What does MiCA look like in practice?

In a year from now, the Markets in Crypto-Assets Regulation (MiCA) enters into application for businesses offering crypto-related services and in 6 months for some categories of token offerors. It means that in order to continue to offer these services to European citizens, those businesses will have to apply for the MiCA authorisation in a chosen EU jurisdiction starting from Dec 30st. 2024.

It should be noted that financial institutions are not required to apply for this authorisation, they are “only” mandated to establish and adhere to compliance requirements specific for them.

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One thing for sure is that during the last year we have talked a lot about MiCA, from its requirements to its Regulatory Technical Standards (RTSs) and its timeline.

But what does it mean in practice??

In this article, I suggest a practical regulatory roadmap based on ESMA's guidelines, discussion with regulators, supplemented with expert insights and of course my own practical experience.?For CASPs, to effectively get ready for this new regulatory environment, a strategic and well-planned approach is crucial for the upcoming year. It becomes even more imperative now that we see few jurisdictions either removing or reducing the initially allowed grand fathering period (= transitional period) such as Lithuania.

ESMA recommends shortening the duration of the grandfathering provision.

Indeed, on October 17th, ESMA released a letter inviting the Member State to consider reducing the duration of the grand- fathering clause from 18 to a maximum of 12 months due to the higher risk clients could face applying to theoretically, according to ESMA, to more than 2000 entities currently registered under these national regimes.?Additionally, Member States are invited to notify their approach to this grand-fathering clause to the European Commission and ESMA long before 30 June 2024.

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Going back to the practical aspect of MiCA. The goal of the steps I am about to share is for CASPs to ensure compliance, maintain client trust, and strategically position themselves in the evolving world of digital assets.

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??Please note that the sequence of steps outlined may vary based on specific use cases, and certain steps may be executed concurrently to optimize efficiency. The goal is to provide a general template for CASPs to adapt to their own operational system.

Note also that to this day, National Competent Authorities haven’t been selected yet. ESMA is expected to publish a competent authorities list designated by Member States.

1. Initiating regulatory dialogue: Begin by engaging with regulators in potential jurisdictions. This preliminary interaction helps assess the regulatory climate and determine the most suitable location for your operations.
2. Regulatory strategy development: Strategically align your current services, while also taking into account potential future services, with existing authorizations and national regulatory frameworks. This forward-thinking approach ensures you are still able to offer your services in a specific jurisdiction while getting your operations ready for MiCA. Options include combining national VASP licenses with MiCA preparation, focusing solely on MiCA compliance, considering overlaps with MiFID regulations, and leveraging existing authorizations.
3. Optimizing jurisdiction selection: Selecting the most suitable jurisdiction for your CASP’s operations is a critical decision as it significantly influences your operational framework. it therefore requires a deep analysis of your current operational status, customer base, current and future service offerings, talent availability, regulators experience and openness to the dialogue, tax implications, jurisdictional reputation, etc.
4. Implementation planning: Depending on the chosen regulatory strategy, develop a comprehensive plan that includes continuous dialogue with regulators, recruitment of local talent, and preparation of operations to meet MiCA's requirements.
5. Application submission and authorisation process: Understanding the timeline, the requirements and their interpretations when submitting your MiCA authorisation application on the official submission date is crucial to ensure that all necessary information and operational requirements are correctly addressed and fully integrated. Such preparation is key to avoiding any deficiencies or misinterpretations that could potentially delay the entire application process.

Before deciding the right jurisdiction and the regulatory road you would like to take, to gain an idea if a jurisdiction makes sense for your business, you might want to initiate contacts with different regulators to have an understanding of how the licensing journey look like, how knowledgeable, experienced and open to dialogue they are.

As you prepare for the upcoming MiCA regulation, it’s essential to consider how your current and planned services align with existing authorisations and national regulations.?

Depending on these factors, your approach in 2024 could take several distinct forms:

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??Combining national VASP with MiCA preparation: If your operations are already active, consider securing a national Virtual Asset Service Provider (VASP) license as an initial step. This move allows you to continue offering services before MiCA enters into application in December 2024. Concurrently, adapt and align your operational model with MiCA standards, gearing up for MiCA authorisation as soon as it becomes available on December the 30st, 2024.

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??Direct focus on MiCA Compliance: For those planning to only initiate crypto-related services in 2024, a strategic focus should be placed on preparing exclusively for MiCA. This path involves gearing up for a direct application for MiCA authorisation at the end of 2024.

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??Considering MiFID overlap: Assess whether your existing or prospective services, including the types of tokens you intend to issue, might intersect with other financial regulatory frameworks, such as the Markets in Financial Instruments Directive (MiFID). Note that the qualification of crypto-assets as financial instruments are part of the Q1 2024 RTS agenda.

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??Leveraging existing authorisations: Evaluate the potential benefits of your current authorisations. Determine if and how they can be effectively utilized or adapted under the upcoming MiCA framework.

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Other important consideration: Regulators will prioritize a ‘substance over form approach’. Whether or not MiCA is applicable depends on the content of an instrument and not on the technology that is used to issue it.

When assessing and classifying crypto-assets, competent authorities should adopt a substance over form approach whereby the features of the crypto-asset in question determine the classification and not its designation by the issuer (Recital 11)

This strategic approach ensures you navigate the MiCA landscape effectively, catering to your unique business model and regulatory circumstances.

Selecting the most suitable jurisdiction for your crypto-asset service provider (CASP) operations is a critical decision under MiCA regulation. To be compliant, authorized CASP applicants must establish themselves as legal entities with specific EU-centric criteria:

?? Establish a registered office within the European Union.

?? Maintain a place of effective management in the EU.

?? Appoint at least one EU resident as a director.

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This decision is pivotal as it significantly influences your operational framework and therefore requires a deep analysis of different components of your business model, the jurisdiction’s reputation and the regulator’s readiness for MiCA.?

A few criterias you would want to consider:

???Evaluate your current operational status: Are you already functioning, or are you in the planning stages?

?? Assess your current corporate base: Where is your company currently situated?

?? Identify your primary customer base: Where are they located, and which markets are you aiming to serve?

???Future service offerings: What type of crypto-related services do you intend to provide moving forward?

???Talent accessibility: Is there a pool of skilled professionals available in the jurisdiction?

?? Regulatory familiarity and openness: Does the regulator have experience with VASP licensing, and are they receptive to ongoing dialogue throughout the pre-MiCA process?

???Fiscal considerations: What are the tax implications in the chosen jurisdiction?

???Reputation consideration: Does the jurisdiction have a good reputation for the type of services you are offering?

By methodically analyzing these factors, you can make an informed decision that aligns with your business strategy and facilitates smooth MiCA compliance.

Naturally, depending on the regulatory strategy chosen, your implementation journey will differ.

On the 17th of October, the European Securities and Markets Authority (ESMA), has issued a

(1) letter addressed to the Economic and Financial Affairs Council (ECOFIN) and

(2) statement to entities providing crypto-asset services and the national competent authorities that will be responsible for their supervision.

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The aim is to encourage preparations for a smooth transition to MiCA.

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ESMA calls on current CASPs, including those who are already authorized financial entities, to take the following steps:

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??Share your transition plans with NCAs and clients at the earliest opportunity.

?? Provide clients with clear information about the regulatory status of the crypto-assets and services you offer. This includes specifying if they are operating under the grand-fathering clause, detailing their authorisation type, and disclosing their country of operation.?

?? If you are authorized under other sectoral regulations, make sure that you clarify the regulatory status of the products and services you provide to prevent any confusion regarding your regulated offerings.

?? Prepare for MiCA's implementation by aligning your practices with the upcoming regulatory requirements.

?? Consider applying for a MiCA authorisation promptly to secure passporting rights within the EU during the transitional period.

?? Collaborate with NCAs to address any questions regarding MiCA's scope and how it applies to their existing activities.

• Application submission: As a prospective Crypto-Asset Service Provider (CASP), you should submit your authorization application to your home Member State's competent authority from December 30, 2024. Your application must contain specific and detailed information.

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• Initial review and acknowledgement: The competent authority will acknowledge receipt of your application in writing within 5 working days, initiating a thorough review process. They have a 25-working-day window to check if your application is complete, requesting additional information if necessary. Incomplete applications may be rejected, and you will be informed promptly upon completion of the review.

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• Comprehensive assessment: Once your complete application is received, the competent authority has 40 working days to assess it. During this period, they may request further information, up to the 20th working day. The assessment timeline is paused from the request date until your response is received, with a maximum suspension of 20 working days. Note that further requests for information after this period do not pause the assessment timeline.

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• Authorisation decision notification: The competent authority will decide whether to grant or refuse your CASP authorisation, based on the nature, size, and complexity of the proposed crypto-asset services. You will be notified of this decision within 5 working days.

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• Notification to ESMA: The competent authority must inform the European Securities and Markets Authority (ESMA) of their decision within 2 working days after granting or refusing your authorisation.

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• ESMA register update: ESMA will update its register with your authorisation status.

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Regarding of any previously submitted information, the competent authorities will not require you to resubmit any information already provided in past authorisation procedures under EMD, MiFID II, PSD2, or national laws related to crypto-asset services before June 29, 2023, provided that the information remains current and valid.

I hope this article has effectively provided a fundamental understanding and a solid starting point for your MiCA compliance journey. May it be a valuable resource in guiding your initial steps in this important regulatory process.

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