Crypto Asset Markets – Crypto Asset Service Providers
The rationale behind the unique regulatory framework for crypto assets within the EU
It is well known that the essence of the European Union (EU) is a single market, meaning a free market for the trade of goods, services, capital, and labour. A single market implies a compatible regulatory framework, more or less. If we take, for example, the banking industry (something crucial for any economy), the EU maintains a system at the EU level allowing all banks to do business anywhere within the EU with near legal certainty. On the other hand, the crypto asset industry is not as fortunate.
Today, crypto asset issuers and crypto asset service providers (CASP) cannot fully take advantage of the single market thanks to the lack of legal certainty concerning treatment of crypto-assets. In addition, there is an absence of a dedicated and coherent supervisory regime at the EU level. While a few Member States have already implemented bespoke regimes addressing some CASP activities, most have yet to act. The contrast between those Member States who do, and those who do not, gives rise to an uneven playing field among CASP from various jurisdictions. In such an environment, more vacuum than substance, investment firms and banks are loathe to strengthen ties to up-and-coming CASP businesses. Their reticence even extends to refusing to open bank accounts and other mundane financial services. These are hardly ideal business conditions and thus CASP ability to scale up activity across the EU has been badly hampered. Additionally, the status quo poses substantial risk to both consumer and investor (e.g. fraud, cyber-attacks, market manipulation).
Hence, MiCA. The European Commission has proposed a mechanism for harmonizing CASP oversight throughout the single market. For purposes of streamlining, MiCA explicitly states that issuers and CASP should not be subject to specific national rules. Instead, control will be at the EU level.
Position of Crypto-Assets Service Providers (CASP) under MiCA
What, specifically, does MiCA have in store for CASP?
First, it offers some definitions. MiCA defines CASP as a person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis. More precisely, CASP is a licensed person performing one of the following activities:
- the custody and administration of crypto-assets on behalf of third parties;
- the operation of a trading platform for crypto-assets;
- the exchange of crypto-assets for fiat currency;
- the exchange of crypto-assets for other crypto-assets;
- the execution of orders for crypto-assets on behalf of third parties;
- placing of crypto-assets;
- the reception and transmission of orders for crypto-assets on behalf of third parties;
- providing advice on crypto-assets.
CASP, as well as intermediaries in the traditional financial industry, perform an important function. Irrespective of whether these entities provide custody for clients’ crypto-assets, or operate crypto trading platforms/exchanges, or store their crypto holdings in wallets, or provide advice on crypto-assets, CASP must be authorized under MiCA. To get requisite permission, CASP will need to be registered as a legal entity with a physical presence in at least one Member State. Additionally, it will be required to submit an application establishing satisfaction of all prescribed preconditions such as sufficient capital and good governance arrangements. As required by national authorities, a CASP will have to demonstrate sufficient cash reserves to cover all risks and potential loses. In this case, sufficient means anything between EUR 50,000 to EUR 150,000 depending on the particular activity. MiCA explicitly states that the cash reserves be held separate from investor assets. In fact, MiCA creates a fiduciary duty for CASP (e.g. acting honestly, fairly and professionally). Compliance will allow CASP to be passported to other Member States.
CASP will also have to demonstrate that they fulfill certain organizational standards such as the appointment of a management team with sufficient integrity, professional qualifications, and required experience. Additionally, significant CASP beneficiaries (meaning all natural persons who directly or indirectly hold more than 20% of ownership or voting rights) must prove that they possess a good reputation and have never been convicted of financial crimes.
CASP will be obliged to prepare a business continuity plan aimed at ensuring that the performance of their services will not be disrupted due to unforeseen external events. Also, CASP will have to establish mechanisms for monitoring and detecting instances of market abuse committed by their clients, making CASP a quasi-government regulator.
In terms of customer service, CASP will be obliged to create and maintain complaint handling procedures, available to their clients free of charge. Investors must be provided with clear and unambiguous statements concerning risks associated with crypto assets. So too should any information offered to the public. The fee structure must be transparent.
One potential issue for crypto true believers is the lack of anonymity. MiCA stipulates that in order to maintain the transparent functioning of crypto-asset markets, crypto trading platforms may only list crypto-assets with a published whitepaper while rejecting all tokens with inbuilt anonymity functions preventing identifying holders and tracking their transaction histories (which is to be expected due to the KYC and AML reasons).
Despite what, at first glance, may appear a daunting set of administrative hoops to jump through, the effort will eventually prove its worth. Any CASP able to comply will have the ability to do business, with a significant degree of business and legal certainty, within the EU bloc. Consumers will benefit from improved services and lower costs. Not to mention that once MiCA passes, traditional financial institutions will almost certainly be more eager to provide their services and potentially financing .