The crypto market is international. Transactions merely require the installation of a wallet software on an internet-capable device and a connection to the internet. National borders and different jurisdictions do not hinder users from a technical point of view to conduct crypto transactions with transaction counterparts around the globe. It is therefore logical that the biggest and most successful market participants now strive for an international roll-out of their business models. In the European Economic Area (EEA), banks and financial service providers as well as investment profit from the harmonization of the European single market through the European Union in this context. Accordingly, businesses of the finance industry have can extend their business operations to other EU member states via the so-called passporting-rules without the necessity to previously obtain an additional regulatory authorization. Instead, they are merely required to conduct a comparatively simple notification procedure with the supervisory authority of their home state. But can also crypto businesses invoke the rules of the EU-passporting for themselves?
No Uniform Regulation for Crypto Assets in the EU Yet
Even though the phenomenon of cryptocurrencies has existed for already more than ten years now, as of today there is no uniform regulation of crypto assets in the EU. On a national level, the German legislator decided to introduce crypto assets as financial instruments to the German Banking Act (KWG) as well as to the Investment Firm Act (WpIG). As a result, most crypto services in Germany are regulated activities and subject to authorization. The legislators in other member states of the European Union mostly did not go that far. Even though the currently applicable fifth European AML directive requires that the member states include virtual currencies as well as the respective exchanges and custody service providers in their AML regulations, a lot of European states decided to implement this requirement merely by imposing an obligation to register upon the according crypto businesses. However, there is no full-fledged authorization requirement with ongoing supervision connected with it as it is the case with banks and investment firms.
EU-Passporting Only Works If the Supervision in the Home-State is Comparable
The EU-legislator’s idea which justifies passporting-solutions is the assumption that the supervision of the transactions of an already in its home-state fully supervised business does not make sense. Effective and comprehensively informed and uniform supervision can best be realized, if the competence for the entirety of the institute is pooled at just one supervisory authority. However, this approach can only work, if the supervisory requirements in the home-state as well as in the target-state are comparable. Only on such basis it be ensured that the supervisory authority can comprehensively take into account the overall risk profile and the economic situation of the business. It is therefore e.g. not possible for a business that is authorized to conduct financial commission business with securities in the Netherlands to conduct such business with crypto assets in Germany. EU-passporting is not possible in this case. The reason is that the crypto assets related business is not subject to supervision in the Netherlands and a supervision in Germany would not be conducted. As of today’s legal framework, the Dutch business would therefore need to obtain an authorization for its business in Germany.
MiCA Regulation Will Probably Solve this Problem
The currently discussed draft of the future Markets in Crypto Assets Regulation (MiCA) will be directly applicable in all member states of the European Union without the need of transposition into national law. The current draft also intends regulations for cross-border crypto services in the EU. According to the current iteration of the draft, a uniform contact point for crypto service providers is intended, which will coordinate cross-border offers of crypto service providers. Crypto businesses will have to provide the contact point with a list of target-states in which they intend to offer crypto services. Furthermore, they will have to state the crypto services which they intend to offer in each target-state and the respective starting date. The creation of passporting-options for crypto service providers is an essential goal of the MiCA Regulation. It can therefore be assumed that after the regulation goes into effect, probably in 2023, cross-border-offers of crypto services without the requirement of a multitude of national authorizations will be possible in one form or another.
Attorney Lutz Auffenberg, LL.M. (London)