Specialist lawyer Lutz Auffenberg and his law firm Fin Law have specialized in the field of fintech and innovative technologies. In particular, blockchain technology and its regulation are at the center of his work. In his guest article he addresses the question of how EU passporting works for crypto companies.
This article is first on the Fin Law Blog appeared.
The crypto market is international. Transactions only require the installation of wallet software on an internet-enabled device and an internet connection. In contrast, national borders and different legal systems do not prevent users of cryptocurrencies, at least in technical terms, from carrying out crypto transactions with global transaction partners. Against this background, it is obvious that the larger and more successful market participants are now trying to roll out their business models internationally. In the European area, banks, financial service providers and investment companies benefit in this context from the harmonization of the European internal market by the European Union. Companies from the financial sector will then have the option of using so-called passporting rules to expand their business to other EU countries without first having to obtain additional regulatory approval. Instead, all that is required is a comparatively simple notification procedure with the supervisory authority in the home country. But can crypto companies also rely on the rules of EU passporting?
No uniform regulation of crypto values in the EU yet
Although the phenomenon of cryptocurrencies has existed for more than ten years, there is still no uniform regulation of crypto values in the EU. In Germany, the legislature has decided to include crypto values as financial instruments in both the Banking Act (KWG) and the Securities Institutions Act (WpIG), with the result that most crypto services in Germany are regulated activities subject to authorization. In most of the other member states of the European Union, the legislators did not go that far. It is true that the currently applicable fifth EU money laundering directive requires the member states to include virtual currencies as well as the swap exchanges and custodian providers concerned in their anti-money laundering supervisory regulations. In many European countries, however, this requirement was only implemented with a registration requirement for corresponding crypto companies. However, this does not involve a full licensing requirement with ongoing official supervision, as is the case with banks and investment companies.
EU passporting only works with equivalent supervision in the home country
The legislative idea that justifies passporting solutions is based on the assumption that it makes no sense to supervise the business of a company that is already fully supervised in its country of domicile. Effective, uniform and well-informed supervision can best be achieved when responsibility for the entire institution lies with just one supervisory authority. However, the approach can only work if the regulatory requirements in both the country of domicile and the home country are equivalent. Only then can it be guaranteed that the supervisory authority can take full account of the overall risk profile and economic situation of the company. If, for example, a company approved in the Netherlands for financial commission business with securities would like to conduct its business in Germany with crypto assets, EU passporting would not be possible. The reason is that the transactions related to crypto assets would not be supervised in the Netherlands and supervision would not take place in Germany. The Dutch company would therefore currently have to obtain approval in Germany for its business model.
MiCA regulation is expected to solve the problem
The Markets in Crypto Assets Regulation (MiCA), which is currently still in the draft stage, will be directly applicable in all member states of the European Union and will not need to be implemented in national law. The current draft also provides for rules on cross-border crypto services in the EU. According to the current status, a uniform contact point for crypto service providers is to be created, which is to coordinate cross-border offers of crypto services. The crypto companies will have to provide the contact point with a list of the target countries in which they want to offer their crypto services. In addition, they will have to name the crypto services that are to be offered for each target country and display the respective start date. Since the creation of passporting opportunities for crypto service providers is a key objective of the MiCA, it can be assumed that after the regulation comes into force, cross-border offers of crypto services without multiple supervision will probably be possible in this or a similar form in 2023.