The end of this month marks the first major deadline for compliance under the EU’s new playbook for the cryptocurrency industry.
The Markets in Crypto Assets regulation, or MiCA, was signed off last year by EU institutions and will impose a raft of new rules on crypto exchanges and other operators in the sector to ensure protections for investors and consumers, alongside tighter controls on anti-money laundering.
On June 30, the matter of stablecoins will come under the remit of MiCA. Stablecoins refer to cryptocurrencies whose value is pegged to a traditional fiat currency like the dollar or the euro.
Stablecoin issuers are now required to have an e-money licence to issue such a crypto token in the EU and prove they have the reserves in tow to maintain the peg.
Companies are already taking measures to restrict access to certain stablecoins in the EU that don’t fall within the rules set out by MiCA. Binance, the world’s largest cryptocurrency exchange by volume, said that it will restrict “unauthorised” stablecoins that are on its platform.
This is on the mind of the lawyers at Coinbase, another of the industry’s major players.
Coinbase’s chief legal officer Paul Grewal told The Currency that it is likely some crypto exchanges will have to delist several stablecoins come June 30.
“The requirements are real and they are coming fast,” Grewal said.
“For all stablecoins, there are now going to be explicit standards around what reserve requirements must be in place and how do you protect those reserves? What do you have to tell your customers about how those assets are backed by either euro or dollars or some other fiat currency?” Grewal said.
It is one of many new higher standards that Grewal believes will help further clean up the industry and put it more in line with the regulatory footing of traditional finance.
Nasdaq-listed Coinbase is one of the world’s largest cryptocurrency exchanges and has established a sizeable presence in Ireland over the last six years. Most recently it confirmed that Ireland would be its main regulatory hub for MiCA in the EU.
“We think that will elevate the space as a whole and put an even higher premium on doing things the right way and being transparent with customers and regulators about what you’re doing, what you’re not doing. That is, I think, the most immediate opportunity and issue that the industry is always going to have to confront.”
In its annual report, the Central Bank stated that the implementation of MiCA and “engaging with firms seeking authorisation under the new regime” was a priority for 2024.
While Coinbase has committed to operating its EU-wide MiCA compliance from Ireland, it remains unclear when exactly firms will be able to submit their applications.
The Netherlands has got the ball rolling and opened its application process, possibly giving it a lead on attracting companies eager to get their MiCA approvals in the bag.
A Central Bank spokesperson told The Currency that it intends to open the “authorisation gateway in early quarter three” of this year for such applications. The watchdog said it will be hosting an industry event in July to inform firms of what will be expected of them when applying.
The spokesperson added that it and its counterparts in Europe have been collaborating on how to interpret the regulation’s various provisions to ensure consistency.
“It has been significant that both Esma [European Securities and Markets Authority] and the EBA [European Banking Authority] have established supervisory coordination networks to facilitate convergence between regulators. At the Central Bank of Ireland, we are active participants and strong supporters of this work,” they said.
While Coinbase has committed to operating its MiCA compliance out of Ireland, others have yet to make any such commitments on location.
Binance has established a presence in Ireland with staff and several corporate entities but a spokesperson would not be drawn on a location decision for the new regulation. “Binance is working towards compliance with the requirements of MiCA and will share more details at the appropriate time,” they said.
For Cara Hennessy, location is a key decision for many of her clients. Hennessy is the founder of Provenance Compliance, a consultancy that she established in the Cayman Islands where she lived for the last 17 years before recently returning to Ireland.
She is assisting clients in getting regulatory clearances in other countries that are now keen to enter the EU but remain undecided on where to establish themselves.
“These clients are saying, ‘where should I go in Europe?’ They’re looking at Ireland. Ireland has a very strong reputation as a strong governing and regulatory body, however, it is taking on average 10 months to process a Vasp registration,” she said, referring to an existing framework for crypto companies.
“If they’re coming into MiCA through Ireland, they must come in through the MiCA authorisation process and what our clients are concerned about is the time it will take them because they can’t operate until they get a licence.”
Hennessy said she welcomes the latest update from the Central Bank on industry engagement.
“That is very much needed and welcomed because the other thing is there are questions about what constitutes a complete application. We know the documentation like a business plan [are required] but there needs to be a bit more detail around what constitutes a complete application so that once you put your application in, there’s not a lot of back and forth.”
Over the next year, MiCA has several deadlines that companies will be expected to meet before the regime is fully in place.
Rules for crypto asset service providers, which will encompass the likes of crypto exchanges, will take effect in December of this year. The Central Bank will then give companies a grace period of 12 months to get their ducks in a row.
Until recently, this was a bone of contention amongst industry. National regulators had discretions on the grace period and firms lobbied for the longer 18-month period allowed for under the regulation.
Coinbase argued for an 18-month grace period in Ireland and so too did other major exchanges, Kraken and Gemini.
Coinbase’s Grewal accepts that it must now work within the constraints of the 12-month period in Ireland but that anything shorter than that would have created a great deal of “pressure” to comply.
Varying grace periods may create some challenges for companies in the EU if some countries have tighter timeframes than others.
“I will say this, the Central Bank of Ireland has a reputation for being a very firm, even tough regulator, and I think that reputation is deserved. Now for some firms perhaps that’s a negative or something that’s less attractive,” Grewal said.
He said that sometimes fintech and crypto companies can focus too much on how to get a licence as quickly as possible and that jurisdiction shopping for “lighter touch” oversight doesn’t always work out for the best.
“I don’t think that any company that thinks it’s going to have an easier time of it should so myopically focus on who may most quickly fast track or grant licences or applications,” he said.
“In regulation, and this is a lesson we’ve seen in traditional finance, I think fintechs and crypto are all learning this as well, the licence applications and the registrations and the like are just the beginning of the journey, not the end of the journey.”
Cathal Houlihan, a partner at financial services consultancy Valentia Partners, flagged the differing grace periods and the fact that some countries will open applications before others.
“There is a risk, certainly the message from the Central Bank and other regulators is that they’re actively working to ensure that there is consistency across jurisdictions,” Houlihan said.
“How you bridge that gap between applications that are already open and those that haven’t yet opened [is important]. If the Netherlands as an example is reviewing applications right now and the CBI may not be reviewing applications for a number of months, it’s hard to know when that consistency will really come.”
The grace period will become less of a problem as more regulators open up their application portals, he said.
“I think the 12-month transition period only really becomes a concern if firms have concerns that they can’t get authorised within that period rather than the fact that it’s 12 or 18 or six months or whatever it might be,” Houlihan said.
These are top of mind for companies when considering MiCA compliance, he added.
While enhancing anti-money laundering controls is a factor of the regulation as well, they will be the least contentious for major crypto companies at this stage. Years of scandals and high-profile collapses – and the lawmaker scrutiny that comes with that – have driven most of the mainstream players to drastically improve AML and KYC controls in recent years.
MiCA formalises much of that and puts it in black and white.
MiCA will create more work for corporates and start-ups alike but others are sniffing out an opportunity for dealmaking under the new regime.
Andrew Forson heads up venture investments at The Hashgraph Association, a Swiss crypto and blockchain developer and investment house.
Forson told The Currency that the MiCA framework gives investors more confidence rather than a feeling of restriction. He said Hashgraph is now actively looking for early-stage crypto and Web3 start-ups to invest in Ireland. While MiCA will create hurdles for young companies to get off the ground initially, it will ultimately separate the wheat from the chaff, he said.
“Regulation means you have barriers to entry and as cynical as that may sound to some, those firms that are able to show a degree of regulatory compliance are also able to show a degree of value protection so we view regulation as inevitable,” Forson said.
“Our interest is in which firms have been able to navigate those regulatory frameworks and build something that is regulatory compliant, that makes them a more attractive investment target to us.”
Hashgraph is considering a possible physical presence in Ireland to scout out deals but, for now, is speaking to some early-stage Irish start-ups about investing.
Hashgraph will write cheques of between €100,000 and €1.5 million for start-ups in the pre-seed and seed rounds, Forson said, with the plan being to “invest in them early and often”.
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