Regulation
The work of preparing cryptocurrencies for a new Europe-wide program has begun
The end of this month marks the first major compliance deadline for the new EU program for the cryptocurrency industry.
The Markets in Crypto Assets Regulation, or MiCA, was signed last year by EU institutions and will impose a series of new rules on cryptocurrency exchanges and other industry operators to ensure the protection of investors and consumers, along with tighter controls strict on anti-money rules. recycling.
From June 30th the issue of stablecoins will pass to MiCA. Stablecoins refer to cryptocurrencies whose value is pegged to a traditional fiat currency such as the dollar or euro.
Stablecoin issuers are now required to have an e-money license to issue such a crypto token in the EU and demonstrate that they have the reserves in tow to maintain the peg.
Companies are already taking steps to restrict access to some stablecoins in the EU that do not fall under the rules set by MiCA. Binance, the world’s largest cryptocurrency exchange by volume, said it will limit “unauthorized” stablecoins on its platform.
This is what the lawyers of Coinbase, another of the major players in the sector, think.
Paul Grewal, chief legal officer at Coinbase, told The Currency that some cryptocurrency exchanges are likely to have to delist several stablecoins starting June 30.
“The requirements are real and they are coming quickly,” Grewal said.
“For all stablecoins, will there now be explicit standards on what reserve requirements must be in place and how to protect those reserves? What do you need to tell your clients about how those assets are backed by euros or dollars or some other fiat currency?” Grewal said.
It is one of many new, higher standards that Grewal says will help further clean up the industry and bring it more in line with the regulatory foundation of traditional finance.
Coinbase, listed on the Nasdaq, is one of the largest cryptocurrency exchanges in the world and has established a sizable presence in Ireland over the past six years. More recently it confirmed that Ireland will be the main regulatory hub for MiCA in the EU.
“We think this will improve 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 and what you’re not doing . This is, I think, the most immediate opportunity and problem that the industry will always face.”
In its annual report, the Central Bank said that the implementation of MiCA and “the involvement of companies applying for authorization under the new regime” is a priority for 2024.
While Coinbase has committed to Europe-wide MiCA compliance from Ireland, it is unclear when exactly companies will be able to submit their requests.
The Netherlands has kicked things off and opened up the application process, perhaps giving them an advantage in attracting companies eager to obtain MiCA approvals.
A spokesperson for the Central Bank told The Currency that it plans to open the “authorization portal early in the third quarter” of this year for such requests. The watchdog said it will host an industry event in July to inform companies of what will be expected of them when they apply.
The spokesperson added that it and its counterparts in Europe have collaborated on how to interpret the various provisions of the regulation to ensure consistency.
“It was significant that it is Esma [European Securities and Markets Authority] and the ABE [European Banking Authority] have established supervisory coordination networks to facilitate convergence among regulators. At the Central Bank of Ireland we are active participants and strong supporters of this work,” they said.
While Coinbase has committed to MiCA compliance outside Ireland, others have yet to make such commitments there.
Binance has established a presence in Ireland with staff and several corporate entities, but a spokesperson will not be named for the location decision for the new regulation. “Binance is working to comply with MiCA requirements and will share more details at an appropriate time,” he said.
For Cara Hennessy, location is a key decision for many of her clients. Hennessy is the founder of Provenance Compliance, a consultancy which she set up in the Cayman Islands where she has lived for the past 17 years before recently returning to Ireland.
It is assisting clients in obtaining regulatory approvals in other countries that now wish to join the EU but remain undecided about where to settle.
“These customers say: ‘where should I go in Europe?’ They are looking at Ireland. Ireland has a very strong reputation as a strong governing and regulatory body, however, it takes on average 10 months to process a Vasp registration,” he said, referring to an existing framework for crypto companies.
“If they come into MiCA through Ireland they have to go through the MiCA licensing process and what worries our customers is the time it will take because they won’t be able to operate until they get a licence.”
Hennessy said it welcomed the Central Bank’s latest update on the sector’s commitment.
“This is absolutely necessary and welcomed because the other thing is that there are questions about what constitutes a complete application. We know the documentation as a business plan [are required] but there needs to be a little more detail about what constitutes a complete application so that once you enter the application, there isn’t a lot of back and forth.”
Over the next year, MiCA has several deadlines that companies will need to meet before the scheme is fully operational.
The rules for cryptocurrency service providers, which will include the likes of cryptocurrency exchanges, will come into force in December this year. The Central Bank will then give companies a 12-month grace period to get back on their feet.
Until recently, this was a point of contention among the industry. National regulators had discretion over the grace period, and companies lobbied for the longest 18-month period allowed by the regulation.
Coinbase supported an 18-month grace period in Ireland, as did other major exchanges, Kraken and Gemini.
Coinbase’s Grewal accepts that it now has to work within the constraints of the 12-month period in Ireland, but that anything shorter would have created a lot of “pressure” to comply.
The variability of grace periods can create some challenges for EU companies if some countries have tighter grace periods 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 companies maybe that’s a downside or something less attractive,” Grewal said.
He said fintech and crypto companies can sometimes focus too much on getting a license as quickly as possible, and that jurisdictional searches for “lighter” oversight don’t always work out for the best.
“I don’t think any company that thinks it’s going to have an easier time should be so myopically focused on who can expedite or grant licenses or applications more quickly,” he said.
“When it comes to regulation, and this is a lesson we have seen in traditional finance, I think fintechs and cryptocurrencies are also learning the same, licensing applications, registrations and the like are just the beginning of the journey, not the end. the journey.”
Cathal Houlihan, partner at financial services consultancy Valentia Partners, flagged the different grace periods and the fact that some countries will open applications earlier than others.
“There is a risk, certainly the message from the Central Bank and other regulators is that they are actively working to ensure that there is consistency across jurisdictions,” Houlihan said.
“How to bridge the gap between applications that are already open and those that have not yet been opened [is important]. If the Netherlands, for example, is reviewing applications now and the CBI may not review them for several months, it is difficult to know when that consistency will actually arrive.”
The grace period will become less of an issue as more regulators open their enforcement portals, he said.
“I think the 12-month transition period only becomes really concerning if companies are concerned that they won’t be able to get authorization within that period rather than whether it’s 12 or 18 or six months or whatever it may be,” Houlihan said .
These are priority issues for companies when considering MiCA compliance, he added.
While strengthening anti-money laundering controls are also a factor in regulation, they will be the least controversial for major cryptocurrency companies at this stage. Years of high-profile scandals and collapses – and the resulting scrutiny from lawmakers – have prompted most major players to dramatically improve their AML and KYC controls in recent years.
MiCA formalizes much of this and puts it in black and white.
MiCA will create more work for both companies and start-ups, but others are smelling an opportunity to strike deals under the new regime.
Andrew Forson heads venture investing at The Hashgraph Association, a Swiss cryptocurrency and blockchain development and investment firm.
Forson told The Currency that the MiCA framework gives investors more confidence rather than a feeling of restriction. He said Hashgraph is now actively seeking early-stage cryptocurrency and Web3 startups to invest in Ireland. While MiCA will initially create obstacles for young companies to get off the ground, it will ultimately separate the wheat from the chaff, he said.
Andrea Forson. Photo: Cormac Rowe
“Regulation means that there are barriers to entry and, as cynical as it may seem to some, those companies that are able to demonstrate some degree of regulatory compliance are also able to demonstrate some degree of value protection, so we consider regulation as inevitable,” Forson said. .
“Our interest is to see which companies have been able to navigate these regulatory frameworks and build something that is compliant with the regulations, which makes them a more attractive investment target for us.”
Hashgraph is evaluating a possible physical presence in Ireland to scout deals but, for now, is talking to some early-stage Irish start-ups about investments.
Hashgraph will write checks of between 100,000 and 1.5 million euros to startups in pre-seed and seed rounds, Forson said, with the intention of “investing in them early and often.”
Further reading: Gabriel Makhlouf called them “Ponzi schemes”. Do EU Regulators Have Their Knives Ready for Cryptocurrencies?