Providers of crypto asset services will be subject to licensing requirements when the European Union’s new Markets in Crypto Assets Regulation (MiCAR) comes into effect, presumably in 2024. In addition to the obligation to obtain an authorization prior to commencing business, crypto asset service providers will also have to fulfill far-reaching due diligence and conduct of business obligations in the new regulatory regime during ongoing business operations. In this respect, the legislator wants to ensure a professional, integer and transparent European crypto market. Admittedly, financial instruments within the meaning of the Markets in Financial Instruments Directive (MiFID2) will not be crypto assets itself, and thus will not be subject to the provisions of MiCAR. Nevertheless, the compliance requirements for crypto asset service providers are, to a large extent, closely aligned with the securities compliance obligations under the regulatory regime of MiFID2. But which due diligence and conduct of business obligations will crypto asset service providers in Europe have to fulfill specifically in the future?
What Are the Compliance Obligations of Crypto Service Providers According to MiCAR?
Like investment service providers regulated in accordance with MiFID2, crypto service providers will have to act honestly, fairly and professionally as well as in the best interest of their clients in the course of their business activities in the future according to the MiCAR regulations. Their business- and marketing-related communications will always need to be clear, unambiguous and not misleading. Marketing statements and communications must also be identified as such by crypto asset service providers pursuant to MiCAR. They will also always have to advise their clients of risks associated with crypto transactions and, to the extent that they operate a crypto trading platform, provide exchange services in relation to crypto assets, crypto advisory services or crypto portfolio management services, provide their clients with hyperlinks to white papers published about the crypto assets they provide crypto asset services for. Crypto asset service providers will always have to publish the prices of their services prominently on their website. Similarly, they will have to publish information on their website regarding the environmental and climate impact of the consensus mechanisms of those crypto assets that are the subject of their crypto asset services. Details regarding the future compliance obligations of crypto asset service providers are to be developed by ESMA within the framework of technical standards and published no later than twelve months beforeMiCAR takes legal effect.
Specific Requirements for Crypto Custodians and for Customer Funds
Specific obligations, however, are provided by MiCAR for crypto asset service providers that want to offer custody of crypto assets to their clients. In particular, crypto custodians will have to strictly separate crypto assets of clients from their own holdings. In the event of insolvency, crypto asset service providers should have effective processes and mechanisms in place to effectively protect customers’ crypto holdings from loss. Which specific processes and mechanisms these may be must be provided by the national insolvency law applicable in each individual case. In Germany, there are as of yet no specific legal regulations for the treatment of customer crypto assets in the insolvency of a crypto custodian, but the legislator has already announced that special regulations will be introduced in near future. Crypto asset service providers must also never mix customer funds with their own assets. Crypto asset service providers will therefore have to transfer customer funds to a segregated bank account at a central bank or an authorized credit institution at the end of each business day.
Atty. Lutz Auffenberg, L.MM. (London)