The regulation of crypto assets and related services is still not consistent in the European Union and appears to be patchy in places.

While the 5th Anti-Money Laundering Directive (AMLD5) covers certain crypto assets under “virtual currency”, it does not follow a unified regulatory approach. Following the implementation of AMLD5, multiple member states created their own regulatory regime for transactions involving "virtual currency" or crypto assets. This issue was addressed by the European Commission’s draft regulation “Markets in Crypto-assets” (MiCAR). MiCAR is currently expected to become applicable during 2024.

New legislation always creates a degree of uncertainty in the market. Therefore, it is important to prepare for the changes coming with MiCAR now, the question is how crypto businesses already authorized under national law will be affected once MiCAR comes into force;

  • how will they be treated under the draft regulation
  • does it still make sense to still acquire a license under national law before the MiCAR comes into force?

This article will address these issues.

MiCAR

As reported earlier, the European Commission published the draft regulation on crypto asset in September 2020. According to the current draft, MiCAR will apply to all persons who want to issue crypto assets or provide services in relation to crypto assets in the European Union. However, the definition of crypto assets under MiCAR is not compatible with the term used in the German Banking Act (Kreditwesengesetz – KWG) so changes are also expected to the German market. The content of the MiCAR draft can be divided into three sections:

  1. The authorization procedure for issuers of crypto-assets and the corresponding obligations for the token types covered by the regulation (asset-referenced tokens, e-money tokens and, as a catch-all provision, crypto-assets).
  2. The authorization procedure for crypto asset service providers.
  3. The competent authorities and their competencies.

MiCAR will create a uniform set of regulations for the European Union, these are expected to come into force in 2022 and, after an 18-month transition period, they will be directly applicable in all member states. This means that a harmonised set of rules for crypto asset related products and services throughout the European Union can be expected for 2024.

Content of MiCAR

MiCAR has been created to introduce regulations on the licensing and supervision of crypto asset providers and their issuers, as mentioned above. The focus is on issuers of asset-referenced tokens and e-money tokens. The regulation is intended to cover the operation, organization, and governance of issuers of asset-referenced tokens and e-money tokens and service providers in the field of crypto assets. The provision of crypto asset services is also to be regulated. Thus, only legal entities that are established in the EU and have received a corresponding authorization from the competent authority may provide these services from 2024 onwards.

An important component of the MiCAR is therefore the licensing regime established under it by the respective competent authorities.

Current status in Germany

Germany follows a strict approach compared to the rest of the European Union, under the current national legal regime: crypto assets are classified as financial instruments. A MiFID license is required for the provision of crypto asset services such as token brokerage; a separate crypto asset custody license is required for the provision of wallet services. The corresponding regulations of MiFID II (Directive 2014/65/EU) have been implemented in Germany in the German Banking Act (Kreditwesengesetz - KWG) and the Investment Firm Act (Wertpapierinstitutsgesetz - WpIG)). Authorization is granted by the German Federal Financial Supervisory Authority (BaFin).

However, this strict approach may have its advantages; firstly, Germany already offers a clear legal framework for crypto asset services, secondly, service providers with MiFID licenses benefit from grandfathering rules under the current MiCAR.

Grandfathering/Transitional Provisions of MiCAR

Institutions with a MiFID license will be able to continue to conduct business under MiCAR without having to obtain a separate license under MiCAR. E-money institutions will also find the transition to MiCAR easier than new entrants.

E-money institutions

A grandfathering process will be available to e-money institutions, under which a simplified procedure for obtaining an authorization will be offered rather than having to undergo the full authorization process. The details of the simplified procedure are not yet specified in the current MiCAR draft. However, it is intended to waive such documents in the authorization procedure that are already known to the competent authority.

MiFID Firms

Institutions that are authorized under MiFID II (such as securities institutions) are not subject to the authorization provisions under MiCAR when providing crypto asset services. These institutions may continue to provide services they have previously provided in relation to financial instruments under MiFID II with regard to crypto assets without any further authorization requirement.

Outlook

Given the advantages that MiFID institutions benefit from under the MiCAR, it is an attractive option for new market participants to apply now for a license as a MiFID institution in Germany. When MiCAR comes into force, these institutions will not be exposed to the uncertainties that a new implementation of the law will automatically bring. A simplified authorization procedure also awaits e-money institutions that have already been authorized, which is associated with advantages. The reason for this is that providers of crypto asset services (from unregulated EU countries in particular) face higher costs that may result from the acquisition of licenses and the establishment of suitable structures to meet the requirements of MiCAR; the early establishment of such an infrastructure under an already established legal framework therefore makes sense. In this way, the advantages of the current German regulatory regime on crypto assets can be optimally used to stay 'ahead' in the implementation of MiCAR.