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MiCA's effect on the most "popular" European crypto licences


MiCA (Markets in Crypto Assets) regulation, which is set to be implemented in the European Union (EU), will have a significant impact on the existing crypto licences in Europe. In this article, the SAXE Global team has taken the initiative to thoroughly understand the new MiCA regulation and carefully analyze its potential effects on various European licenses.


The analysis highlights the significant impact that MiCA is expected to have on existing licenses across Europe. Currently, different countries in Europe offer crypto-specific licenses that attract crypto businesses due to their favorable regulatory frameworks. However, with the introduction of MiCA, the landscape is anticipated to undergo significant changes. Our team has examined the specific cases of the Virtual Financial Assets (VFA) regime in Malta, the regulatory framework of FINMA in Switzerland, Lithuanian virtual currency licence, and the Estonian Cryptocurrency Exchange and Wallet Service Provider License.


Background


On 24th September 2020, the European Commission unveiled the MiCA proposal as part of a comprehensive digital finance package designed to promote technological advancement, financial stability, and safeguard consumer interests. Alongside MiCA, the package includes a digital finance strategy, the Digital Operational Resilience Act (DORA) encompassing crypto-asset service providers, and a proposal for a distributed ledger technology (DLT) pilot regime catering to wholesale applications.


This package effectively addresses gaps in existing EU legislation, ensuring that the current legal framework does not hinder the utilization of emerging digital financial instruments. Simultaneously, it establishes a framework wherein these novel technologies and products fall within the purview of financial regulation and operational risk management for EU-based firms. This approach facilitates innovation, encourages the adoption of new financial technologies, and upholds consumer and investor protection.


The Council adopted its negotiating mandate on MiCA on 24th November 2021. Trilogues between the co-legislators commenced on 31st March 2022, concluding with a provisional agreement reached on 30th June 2022. The formal adoption of the regulation on 16th May 2023 marks the conclusive stage of the legislative process.


Under MiCA, crypto asset service providers (CASPs) will be required to obtain licences from national authorities to operate within the EU. This means that the licences offered by individual countries may no longer be sufficient for providing services across the entire EU market. CASPs will need to comply with MiCA's requirements to ensure they meet the new regulatory standards.


While specific details about the impact on existing licences are yet to be finalised, it is anticipated that companies holding licences from individual countries may need to transition to the MiCA licensing regime. This transition could involve obtaining a MiCA licence or adapting existing licences to align with MiCA's requirements. The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) are expected to provide further guidelines and details regarding the transition process and timeline.


One of the key advantages of MiCA is the introduction of a passporting mechanism, allowing CASPs licensed in one EU member state to provide services in other member states without needing separate licences. This harmonisation and passporting system could streamline operations for crypto firms, eliminate the need to navigate different regulatory regimes, and promote fair competition.


The implementation of MiCA is expected to create a more uniform regulatory framework and potentially replace individual country licences with the EU-wide MiCA licence. While this may require some adjustments for companies operating under different licences, the increased regulatory clarity and harmonisation offered by MiCA could ultimately benefit the crypto industry in Europe by fostering greater trust, enabling broader market access, and attracting more traditional banking partners.


From a consumer perspective, MiCA aims to enhance protection by introducing conduct rules, advertising rules, disclosure requirements, and suitability assessments for investors. The regulation seeks to increase awareness and ensure that individuals investing in crypto assets understand the risks involved and are protected from fraudulent activities.


VFA (Malta)


Regarding the impact on Malta's regulatory framework, once MiCA comes into force, Malta will have to repeal its local Virtual Financial Assets (VFA) regime completely. The Malta Financial Services Authority (MFSA) has two options: either do nothing until MiCA is enacted and lose the competitive advantage, or analyse the differences between MiCA and the VFA regime and bridge the gaps during the transition period. The second option allows existing licence holders to achieve MiCA compliance seamlessly and provides the MFSA more time to align internal processes with MiCA expectations.


MiCA offers new opportunities for operators within the EU, as it introduces a licensing requirement for all crypto-asset service providers. Any third-country operator wanting to offer services to EU citizens would also need to establish a licensed branch. Malta, being at the forefront of the sector with experience in licensing and supervising operators, could benefit from the increased activity in the crypto space.


FINMA (Switzerland)


The introduction of the EU's Markets in Crypto Assets (MiCA) regulations could potentially impact Switzerland's Financial Market Supervisory Authority (FINMA) and its regulatory approach to blockchain and digital assets. As one of the most mature and comprehensive regulatory frameworks in the world, Switzerland has attracted numerous blockchain companies to its Crypto Valley.


For FINMA, the challenge lies in balancing its existing regulatory approach with the harmonised framework proposed by MiCA. While Switzerland is not an EU member, its close proximity and significant interactions with EU markets mean that Swiss companies may need to align with MiCA regulations to continue operating within the EU.


FINMA may need to assess the potential impact of MiCA on Swiss-based companies, especially those that have a strong presence or conduct business in the EU. It may need to collaborate with EU regulators to ensure compatibility between the Swiss regulatory framework and the new EU regulations. This could involve reviewing and possibly adjusting its current regulations to maintain regulatory harmonisation and market access for Swiss companies within the EU.


Estonian Cryptocurrency Exchange and Wallet Service Provider Licence


MiCA will also have a significant impact on Estonian Cryptocurrency Exchange and Wallet Service Providers, which are currently regulated under the Money Laundering and Terrorist Financing Prevention Act (MLTFPA). Under MiCA, these service providers will be classified as Crypto-Asset Service Providers (CASPs) and will need to obtain a new licence from the relevant authority, likely the Financial Supervision Authority (FSA).


The new licence requirements introduced by MiCA will be stricter and more comprehensive compared to the current Estonian legislation. CASPs will need to meet various obligations and requirements, such as having a registered office in an EU member state, maintaining minimum capital requirements, implementing robust internal regulations and policies, safeguarding client assets, and ensuring business continuity and risk management measures.


CASPs will also be subject to increased supervision by the FSA, similar to other financial institutions in Estonia. The transition from the existing licence issued by the Financial Intelligence Unit (FIU) to the new licence under MiCA will need to be completed within the transition period of 18 months after MiCA's implementation.


On the positive side, obtaining a licence under MiCA will enable Estonian CASPs to passport their services across the EU without the need for separate licences in each member state. This can potentially expand their market reach and provide a competitive advantage.


Overall, Estonian Cryptocurrency Exchange and Wallet Service Providers will need to adapt their operations and comply with the new requirements and obligations set by MiCA. Successfully obtaining and implementing the new licence will be crucial for their continued operation and growth in the evolving regulatory landscape of the crypto-asset market.


Lithuanian virtual currency license


MiCA (Regulation on Markets in Crypto-Assets) has the potential to significantly change crypto licensing in Lithuania. Lithuania, known for its crypto-friendly environment and comprehensive regulatory framework, is positioning itself as a leading hub for crypto activities within the EU.


The upcoming implementation of MiCA in the second half of 2024 will introduce comprehensive requirements and standards for crypto-asset service providers. These include increased minimum capital requirements based on the class of services offered, the need for impeccable reputation of management personnel, public listing of virtual currency exchange and depository wallet operators, and the establishment of a register of EU crypto-asset service providers by ESMA. Additionally, new obligations will include prudential safeguards, client fund placement, complaint handling procedures, record-keeping requirements, and various policies and procedures.


For example, now virtual currency exchange or depository wallet operator in Lithuania must have an authorized capital of at least EUR 125 000. After MiCA comes into force the minimum capital requirements for crypto-asset service providers will differ based on the Class of services, ranging from EUR 50,000 to EUR 150,000. For example, a Class 2 crypto assets wallet operator must have a minimum authorized capital of EUR 125,000, while a Class 3 crypto asset exchange platform operator requires a minimum of EUR 150,000.


The focus at present is primarily on the implementation of MiCA, which is set to establish a comprehensive set of rules for the crypto market—an area that has lacked a unified regulatory framework until now. Many experts argue that the timely implementation of MiCA could have prevented the malpractices observed at FTX and similar incidents. As a result, MiCA's model is seen as one that other countries should consider emulating.


Various countries worldwide are also actively exploring the regulation of cryptocurrencies. In the United States, the March 2022 White House executive order initiated efforts that led to the country's first-ever comprehensive regulatory framework for cryptocurrencies.


Additionally, countries such as the United Arab Emirates (UAE), Saudi Arabia, Bahrain, and Brazil have introduced their own crypto regulations. Meanwhile, in the United Kingdom, the Treasury launched a consultation earlier this year to gather insights and opinions on the regulation of crypto assets.


Overall, there is a global trend towards recognizing the need for regulatory measures in the crypto industry, with MiCA serving as a notable example. As countries develop their own frameworks and regulations, they aim to ensure consumer protection, prevent illicit activities, and establish a more secure and transparent environment for participants in the crypto market.


SAXE Global considers the information on MiCA and its implications for European crypto assets licences to be both intriguing and pertinent to their line of work. Our team remains informed and monitors developments in the regulatory landscape, such as the implementation of MiCA, to ensure they provide up-to-date and relevant guidance to their clients.


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