The European Council, an institution of the European Union (EU), reached an agreement last month on MiCA’s final proposal: ‘ Regulation on Markets in Crypto Assets ‘. This new European regulation further tightens the regulations for crypto companies and the crypto market. We will explore the background and the possible impact of MiCA in this article. If you are interested in bitcoin trading, check why more people want to pay with bitcoin.
Background
First, let us explain the difference between regulations and directives to understand the matter better. Both are EU legislative instruments. Regulations have direct effect and take precedence over the national law of the EU Member States. Guidelines do not directly affect and must be implemented in national regulations. Directives may contain minimum or maximum harmonization. In the case of minimum harmonization, the Member States must at least comply with the standards set by the Directive in their national implementation of the Directive. In the case of maximum harmonization, Member States may not increase the standards set by the Directive.
In addition, guidelines must be implemented promptly in national regulations. If a member state does not implement a directive in time, the European Commission launches a so-called infringement procedure. The Netherlands has been subject to such procedures with some regularity. For example, on February 12, 2020, the Netherlands was reprimanded from Brussels for failing to implement the AMLD5 in time.
AMLD5 aimed to bring ‘the gatekeepers to the virtual currency’ under anti-money laundering regulations. This concerned firstly ‘providers for exchanging between virtual currencies and fiat currencies’ and secondly ‘providers of custodian wallets’. On May 21, 2020, the Implementation Act amending the fourth Anti-Money Laundering Directive (AMLD5) entered into force. Since then, providers of crypto services (after this: crypto companies), including Bitonic, have been subject to integrity supervision by De Nederlandsche Bank (DNB).
On September 24, 2020, the European Commission presented a package of new regulations. The package is called overarching: ‘ Digital Finance Package ‘. The package should create more space for – and give impetus to – the potential digital financial services offered in terms of innovation and competition while mitigating risks.
The European regulation, MiCA, pursues four goals, namely: to promote legal certainty within the EU, to stimulate innovation, to regulate consumer protection and rules on market integrity, and to guarantee financial stability. MiCA creates a common regulatory framework for all crypto-assets, including crypto-assets that currently fall outside financial law. In addition, stablecoins are strictly regulated, and MiCA includes a licensing regime that applies to crypto companies. Furthermore, the crypto companies will have to comply with, among other things, behavioral supervision law and prudential requirements.
The licensing regime
Chapter 1 of Title V of MiCA contains the provisions regarding the licensing regime. Article 53 paragraph 1 MiCA contains the licensing obligation for crypto companies and reads as follows:
The above article talks about ‘crypto-asset services’. But which services does this mean? For this, we have to go back to article 3, MiCA, the regulation’s definition. The definitions in MiCA are inspired by the definitions used by the Financial Action Task Force (FATF), a global intergovernmental watchdog that is supposed to combat money laundering and terrorist financing, but these have been drawn much broader. As described above, article 3 paragraph 1 sub 9 MiCA contains the enumeration of ‘crypto-asset services’. All crypto-asset services and activities listed below are covered by:
What stands out? Components (a) and (c) were also found in AMLD5. So the rest has been added, closing the regulatory framework for crypto-assets nicely. How (d) relates to decentralized finance (DeFi) remains to be seen. It is also noticeable that trading platforms under subsection (b) will also fall under the licensing regime, which is only logical.
The license will have to be requested from the regulator in the EU Member State where the crypto company is located. Although crypto companies in the Netherlands are currently under integrity supervision by DNB, it is evident that the Netherlands Authority for the Financial Markets (AFM) will grant the MiCA license. This is given the agreements between investment firms and crypto companies, and ESMA, the European authority for securities and markets, will keep a register of licensed crypto companies (Article 57 MiCA).
What is also worth mentioning is that all licensed crypto companies will soon be able to offer their services in all EU Member States by using the ‘European passport’. After all, the basic principle of the European passport is that a license granted by one Member State can be used in another Member State to enter the market without having to apply for a new license in that Member State. The passport procedure will have to be completed (art. 58 MiCA).
Regulation – particularly MiCA – is controversial for an industry that knows no national borders and is innovating rapidly.