The Council presidency and the European Parliament reached a provisional agreement on the markets in crypto-assets (MiCA) proposal in late June 2022 which covers issuers of unbacked crypto-assets, and so-called “stablecoins”, as well as the trading venues and the wallets where crypto-assets are held. This regulatory framework will protect investors and preserve financial stability, while allowing innovation and fostering the attractiveness of the crypto-asset sector. This will bring more clarity in the European Union, as some member states already have national legislation for crypto-assets, but so far there had been no specific regulatory framework at EU level. With the introduction of MiCA, the EU brings crypto-assets, crypto-assets issuers and crypto-asset service providers under a regulatory framework for the first time.
Introducing EU-wide rules for crypto-asset service providers (CASPs) and different crypto assets
Under the provisional agreement reached in June 2022, CASPs will need an authorisation in order to operate within the EU. National authorities will be required to issue authorisations within a timeframe of three months. Regarding the largest CASPs, national authorities will transmit relevant information regularly to the European Securities and Markets Authority (ESMA).
Non-fungible tokens (NFTs), i. e. digital assets representing real objects like art, music and videos, will be excluded from the scope except if they fall under existing crypto-asset categories. Within 18 months the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate and horizontal legislative proposal to create a regime for NFTs and address the emerging risks of such new market.
Regulating the risks related to crypto-assets
MiCA will protect consumers against some of the risks associated with the investment in crypto-assets, and help them avoid fraudulent schemes. Currently, consumers have very limited rights to protection or redress, especially if the transactions take place outside the EU. With the new rules, CASPs will have to respect strong requirements to protect consumers wallets and become liable in case they lose investors’ crypto-assets. MiCA will also cover any type of market abuse related to any type of transaction or service, notably for market manipulation and insider dealing.
Introducing environmental and climate footprint requirements
Actors in the crypto-assets market will be required to declare information on their environmental and climate footprint. The European Securities and Markets Authority (ESMA) will develop draft regulatory technical standards on the content, methodologies and presentation of information related to principal adverse environmental and climate-related impact. Within two years, the European Commission will have to provide a report on the environmental impact of crypto-assets and the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work.
Avoiding overlap with AML legislations and requirements
To avoid any overlaps with updated legislation on anti-money laundering (AML), which will now also cover crypto-assets, MiCA does not duplicate the anti-money laundering provisions as set out in the newly updated transfer of funds rules (Travel Rule) agreed on 29 June 2022. However, MiCA requires that the European Banking Authority (EBA) will be tasked with maintaining a public register of non-compliant CASPs. CASPs, whose parent company is located in countries listed on the EU list of third countries considered at high risk for anti-money laundering activities, as well as on the EU list of non-cooperative jurisdictions for tax purposes, will be required to implement enhanced checks in line with the EU AML framework. Tougher requirements may also be applied to shareholders and to the management of the CASPs, notably with regard to their localization.
Background
The European Commission came forward with the MiCA proposal on 24 September 2020. It is part of the larger digital finance package, which aims to develop a European approach that fosters technological development and ensures financial stability and consumer protection. In addition to the MiCA proposal, the package contains a digital finance strategy, a Digital Operational Resilience Act (DORA) – that will cover CASPs as well – and a proposal on distributed ledger technology (DLT) pilot regime for wholesale uses.
This package bridges a gap in existing EU legislation by ensuring that the current legal framework does not pose obstacles to the use of new digital financial instruments and, at the same time, ensures that such new technologies and products fall within the scope of financial regulation and operational risk management arrangements of firms active in the EU. Thus, the package aims to support innovation and the uptake of new financial technologies while providing for an appropriate level of consumer and investor protection.
The Council adopted its negotiating mandate on MiCA on 24 November 2021. Trilogues between the co-legislators started on 31 March 2022 and ended in the provisional agreement reached on 30 June 2022.
How can Y. Vasiliou & Co LLC (YVL) assist?
Cyprus already introduced a regulatory framework in regards to the registration of service providers whose business activities are related to crypto currencies. YVL offers the following services:
- Setting up of a Cyprus Company and assisting with the application for a Cyprus Crypto-Asset Services Provider (CASP) License,
- Consulting on and implementing the AML/CFT requirements,
- Drafting of relevant policies and procedures,
- Supporting with software solutions for wallet applications, consultation of KYC processes and AML monitoring in conjunction with our associates,
- Supporting in regards to on-going operations for AML/CFT processes (documentation and set up of processes) – the implementation into operational structures of the requirements and the ongoing monitoring of their effective functioning.
YVL works together with industry experts in regards to AML Compliance and provides the regulatory know-how as well as support with software solutions, technical implementation and the consultation therein. We do not only cover the basic services in regards to AML Compliance but can also assist with on-going AML Compliance aspects, supported by skilled experts with hands on mentality.
Useful links and sources:
https://www.vasiliou.law/crypto-exchange-license-in-cyprus/
https://www.vasiliou.law/crypto-asset-providers-need-sound-aml-cft-measure/
https://www.consilium.europa.eu/en/policies/digital-finance/
