Introduction
Crypto-assets are becoming increasingly popular as financial products, with more and more businesses venturing into the ‘crypto space’. This has brought an increasing focus from Regulators on how these new financial products are regulated and the measures to be put in place to ensure that the market is protected.
This has therefore led to Regulators in the European Union (“EU”) to propose and establish a framework that looks to harmonise the treatment of crypto-assets across member states. Similar frameworks are being developed across multiple other regulators (the FCA for example has already established financial promotion rules for crypto firms through PS23/4). The EU has now pushed forward, through the European Securities and Markets Authority (“ESMA”), establishing the Markets in Crypto-Assets Regulation (“MiCA”) to start the process of harmonisation across EU member states and regulation of these new crypto-asset firms.
What is MiCA?
MiCA is a regulatory framework, developed by ESMA, that will look to bring crypto-assets, crypto-asset issuers and crypto-asset services providers under the regulatory umbrella. These regulations will ensure that the market is protected from harm and that firms are measured against standards that are deemed acceptable to trade within the EU. These same standards will also be applied against crypto-products to ensure that the products do not cause harm to the market and are appropriately distributed to market participants. These regulations will look to formalise the crypto sector and bring some stability that was not present in its infancy.
Who does MiCA effect?
As MiCA is an EU established regulatory framework, it will naturally be of major interest to firms established in the EU. In particular, the following sectors will be interested in MiCA:
- Crypto-Asset Issuers;
- Crypto-Asset Service Providers; and
- Crypto-Asset Manufacturers.
Alongside relevant EU firms, UK firms that are involved in the crypto sector and that operate in the EU will be caught under the new MiCA regulatory framework. Any crypto activity that is undertaken in the EU will be expected to abide by the MiCA regulatory framework.
The Current State of Play
The MiCA regulation is now well established and moving towards implementation. In the second half of 2023 and Q1 2024 three consultation packages were produced by ESMA that established the groundwork for the implementation of the MiCA regulation. In summary these packages covered:
- Consultation 1 (July 2023): provided technical standards regarding notifications and authorisations in connection with MiCA;
- Consultation 2 (October 2023): provided proposed rules in regard to sustainability indicators, business continuity, trade data transparency, content/format of order book records and technical means for appropriate public disclosure; and
- Consultation 3: provided proposed rules in regard to prevention/detection of crypto-asset market abuse, advisory suitability and portfolio management services requirements, crypto-assets transfer services and security and system protection protocols.
Full application of MiCA will be applied from the end of December 2024, with aspects relating to e-money and asset referenced tokens already in force, with member states already having had the opportunity to notify the Commission and ESMA of their intention whether or not to allow ‘grandfathering’ of current crypto providers into the new regime.
Where member states have opted not to ‘grandfather’ current providers, those firms will be required to go through a formal authorisation process, and gain approval, before being able to offer crypto services similar to that of new providers post December 2024.
However, where member states have taken up the ‘grandfathering’ regime from the end of December 2024, MiCA will be applied to their business and an 18-month transitional timer will begin. Firms will be expected to acquire authorisation within the transitional period, but firms will be able to continue their crypto activities within this 18-month window. The transition window for ‘grandfathered’ firms will close in July 2026, at which point firms will have to cease operation if authorisation has not been granted.
Moving Forward
EU crypto-asset firms must become familiar with the MiCA rules and ensure that they are ready to comply and be brought under the regulatory umbrella. If firms are not prepared to do so, they will have to cease trading in the EU.
UK crypto firms, or firms looking to branch out into the EU, must also take note and ensure their understanding of MiCA as a regulatory framework and the implementation timeline as set out above.
It is also vitally important that firms check their local jurisdiction’s decision on whether to implement the ‘grandfathering’ regime or not. This will allow firms to understand their timeline over the next 18 months and the process they will need to go through to satisfy the MiCA regulations. Equally, EU crypto-firms undertaking cross-border activities that benefit from the application of ‘grandfathering’ by their Home State regulator, will only be able to carry out activities in other member states where the ‘grandfathering’ provisions have also been adopted.
How can Complyport Help?
Our specialised team of financial crime and digital assets consultants diligently monitors regulatory developments, ensuring our clients maintain the highest levels of compliance in the realm of Crypto-assets, and can support your firm in the following ways:
- Compliance Support: Ensure the FCA’s new financial promotion rules for crypto assets are adhered to, through comprehensive regulatory compliance audits, risk assessment services and personalised guidance on implementing necessary controls and disclosures.
- FCA Authorisation and Registration Management: Prepare and oversee your firm’s FCA authorisation and registration process. This involves assisting with the preparation of the application and supporting documentation and engaging with your firm and the FCA throughout the application. We also provide continued support post-registration, including compliance monitoring.
- Regulatory Policies and Procedures Development: Create bespoke policies and procedures and supporting the implementation of existing policies and procedures.
- Regulatory Guidance: Offer regulatory guidance to clients involved in crypto trading, clarifying the required permissions and registrations.
- AML and KYC Frameworks: Develop Anti-Money Laundering (AML) and know your customer (KYC) and know your transaction (KYT) frameworks, including mandatory annual business-wide risk assessments as required by regulations.
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