Article 16 of Commission Directive 2006/73/EC (40). That account shall be opened in the name of the issuer of the asset-referenced tokens for the purposes of managing the reserve assets of each asset-referenced token, so that the funds held in custody can be clearly identified as belonging to each reserve of assets.

For the purposes of point (b) of the first subparagraph, credit institutions and investment firms shall ensure that all financial instruments that can be registered in a financial instruments account opened in the credit institutions’ books and investment firms’ books are registered in the credit institutions’ and investment firms’ books on segregated accounts in accordance with the provisions of national law transposing Article 16 of Directive 2006/73/EC. The financial instruments account shall be opened in the name of the issuers of the asset-referenced tokens for the purposes of managing the reserve assets of each asset-referenced token, so that the financial instruments held in custody can be clearly identified as belonging to each reserve of assets.

For the purposes of point (c) of the first subparagraph, crypto-asset service providers shall open a register of positions in the name of the issuers of the asset-referenced tokens for the purposes of managing the reserve assets of each asset-referenced token, so that the crypto-assets held in custody can be clearly identified as belonging to each reserve of assets.

For the purposes of point (d) of the first subparagraph, the assessment whether issuers of asset-referenced tokens own the reserve assets shall be based on information or documents provided by the issuers of the asset-referenced tokens and, where available, on external evidence.

1. The appointment of crypto-asset service providers, credit institutions or investment firms as custodians of the reserve assets as referred to in paragraph 4 of this Article shall be evidenced by a contractual arrangement as referred to in Article 34(5), second subparagraph. Those contractual arrangements shall, amongst others, regulate the flow of information necessary to enable the issuers of the asset-referenced tokens and the crypto-asset service providers, credit institutions and investment firms to perform their functions as custodians.

2. The crypto-asset service providers, credit institutions and investment firms appointed as custodians in accordance with paragraph 4 shall act honestly, fairly, professionally, independently and in the interest of the issuers of the asset-referenced tokens and the holders of such tokens.

3. The crypto-asset service providers, credit institutions and investment firms appointed as custodians in accordance with paragraph 4 shall not carry out activities with regard to the issuers of the asset-referenced tokens that might create conflicts of interest between those issuers, the holders of the asset-referenced tokens and themselves unless all of the following conditions are met:

(a)

the crypto-asset service providers, credit institutions or investment firms have functionally and hierarchically separated the performance of their custody tasks from their potentially conflicting tasks;

(b)

the potential conflicts of interest have been properly identified, monitored, managed and disclosed by the issuers of the asset-referenced tokens to the holders of the asset-referenced tokens, in accordance with Article 32.

1. In the case of a loss of a financial instrument or a crypto-asset held in custody pursuant to paragraph 6, the crypto-asset service provider, credit institution or investment firm that lost that financial instrument or crypto-asset shall compensate, or make restitution, to the issuer of the asset-referenced token with a financial instrument or a crypto-asset of an identical type or the corresponding value without undue delay. The crypto-asset service provider, credit institution or investment firm concerned shall not be liable for compensation or restitution where it can prove that the loss has occurred as a result of an external event beyond its reasonable control, the consequences of which were unavoidable despite all reasonable efforts to the contrary.