MiCA and the CySEC CASP regime in Cyprus

1. What is MiCA?

MiCA refers to the Markets in Crypto-Assets (MiCA) regulation, amending Directive 2019/1937. It consists parts of the crypto-assets and distributed ledger technology (DLT) broader legal frameworks, prepared at the EU level. The proposed regulation is governed by the following objectives:

• provision of the legal basis for crypto-assets not covered by existing EU legislation,
• establishment of uniform rules for crypto-asset services providers and issuers at the EU level,
• replacement of existing national frameworks that apply to crypto-assets not covered by existing EU financial services legislation,
• establishment of specific rules for stablecoins, including the cases of them being e-money.

In this way, MiCA regulation aims to deliver uniform requirements concerning the authorisation, operation, organization, and governance of CASP and subsequently protect investors and market integrity from risks associated with crypto-assets.

The groundwork of MiCA was initiated in 2018 due to the increased public interest observed within the EU for investing in cryptocurrencies. The EC adopted a digital finance package, including MiCA in September 2020 which has led to extensive discussions among the preparatory bodies such as the EU Council, the European Central Bank (ECB), and the Economic and Social Committee. MiCA regulation is expected to come into force in 2023, in alignment with other regulations for anti-money laundering (AML) and tracing transfers of crypto-assets and complement the efforts of local regulators such as CySEC (Cyprus Securities and Exchange Commission) for the CASP registration regime.

2. What does the agreed EU deal mean for the crypto-asset services industry and how does it affect a CASP in Cyprus? 

Upon application, MiCA will be directly enforceable across all EU member states, with the CASP being able to provide its services in the single market. In this respect, harmonised rules and operational requirements will apply for CASP, allowing them to passport their services across the EU and at the same time preventing regulatory fragmentation.

The MiCA provisions will apply to any person that is engaged in the issuance of crypto-assets or the provision of crypto-asset services in the EU. Furthermore, the crypto-assets regulation defines CASP as any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis.

MiCA’s scope of application will be extended to crypto-assets currently not governed by existing regulations. These consist of asset-referenced and electronic money tokens known as ‘stablecoins’, as well as utility tokens regarding the provision of digital access to a good or service available on DLT, accepted only by the issuer of the token. Yet, non-fungible tokens (NFT) will be excluded from the scope unless they fall under any existing crypto-asset category.

Beyond the requirement of being authorised to issue crypto-assets or provide crypto-asset services, MiCA will promote further transparency to investors. In particular:

• Drafting a crypto-asset white paper before offering crypto-assets to the public or seeking their admission on a trading platform.
  • The white paper shall contain specifics for the issuer, the crypto-asset, the offer characteristics, the underlying technology, and other relevant information and shall be notified to the national competent authority (NCA).
  • Marketing material disseminated to the public shall clearly state the white paper publication and be informationally consistent with the said paper.
• Maintaining liquid reserves of assets, in the case of stablecoins issuers, with a one-to-one ratio and partly in the form of deposits, will back the tokens to become a credible means of exchange and store of value similar to e-money.
  • Each category of an asset-referenced token offered will require a separately managed reserve of assets to be held by the issuer, subject to specific custody and investment provisions.
• Disclosing information about the adverse environmental and climate-related impact of crypto-assets through regulatory technical standards (RTS) specifically developed by the European Securities and Markets Authority (ESMA) in this respect.

Mirroring the Markets in Financial Instruments Directive (MiFID), MiCA’s provisions reference among others such as CASP’s organisational requirements, safeguarding of clients’ crypto-assets and funds, client complaint and conflicts of interest handling procedures, as well as prevention and management of market abuse.

3. What are the main difficulties of regulating crypto-assets?

A part of regulating the space of crypto-assets has been focused on the prevention of money laundering and terrorist financing (ML/TF) due to the anonymity (or pseudonymity) offered in crypto-asset transactions.

The EC’s intention to revise Regulation EU 2015/847 on the information accompanying the transfer of funds to ensure the traceability of crypto-asset transfers, consists of the new legislative proposals for strengthening the EU’s AML regulation.

The revision proposes the adoption of the Travel Rule for crypto-asset transfers without any applicable minimum thresholds or low-value transactions being exempted from the obligation, as initially suggested. The CASP will be required to provide to the NCA the information collected on the beneficiary and the source of the asset during an inspection or upon request.

In this respect, the CASP will be obliged to perform transaction monitoring referred to as Know Your Transaction (KYT), a perpetual procedure used for the detection and reporting of suspicious crypto-asset transactions. Additionally, the CASP shall verify that the asset is not linked to any restrictive measures or sanctions before making it available to its beneficiaries.

The proposed rules will also cover the situation where a CASP’s hosted wallet will interact with an un-hosted wallet, meaning a crypto-asset wallet address which is in the custody of a private user. If a CASP client sends or receives at least 1,000 EUR from an un-hosted wallet, then the CASP shall verify whether the wallet is effectively owned or controlled by that specific client.

4. How SALVUS can help set up a CASP under CySEC

The SALVUS Crypto-Assets team has been involved with the licensing and registration of varying models of crypto-businesses. We employ our extensive experience and understanding to help you determine the operational model and the required crypto-asset services authorisations that suit your business model, strategy, and objectives.

Through our CASP registration service, we guide applicants wishing to become CySEC registered Crypto-Asset Services Providers, collecting the necessary information and documentation, and preparing and submitting a complete and well-documented application.

Once CySEC has successfully reviewed and approved the application, the CASP will be added to the CySEC CASP Register and will be authorised to offer crypto-asset services in and from Cyprus.

Post-registration and after the authorisation of the CASP, our Regulatory Compliance team takes over ensuring compliance with the applicable AML regulatory framework and other obligations. These include fulfilling regulatory reporting requirements and establishing adequate measures and procedures to respond to the introduction of new regulatory requirements such as MiCA provisions.

Please contact us at info@salvusfunds.com or call us at +357 7000 7898 if you require additional information about your CASP registration or support with your crypto-asset regulatory obligations.

#StayAhead

Should you be interested to read more about CySEC CASP and the Cyprus National Risk Assessment please visit the selected articles below:

• Cyprus National Risk Assessment 2021; Findings and Recommendations
• Submitting a Crypto-Exchange CASP application to CySEC
• Becoming a Crypto-Assets Services Provider (CASP) in Cyprus

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.