Guide to the crypto service licence under the MiCa Regulation

To provide crypto-asset services in the EU you have to submit a license or notification request with the financial authority in member state. In the Netherlands AFM will handle the licence procedure for crypto asset providers. You only need the crypto licence in one EU country. The Dutch AFM is the supervisor responsible for handling licence applications from crypto-asset service providers and notifications from other financial institutions (see Article 60 MiCa).

Market participants can submit CASP licence applications or notifications to the AFM from 22 April 2024 and once approved can be used from December 30, 2024. In this introduction you can read more about MiCa. We help out clients to obtain licences in the Netherlands, so we’re happy to assist you in the process.

Some definitions before you get into the MiCa Regulation

• MICA = Markets in crypto assets
• ESMA = European Securities and markets Authority
• EMT = electronic money tokens, are stablecoins that refer only to a single fiat currency.
• CASP = crypto asset service provider
• DEFI = decentralized finance
• ART = asset-referenced tokens; all other stablecoins, including baskets of goods, commodities, other crypto-assets, a combination of such assets or fiat currencies (promoted by MiCa but obstructed in use and application)
• Stablecoins = a cryptocurrency whose value is pegged or tied to that of another currency, commodity, or financial instrument, like Tether (USDT) or Paxos Gold (PAXG)
• Payment token = tokens with payment functions similar to official currencies or cryptocurrencies; these are covered by MiCa
• Tokenized securities = traditional financial instruments such as bonds or equities that have been issued as crypto assets; these are regulated under the MiFID II/MiFIR framework.

MICA in a nutshell

Mica identifies 3 types of crypto-assets, namely asset-referenced tokens (ART), electronic money tokens (EMT), and other crypto-assets that are not covered by existing EU law, for example ‘utility tokens,’ which are intended to provide digital access to a good or service, available on DLT, and are only accepted by the issuer of that token. The legislation regulates issuance and trading of crypto-assets as well as the management of the underlying assets, where applicable, with additional regulatory rules aimed at ‘significant’ ART and EMT. MiCA will not apply to persons who buy or sell crypto assets for their own account. More explanation on crypto you can read here. Crypto-asset service’ means any of the following services and activities:

• exchange of crypto-assets for funds;
• exchange of crypto-assets for other crypto-assets;
• providing custody and administration of crypto-assets on behalf of clients;
• operation of a trading platform for crypto-assets;
• execution of orders for crypto-assets on behalf of clients;
• placing of crypto-assets;
• reception and transmission of orders for crypto-assets on behalf of clients;
• providing advice on crypto-assets;
• providing portfolio management on crypto-assets;
• providing transfer services for crypto-assets on behalf of clients.

So any person or company wishing to provide any of these services in the EU must be authorized under MiCAR, via either a CASP-license in 1 EU country. With the crypto service licence you may then be active in all EU countries.

What does Mica entail for issuers of crypto?

(Identifiable) cryptoasset issuers must provide complete and transparent information about the cryptoassets – on blockchain technology and traded on markets – they issue, and comply with disclosure and transparency rules. Cryptoasset service providers (Casp’s) must be registered in a EU country and implement security measures and anti-money laundering compliance. This includes exchanges, custodian wallet providers, issuers of initial coin offerings (ICOs) and other CASPs. Recital 22 of MiCa explicitly excludes crypto-assets which have ‘no identifiable issuer’ from major parts of the Regulation. At least Title II is excluded for most bitcoins. MiCa contains far reaching rules on transparency and disclosure; e.g  a white paper must be filed by crypto asset issuers. Far reaching conduct rules for traders to act fairly, professionally, disclose conflicts of interest. Also a right of redemption is introduced for holder of asset-referenced tokens as well as an obligation to have reserve of assets, composition and management of such reserve of assets. The bigger the stablecoin (ARTs and EMTs) the more stringent the rules.

Obtaining advice in preparation for the MiCa licence application

The Dutch AFM has proposed some best practices for submitting a licence application. One of the suggestions is to get proper advice; we know from experience with other licence procedures that this certainly helps a lot especially if you not been through a tough licence procedure before. Best practices for submitting a licence application are:

• Determine which MiCa rules apply to your organization (scoping).
• Acquire knowledge related to the MiCa rules.
• Obtain advice in preparation for the MiCa licence application (if necessary).
• Contact the AFM in good time.
• Submit a comprehensive licence application with a clear list of the included documents.
• Be prepared to answer questions from the AFM (and DNB) promptly.
• Apply for a pre-scan procedure before submission (optional).

The AFM and the applicant will communicate with each other on an ad hoc basis during the procedure and supervisory interviews will be arranged if necessary.

The benefits the MiCa legislation should bring

Benefits are the better regulatory clarity for CASPs in the EU, improved consumer and investor protection and enhanced financial stability. MiCa will also make it easier for member states to cooperate on blockchain technology, as the EBP will provide a forum for discussion and exchange of best practices. It may improve fair competition and the integrity of the crypto markets. MiCa will impact all CASPs offering services to clients in the EU. Crypto clients and investors should benefit from the MiCa regulation tough rules.

Crypto-assets that are not covered by MiCa

• Crypto assets traded outside markets.
• Crypto assets that are a financial instrument & already subject to financial regulation.
• Crypto assets that do not use blockchain = DLT.
• Crypto assets to be used in exchange for goods and services in a limited merchants network, like utility tokens.
• Assets and financial instruments that are already within the scope of other EU legislation, like MiFidD II, PSD2 or the Securitization Regulation.

MiCa excludes new paradigms such as the DeFi (Decentralized Finance) industry and non-fungible (non-tradable) tokens (NFT) but also non-fungible tokens, security tokens, and even cryptoasset finance. All these variables either already have their own regulation in accordance with their nature, as in the case of security tokens, or they have such specific features that legislators need to carry out further analysis to configure a regulatory framework that suitably addresses the risks. Central bank digital currencies (CBDCs) also fall outside the scope of MiCA.

According to the definition provided by the European Central Bank, DeFi is a new way of providing financial services that dispenses with traditional centralized intermediaries and instead relies on automated protocols. MiCA leaves several components of the digital asset world outside its scope.

Crypto activities outside the EU will be touched by the MiCa legislation

Crypto-assets cannot be issued and services relating to them cannot be rendered from outside the EU. If they want to market their products or services to EU residents, they must create a new legal person in one of the 27 Member States.  MiCa erects a very high market barrier for issuers and service providers from other parts of the world. The regulation does not allow for recognizing the regulatory and supervisory frameworks of any third country as equivalent to those of the EU . The only way EU citizens can access third-county crypto-assets and services is by searching on their own initiative for foreign offers (so-called ‘reverse solicitation‘).

Solicitation of crypto providers outside the EU is not allowed

ESMA has emphasized that the non-solicitation rules are construed in the widest possible way. Any  banner advertisements, sponsorship deals, solicitation by any kind of affiliates such as influencers and other celebrities. The person soliciting includes the third-country firm or any entity or person on its behalf. The ESMA draft guidelines provide guidance on how to assess whether the third country firm markets a new type of crypto-asset or crypto-asset service or activity.  Only if the client at its own initiative has contacted a company and requested the service, the third-country company may provide it. Clients shall not be excluded from using third-country firms if they choose to do so without having been solicited by such firms.

Exemption for small crypto assets

• Crypto asset offers to less than 150 person per Member State.
• Or crypto assets offered for free or created as a reward.
• Crypto assets solely offered to qualified investors.
• Public crypto-assets (not asset-reference tokens or e-money tokens worth less than EUR 1.000.000 over 12 months period. This is a very low threshold for financial instruments it’s 8 mio.

A notification may suffice for authorized entities

Crypto-asset services can also be provided by authorized entities seeking to offer certain specific crypto-asset services in relation to specified equivalent services that have already been approved (see Article 60 MiCAR). The following parties must submit a CASP notification before crypto asset services can be provided:

• Credit Institutions
• Central Securities Depository
• Investment Firms
• Market Operators
• Electronic Money Institutions
• UCITS Management Company
• Alternative Investment Fund Manager

2 transitional options for member states

Member States will have the option of implementing ‘transitional measures’ (Article 143 of MiCa) that would allow entities or undertakings already providing crypto-asset services under applicable law in their jurisdictions to continue doing so during the transitional phase of MiCa (i.e., the period of 18-months after full application in December 2024). These transitional measures include:

A ‘grand-fathering’ clause Art. 143 (3) – allowing entities providing crypto-asset services in accordance with national applicable laws before 30 December 2024 to continue to do so until 1 July 2026 or until they are granted or refused a MiCa authorization. A simplified authorization procedure Art. 143 (6) – for entities that were already authorized under national applicable law on 30 December 2024 to provide crypto-asset services.

Requirement for the white paper for admission of asset referenced token (ART)

It will not be easy to draft a MiCAR-compliant whitepaper. The Regulation lists 74 pieces of information to be provided and delat with in the white paper. Some requirements are basic, like the name, legal form and registered address of the issuer. More effort will be necessary on the information about the financial condition of the issuer over the last three years or about the characteristics and functionality of the crypto-asset, including data necessary for its classification. The whitepaper must also disclose the principal adverse impacts the crypto-asset may have on the climate; in this respect, the proof-of-work consensus mechanism is notorious. The European Commission estimates the cost for preparation to be between EUR 35,000 and 75,000 for each whitepaper.

The Dutch pre-scan procedure with AFM

The AFM offers companies preparing a CASP licence application the opportunity to request an optional pre-scan procedure. Market participants can submit CASP licence applications or notifications to the AFM from 22 April 2024. If approved, the licences or notifications can be used from 30 December 2024. The pre-scan procedure means:

• AFM schedules a short scope- and planning meeting to align on the substance and timeline of the pre-scan.
• It sends you a list of questions on the most important topics for you to answer, which you can optionally supplement with supporting documentation.
• It schedules a meeting in which you give a presentation explaining your answers to the questionnaire, which we can afterwards discuss.
• You will receive feedback in writing, also in relation to the envisaged planning to submit your CASP license application to the AFM.

The Dutch pre scan procedure is not for parties who are unsure whether their activities fall under the scope of MiCA. This is something to seek legal advice for which our firm can do. You could provide AFM with a legal opinion when still in doubt about the status of your crypto assets or acivitity

Requested information for application of Dutch crypto licence

• General information
• Programme of operations
• Prudential requirements
• Governance arrangements and internal control mechanisms
• Business continuity
• Detection and prevention of money laundering and terrorist financing
• Identity and proof of good repute, knowledge, skills, and experience and of sufficient time commitment of the management board members
• Information on shareholders or members with qualifying holdings
• ICT systems and related security arrangements
• Segregation of clients’ crypto-assets and funds
• Complaints-handling

Applicable

• Operating rules of the trading platform and market abuse detection
• Custody and administration policy
• Exchange of crypto-assets for funds or other crypto-assets
• Execution policy
• Provision of advice or portfolio management on crypto-assets
• Transfer services

Supporting documentation

• Supporting documents are aligned with the information in the authorization form and include for example internal
• policies, (control) procedures, risk analyses, (risk/compliance/financial) reports, screenshots of tooling or account
• information, examples of client flows and marketing communications.

Get advice on your crypto service authorisation

We know from experience with other licence procedures that it helps to get independant legal advice when you wish to do a licence application. Especially  if you not been through a Dutch licence procedure before. Our licence specialists are happy to assist you.