Europe goes Crypto: the MiCA license

This article first appeared on the Fin Law Blog.

The final text of the new Markets in Crypto Assets Regulation (MiCA) has been in effect since early October 2022. The new EU regulation is expected to enter into force in late 2022 or early 2023 and become legally effective for all economic operators in the European Union 18 months later. 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 shipping on crypto assets, as well as advice and portfolio management on crypto assets as crypto services.

Crypto service providers will then have to apply for a MiCA license from the competent authority in their home country – in Germany that is BaFin. But what requirements must crypto service providers meet in order to obtain a MiCA license?

What requirements must providers of crypto services meet for a MiCA license?

Even if the business models to be regulated by MiCA in the future are precisely those not yet 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 in the European Union and have at least one company director. They must also provide comprehensive information to BaFin about their company and the owners behind it, as well as the intended managers, who must be technically capable and reliable.

Like financial institutions, crypto service providers will have to prove in the future that they have a good and appropriate business organization. They must be able to demonstrate internal controls, contingency plans and secure IT systems, as well as adequate risk management and a money laundering prevention and compliance organization that meets legal requirements. In addition, they are required to have a professional complaint management system and to strictly separate client funds and client crypto assets from their own funds. In the MiCA license application, crypto service providers will also have to describe their specific business model in detail, possibly by submitting model customer contracts. In addition, providers of crypto services will need to have sufficient capital resources.

The minimum amount required for crypto trading platforms 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 must be developed by ESMA in collaboration with the EBA in technical standards no later than 12 months after the MiCA comes into effect.

Short deadlines provided in the MiCA approval process

MiCA authorization procedures will differ from authorization procedures for financial institutions and investment firms, in particular with regard to legal processing times. BaFin will have to notify applicants within 25 business days if 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 business days to review the content of a full MiCA license application.

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

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