The final text of the new Markets in Crypto Assets Regulation (MiCAR) has been finalized since the beginning of October 2022. It is expected that the new EU regulation will go into effect at the end of 2022 or the beginning of 2023 and will take legal effect directly vis-à-vis all market participants in the European Union 18 months later. MiCAR will then regulate the custody and administration of crypto-assets on behalf of third parties, the operation of trading platforms for crypto-assets, the exchange of crypto-assets for funds or other crypto-assets, the execution of orders for crypto-assets on behalf of third parties, the placing of crypto-assets, the provision of transfer services for crypto-assets on behalf of third parties, the reception and transmission of orders for crypto-assets on behalf of third parties, and the provision of advice and portfolio management on crypto-assets as crypto-asset services. Providers of crypto-asset services will then have to apply for a MiCAR authorization from the competent authority in their home country – in Germany, this will be BaFin. But what requirements will crypto-asset service providers have to fulfill in order to obtain a MiCAR authorization?
What Requirements Must Crypto-Asset Service Providers Fulfill to Obtain a MiCAR Authorization?
Even though the business models that will be regulated by MiCAR in the future are precisely those that are not already covered by European financial market regulation, the requirements for obtaining a MiCAR authorization are very closely modeled after those for financial institutions under MiFID II. To obtain a MiCAR authorization, crypto-asset service providers must have their registered office and at least one member of the management body within the European Union. They must also disclose to BaFin comprehensive information about their company and the owners behind it, as well as the intended members of the management body, who must be of sufficiently good repute and possess appropriate knowledge, skills and experience. Like financial institutions, crypto service providers will in the future have to prove that they have a proper and adequate business organization. They must be able to demonstrate internal control mechanisms, contingency plans and secure IT systems, as well as sufficient risk management and a money laundering prevention and compliance organization that meets the legal requirements. In addition, they are required to have a professional complaint management system in place and to strictly segregate client funds and client crypto-assets from their own assets. In the MiCAR authorization application, crypto-asset service providers will also have to describe their specific business model in detail, possibly submitting sample customer contracts. In addition, crypto-asset service providers will be required to have sufficient capital resources. The minimum amount required is 150,000 euros for operators of trading platforms for crypto-assets, 125,000 euros for operators of crypto-asset custody and exchange providers, and otherwise 50,000 euros or – if higher – one quarter of the previous year’s fixed overhead costs on an annual basis. The exact requirements for the business organization to be maintained by crypto-asset service providers are to be developed by ESMA in cooperation with EBA in technical standards 12 months after MiCAR goes into force.
Short Deadlines Provided in MiCAR Authorization Procedures
MiCAR authorization procedures will differ from authorization procedures of financial institutions and investment firms, particularly with regards to the processing periods provided for by law. BaFin will have to inform applicants within 25 working days whether a MiCAR application is complete. If proof 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 MiCAR authorization application. It must then reject or approve the application. In the case of authorization applications from financial institutions or investment firms, the law only stipulates that BaFin must issue a decision within six months of the submission of a complete application, which often leads to subsequent requests shortly before the six-month period expires. In this context, the short processing periods under MiCAR should lead to more expeditious processing of MiCAR authorization applications by BaFin.
Attorney Lutz Auffenberg, LL.M. (London)