Europe goes Crypto: The MiCA permit

This article is first on the Fin Law Blog appeared.

The final text of the new Markets in Crypto Assets Regulation (MiCA) has been in place since the beginning of October 2022. The new EU regulation is expected to come into force at the end of 2022 or the beginning of 2023 and 18 months later will take legal effect directly for all market participants in the European Union. MiCA will then perform crypto custody and management for others, operate crypto exchange platforms, exchange crypto assets for fiat money or other crypto assets, execute client orders on crypto assets, place crypto assets, execute crypto transactions for clients, order acceptance and transmission on crypto assets as well as advice and portfolio management on crypto assets as crypto services.

Providers of crypto services will then have to apply for a MiCA license from the competent authority in their home country – in Germany this will be BaFin. But what requirements will crypto service providers need to meet to get a MiCA license?

What requirements do crypto service providers have to meet for a MiCA permit?

Even if the business models regulated by MiCA in the future are precisely those that are not already covered by European financial market regulation, the requirements for granting a MiCA license are very closely based on the requirements for financial institutions under MiFID II. To obtain a MiCA license, crypto service providers must be based and have at least one business manager in the European Union. They must also disclose comprehensive information to BaFin about their company and the owners behind it, as well as the intended managers, who must be technically suitable and reliable.

Like financial institutions, crypto service providers will have to prove in the future that they have a proper and appropriate business organization. They must be able to demonstrate internal control mechanisms, emergency plans and secure IT systems as well as adequate risk management and a money laundering prevention and compliance organization that meets the legal requirements. In addition, they are obliged to have a professional complaints management system and to strictly separate customer funds and customer crypto assets from their own assets. In the MiCA license application, crypto service providers will also have to describe their specific business model in detail, possibly by submitting sample customer contracts. In addition, it will be necessary for crypto service providers to have sufficient capital resources.

The minimum amount required for crypto trading venues is EUR 150,000, for crypto custodians and exchange providers EUR 125,000 and otherwise EUR 50,000 or – if higher – a quarter of the fixed operating costs of the previous year on an annual basis. The exact requirements for the business organization to be maintained by crypto service providers are to be developed by ESMA in cooperation with the EBA in technical standards by 12 months after the MiCA comes into force.

Short deadlines foreseen in the MiCA approval process

MiCA authorization procedures will differ from authorization procedures for financial institutions and investment firms, particularly with regard to the statutory processing periods. BaFin will have to inform applicants within 25 working days whether a MiCA license application is complete. If evidence or information is still missing, BaFin must set a deadline for subsequent delivery. BaFin will have 40 working days to review the content of a complete MiCA license application.

She must then reject or approve the application. In the case of license applications from financial institutions or investment firms, the law only stipulates that BaFin must issue a decision within six months of submitting a complete application, which often leads to additional demands shortly before the six-month period expires. In this context, the short processing times for MiCA should lead to faster processing of MiCA license applications by BaFin.