On 20 April, the European Parliament endorsed two regulations which will fundamentally change the crypto-asset market landscape in the EU and potentially beyond: the Regulation for Markets in Crypto-assets (MiCA) and the recast version of the Transfer of Funds Regulation (TFR recast). As a forerunner in regulating crypto business, Estonia has had local crypto laws in place since 2017, however, MiCA and TFR recast will be directly applicable in the EU and will replace the respective local legislation.
Changes introduced by MiCA
Some of the most significant changes introduced by MiCA compared to the effective Estonian laws are as follows.
- MiCA will introduce three types of crypto-assets: (1) electronic money tokens, whose value is pegged to only one official currency and which have a very similar function to that of electronic money under EMD2; (2) asset-referenced tokens, whose value is pegged to any other value or right or their combination, including one or several official currencies; and (3) all other types of crypto-assets, including utility tokens. The third group of crypto-assets is intended as a catch-all category. The Estonian AML Act currently provides a definition for only one type of virtual currency.
- MiCA will cover ten crypto-asset services. MiCA’s list of crypto-asset services partly echoes the list of investment services in MiFID II. Compared to the applicable Estonian law, MiCA will increase the number of regulated crypto-asset services and will cover the following activities:
- custody and administration of crypto-assets on behalf of clients
- operation of a trading platform for crypto-assets
- exchange of crypto-assets for funds
- exchange of crypto-assets for other 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.
- MiCA will introduce a white paper requirement for all three types of crypto-assets and marketing communication requirements. A white paper must be drafted, notified to the competent authority and published on the crypto-asset service provider’s website. The currently applicable Estonian law does not require preparation of a white paper.
- Share capital requirements will be decreased for some crypto-asset services and increased for others compared to the currently applicable Estonian requirements. For example, while the share capital requirement of a virtual currency transfer service provider will decrease from EUR 250,000 to EUR 50,000, the share capital requirement of a virtual currency wallet service provider will increase from EUR 100,000 to EUR 125,000.
- Retail holders who are acquiring crypto-assets on the primary market will have the right of withdrawal within 14 days. The right of withdrawal will not apply to trading on the secondary market, as in such a case, the price of crypto-assets depends on the fluctuations of crypto-asset markets.
- The crypto-asset service providers license will be passportable in the EU upon notification of the home Member State. The current Estonian crypto license is only valid in Estonia.
- Offerors that are established in a third country should notify their crypto-asset white paper, and, upon request of the competent authority, their marketing communication, to the competent authority of the Member State where the crypto-assets are intended to be offered.
MiCA will not apply to, inter alia:
- crypto-assets falling under existing financial services legislation, e.g. which can be qualified as financial instruments under MiFID II
- non-fungible tokens (i.e. unique tokens which are not interchangeable)
- crypto-asset services which are provided in a fully decentralised manner without any intermediary
- crypto-asset services provided by third-country firms on a reverse solicitation basis
- offers of crypto-assets (other than asset-referenced tokens or e-money tokens) that are exclusively offered to qualified investors and can be exclusively held by such qualified investors, or that are made to a small number of persons (per Member State) (exceptions may apply)
- crypto-assets (other than asset-referenced tokens or e-money tokens) that are offered for free or that are automatically created as a reward for the maintenance of the distributed ledger technology DLT or the validation of transactions in the context of a consensus mechanism (exceptions may apply).
Changes introduced by TFR recast
Together with the MiCA Regulation, the European Parliament adopted a recast version of the Transfer of Funds Regulation (TFR recast). TFR, first adopted in 2015, sets out the so-called “travel rule” applicable to traditional transfers of funds. The travel rule means that information on the sender and the recipient of funds will have to “travel” with the transaction and be stored by service providers. With the recast version, the travel rule will also apply to crypto-asset transfers.
Under TFR recast, the crypto-asset service provider of the originator will have to ensure that transfers of crypto-assets are accompanied by the following information on (i) the originator, where applicable: name; distributed ledger address; crypto-asset account number; the originator’s address, including the name of the country, official personal document number, and the customer identification number or, alternatively, date and place of birth; the current LEI or any other available equivalent official identifier; and the following information on (ii) the beneficiary, where applicable: name; distributed ledger address; crypto-asset account number; the current LEI or any other available equivalent official identifier.
Crypto-asset service providers should in principle not be required to verify the information on the user of a self-hosted address (i.e. a wallet not provided by a crypto-asset service provider). However, in case of a transfer above EUR 1,000 to or from a self-hosted address, crypto-asset service providers will have to take adequate measures to verify the information on the person using the self-hosted address.
TFR recast will not apply to, inter alia:
- transfers of crypto-assets where both the originator and the beneficiary are crypto-asset service providers acting on their own behalf
- person-to-person transfers of crypto-assets carried out without the involvement of a crypto-asset service provider.
Entry into force and applicability of MiCA and TFR recast
Having been adopted by the Parliament, MiCA and TFR recast must now also be adopted by the Council and published in the Official Journal of the EU. MiCA will enter into force on the 20th day after its publication and apply from 18 months as of entry into force. The provisions related to asset-referenced and electronic money tokens (i.e. Titles III and IV) will apply from 12 months as of entry into force. TFR recast will apply from the date of application of MiCA. This means that crypto-asset service providers will probably have to start applying for a new licence under MiCA towards the end of 2024. Currently, local Estonian transitional provisions for current licence holders have not been adopted yet.
By Monika Koolmeister, Partner, Anna Daniel, Junior Associate, and Andres Havik, Assistant Lawyer, Cobalt