Regulation is a sign that crypto has come of age

The EU’s Markets in Crypto Assets (MiCA) regulation will be a baptism of fire for some crypto businesses, but for established players already embracing regulation, it will be a huge opportunity.

Businesses of any kind rarely welcome the arrival of new regulations, but for the crypto sector, MiCA, which takes effect on December 30th, represents a major step forward and spur to growth.

The implementation of MiCA will not be painless and will place significant new burdens on crypto service providers. For smaller companies meeting the terms of MiCA may stretch their resources, even, perhaps to breaking point.

But MiCA also represents a coming of age for crypto in Europe. It is a recognition from the European Securities and Markets Authority (ESMA) as well as the European Commission and Parliament that crypto is an established part of our financial infrastructure.

It also represents an opportunity for crypto service providers themselves, creating standards for licensing and prudential regulation, which will provide crypto investors with confidence in their service provider and coin issuers.

“This is the MIFID for crypto,” says Marie Arras, Head of Compliance for BCB payments and BCB markets in the EU. “The law harmonises the way we treat customers and how we do business. It will help the crypto business and will help the market grow.”

While welcoming MiCA, Arras recognises that for some smaller operators it may prove a challenge. “MiCA has a lot of requirements and you need quite a few resources to address it. If you don’t have broad enough shoulders, it will take a lot of time, and some businesses might not survive.”

BCB, meanwhile, has been at work on MiCA ever since the first consultations were launched and Arras is confident that BCB will meet the requirements very soon after their implementation.

Proving your prudence

The central pillar of MiCA is the requirement for full licensing of Crypto Assets Service Providers (CASPs). Licensing is overseen at national level by the relevant National Competent Authority. For BCB that means France’s Autorité des Marchés Financiers (AMF). 

For larger groups, such as BCB Group that are already registered as digital asset service companies, upgrading to full CASP will be more straightforward and BCB is already well on its way to that licence.

The key aspect of a licence that some crypto service providers may find challenging are the prudential requirements – firms must demonstrate they have capital buffers in place to enable them to continue to operate in the event of market problems and so ensure they can continue to return assets to clients.

The sums required vary and according to Arras, meeting the requirement may be a shock to those who have no existing licence. Businesses that are already authorised as electronic money institutions (EMI) are used to such guardrails. “If you are not used to these types of guardrails, this is something that is really going to change the game. It’s great for clients, but it comes with a lot of obligations and oversight from the regulators.”

Audits for cybersecurity

A second key component, according to Arras, is the requirements that firms ensure cybersecurity. On the one hand this may appear to be a moving target, with ESMA calling for modifications in the regulations as recently as October that will require CASPs to provide an external audit of their cybersecurity.

In practice major national financial authorities are already requiring such audits as part of their MiCA implementation with BCB’s regulator, the AMF, requiring a third-party audit known as PASSI.

“This is pretty important and again, for those without this in place already, it requires a lot of time and a lot of resources,” says Arras.

Coin issuers will also be required to meet a range of requirements, most notably stablecoin issuers whose reference asset is a European currency. For service providers such as BCB, this and various other aspects of MiCA affecting clients will be integrated with onboarding and BCB’s recent upgrading of its onboarding process is designed with this in mind.“We do have clients who are going to issue or who are already issuing stablecoins, and we are scoping whether they will fall under MICA and it depends which jurisdiction they are in,” says Arras.

“Among our clients, the larger, established ones are definitely on top of it and we’re already getting a sense that the medium and large clients are getting MiCA-compliant. We have meetings with them, we share information from a compliance perspective as well. We all need to know that everyone is on top of this.”

MiCA rules concerning governance, dealing in crypto currency by company directors and general market abuse controls come into immediate force for all service providers on December 30. However, service providers registered with their national authority will have a transition period in which to comply with the new regulations and acquire their full CASP licence. The maximum is 18 months, but a number of states have indicated their transition period will be shorter, in some cases 12 months, in others six or less. 

Meanwhile, the new MiCA regulation does not exist in isolation. It sits amid a wider landscape of EU regulation and is itself set to evolve. For example, NFTs have not been included in current regulations but are likely to be drawn under MiCA in later rules revisions. In the interim, sustainability assessments are also expected to become part of the regulations, bringing crypto closer to existing EU regulations on sustainable finance.

Don’t fear the regulator

When it comes to MiCA (and indeed for all the new regulations that are in the pipeline that might affect the crypto space) Arras has one simple piece of advice for clients.

“It’s really important that they talk to their regulators. We have a close relationship with our regulator and that has been really helpful. We’re in good shape to know what’s coming. I would tell our customers not to be scared to talk to their national competent authority, because regulators themselves appreciate knowing who is doing what to comply with MiCA. Get it right now, if you haven’t already.”

MiCA regulations naturally only apply to EU-based businesses and in the short term some operators may be tempted to migrate beyond the EU’s borders to avoid the regulatory burden. However, even then providing digital asset services to EU citizens from a third country will only be permissible if it comes from a ‘reverse solicitation’ in which the client has requested the service entirely under their own initiative.

Where the EU leads in financial regulation jurisdictions typically follow, not least because access to EU markets requires, if not identical regulations, then at least ‘equivalence’.  MiCA is also the most advanced set of regulations in crypto and as such is highly likely to be a reference point for other jurisdictions as they design their own rules.

It is certainly what Arras is hoping for: “MiCA is not perfect and includes some unwelcome restrictions for example on staking and other techniques for earning income from stablecoins. On balance, however, it provides a useful framework on which to build. At BCB we are more than comfortable that we can meet the MiCA requirements and continue to expand our services to our clients.”

The information contained in this document should not be relied upon by investors or any other persons to make financial decisions. It is gathered from various sources and should not be construed as guidance. The information contained herein is for informational purposes only and should not be construed as an offer, solicitation of an offer, or an inducement to buy or sell digital assets or any equivalents or any security or investment product of any kind either generally or in any jurisdiction where the offer or sale is not permitted. The views expressed in this document about the markets, market participants and/or digital assets accurately reflect the views of BCB Group. While opinions stated are honestly held, they are not guarantees, should not be relied on and are subject to change. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This document may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Past performance of the digital asset markets or markets in their derivative instruments is not a viable indication of future performance with actual results possibly differing materially from those stated herein. We will not be responsible for any losses incurred by a client as a result of decisions made based on any information provided.

Written by

Sam Shrager

Share