Currently, we can read many summaries and briefings on the new Market in Crypto Assets Regulation (“MiCAR”) everywhere. Certainly, MiCAR has the potential to give the EU crypto market a major boost. From what we have seen so far, regulation for new business models, especially in the fintech market, is not as bad as everyone has previously assumed.
We can all remember the early days of Bitcoin aiming for an unregulated currency and I still hear voices saying that regulating cryptos is destroying the whole idea of the crypto market. But that’s not the case. Germany has already made such a push by incorporating a regulation and license for crypto custody businesses and crypto registrants. In addition, there are clear guidelines for classifying the different types of crypto assets and how they are regulated. So far we have seen a very positive response to the regulation in Germany.
Investors appreciate the security and clear legal requirements as well as the existing supervision. We see that fintechs are striving for German regulation and approval in order to be able to send the signal to the market, investors and (potential) customers: We adhere to certain predefined standards, have a functioning risk and compliance system, a stable and tested one Funding and sufficient experience to run this business.
Kind of like a seal of approval. This is very well received in the market, because ultimately crypto investments, like any other investment product, are also associated with risks that should be hedged according to their individual design.
German crypto regulation
So what is the current regulation for crypto in Germany all about? German regulation classifies crypto assets into (1) currency tokens (also payment tokens or exchange tokens) such as Bitcoin, Ethereum etc., which have a payment or exchange function, (2) security tokens (also equity tokens or investment tokens), which are similar to securities, typically embodying membership or ownership rights, (3) utility tokens (fungible or non-fungible) as a type of digital voucher giving an access key to goods and services of the issuer or a third party, and (4) hybrid Token that combines features of the aforementioned basic forms. The main characteristic of the respective crypto is decisive for the classification of hybrid crypto tokens.
Service providers and issuers must decide whether the respective token is a financial instrument and, if so, what type of financial instrument it is. Such a classification is subject to approval requirements. Security tokens, for example, are typically classified as financial instruments within the meaning of the Securities Trading Act (WpHG), accordingly, a public offering of the token requires a prospectus, which has certain requirements in terms of scope and type. MiFID rules (and the equivalent German regulation) apply mutatis mutandis to crypto assets classified as financial instruments, and licensing requirements may also apply.
Underlying the issuance of such tokens are the underlying rule against market abuse, i.e. insider trading, and certain transparency obligations (e.g. regular and ongoing disclosure). This is based on the existing regulation, which now has clear guidelines on crypto classification. Cryptocurrencies are classified by the Federal Financial Supervisory Authority (BaFin) as a unit of account and thus as a financial instrument under the German Banking Act (KWG). Issue and support then require a license according to the stricter rules of the German Banking Act. A utility token in its general form of a pure voucher function is typically not classified as a financial instrument and therefore does not trigger an approval requirement.
Now the new German supervisory law also requires a permit for crypto custody business and for keeping crypto securities registers. A Crypto Custody License is required to hold, manage and protect crypto assets or private cryptographic keys used to hold, store and transfer crypto assets to others. A crypto-securities registry operator license is the required license to operate a crypto-securities registry that ensures the proper functioning of the crypto-securities registry. Both businesses cannot be operated with existing licenses, for example as a bank or financial service provider.
In addition to the new regulation of the crypto custody business and the crypto securities register, Germany has also implemented the Electronic Securities Act (eWpG), thereby enabling digital securities in Germany and thus also covering regulated opportunities for the crypto sector.
BaFin is the body responsible for all approval procedures. When applying for a concession, the company’s start-up capital, the business model (specification of a business plan for the first three years), the personal and professional reliability and availability of the managing directors, the group structure of the company (if relevant), expertise of management and supervisory bodies etc.
EU Crypto Regulation
So far, there is no European standardized framework for crypto assets and crypto services, and each member state follows its own national regulation (if any). The draft Markets in Crypto Assets Regulation (MiCAR) now offers a uniform EU-wide framework for the most important crypto services, which will apply uniformly to all persons who want to issue crypto assets or provide crypto services within the EU. This was seen as a very good signal for the fintech market in Europe for a transparent and secure future for the crypto business. The attempt to find practical regulations and solutions appears to have been largely successful with the present draft. Where industry has previously criticized individual provisions, the regulatory authority seems to have taken them into account. From this draft we can see that the EU was ready to find a viable solution for crypto assets that respects current technical standards but at the same time offers sufficient security.
MiCAR is scheduled to come into force in 2024 and each EU country is to implement National Competent Authorities (NCAs), in Germany this will most likely be BaFin, acting as the competent supervisor along with the European Banking Authority (EBA) and the European Securities and Markets Authority should (ESMA).
Classification of cryptos under MiCAR
MiCAR’s classification of crypto assets is not identical to the current classification in Germany, but is based on the same understanding. It defines crypto assets as “a digital representation of value or rights that can be transmitted and stored electronically, using distributed ledger technology or similar technology.” MiCAR distinguishes between currency tokens (as in the German regulation), stablecoins (e-money tokens and assed referenced tokens) and utility tokens (usage tokens, as also provided for in the German regulations). MiCAR does not contain any regulations on Security Tokens and Non-Fungible Tokens (NFTs).
For security tokens, this seems logical and correct, since security tokens – just like for German regulation – are considered financial instruments and therefore fall under the MiFID II rules. It’s different with NFTs. In general, NFTs represent individual assets, rights or objects that are individualized via smart contracts. So far, MiCAR only regulates fungible crypto assets and intends not to regulate NFTs at all.
However, there is an opening clause on NFTs stating that NFTs fall within the scope of MiCAR if they are part of a so-called “collection” and thus part of a crypto class regulated by MiCAR, but without defining such a collection of NFTs. Presumably, further guidelines and technical standards from ESMA will ensure a clearer understanding. The market currently assumes that a collection of NFTs is meant, for example when a large number of NFTs are issued with only minor deviations from one another.
MiCAR rules for issuers and service providers
Issuers of crypto assets under MiCAR must (1) be a legal entity, (2) prepare, report and publish a white paper (such as a securities prospectus), (3) comply with certain codes of conduct, and (4) be based in the EU. Issuers of asset-related tokens must also comply with comprehensive codes of conduct and capital requirements. There are a variety of services for service providers that can be provided in relation to cryptos and deviating from the German regulation.
MiCAR uniformly regulates such a broad spectrum. Crypto services under MiCAR range from custodial services, exchange services or placements of crypto securities to portfolio management and advice on crypto stocks, to name a few. Crypto service providers require a license under MiCAR and ongoing commitments to do business. Special requirements apply to “major crypto asset service providers”, which is a service provider with more than 15 million users.
Passport and interaction between German and EU regulation
Licenses issued in one member state under the MiCAR regime can be passported throughout the EU, meaning that a license, e.g. For example, in Spain, the licensed company is allowed to do regulated business across the EU, with only minor registration requirements for each country doing business in.
But would it make sense to get a German license now, e.g. for the crypto custody business, or is it better to wait for MiCAR to come into force and then license directly under MiCAR? If a company is looking to start a crypto business and is ready, it still makes sense to opt for a German license as it provides proof of quality, which makes it easier to find investors and allows companies to establish all the necessary structure, compliance and risk requirements , which are also required under MiCAR. This provides an immense advantage, allows you to start your business and once MiCAR comes into effect, it will be easier to simply “switch” the license from the German to the European license. However, the current German crypto custody and crypto registrar license is not passable as it is not based on an EU regulation.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.