Navigating MiCAR: Your essential guide

MiCAR’s jurisdiction is not limited to companies operating within the EU. In alignment with its core objective of safeguarding European investors, MiCAR's requirements become applicable the moment EU-based customers are the intended recipients of services.

Regardless of their registered office location, MiCAR applies to both issuers and service providers if their actions are related to the EU market. Therefore, companies from Switzerland or other third countries aiming to offer crypto-assets or provide MiCAR-covered services in the EU must comply with all MiCAR requirements to avoid regulatory actions and penalties imposed by EEA Member State regulators.

ESMA released a consultation paper on the draft guidelines on reverse solicitation under MiCAR on 29th January 2024. This is crucial for third-country firms, including those located in Switzerland’s "Crypto Valley“, who seek to offer services to clients domiciled in the EU. ESMA will consider feedback from this consultation, aiming to publish a final report by the end of 2024.

MiCAR categorizes the following crypto-asset services:

• Custody and administration of crypto-assets on behalf of third parties
• 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 third parties
• Placing of crypto-assets
• Reception and transmission of orders for crypto-assets on behalf of third parties
• Provision of advice on crypto-assets

These services, including wallet and exchange services, are subject to MiCAR regulations.

The MiCAR defines crypto-assets as "a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology". It differentiates between the following three types of crypto-assets (tokens):

• Utility Token – A type of crypto-asset that is only intended to provide access to a good or a service supplied by its issuer
• Asset-referenced Token (ART) – A type of crypto-asset that is not an electronic money token and that aims to maintain a stable value by referencing another value or right or a combination thereof, including one or more official currencies
• E-Money Token (EMT) – A type of crypto-asset that purports to maintain a stable value by referencing the value of one official currency

The MiCAR does not apply to (i) crypto-assets that qualify as financial instruments, deposits, funds or scuritisation positions; (ii) non-fungible tokens (“NFTs”); (iii) intra-group crypto-asset services; and (iv) crypto-assets issued by central banks or public authorities.

Regardless of the mechanism, stablecoins fall under MiCAR’s scope based on predefined definitions.

For CASP license applications, the following documents and policies are essential:

• Legal and commercial names, legal entity identifier, website and physical address
• Legal status and articles of association
• Program of operations detailing services, marketing, governance and financial forecasts
• Governance arrangements and proof of criminal record absence
• Internal control mechanism, risk assessment, and business continuity plan
• Descriptions of IT systems and security arrangements
• Prudential safeguards confirmation
• Procedures for handling client complaints, segregation of client assets and detection of market abuse

Noteworthy additions from MiCAR include ESG requirements, an orderly wind-down plan and a complaint handling procedure.

Issuers must adhere to specific requirements when issuing assets, such as:

• Establishing a legal entity
• Drafting and publishing a white paper with notification to competent authorities
• Meeting marketing communication requirements

There are exemptions for free offerings, limited recipients, small offerings and offerings to qualified investors

MiCAR emphasizes consumer protection, allowing withdrawal within 14 days, and imposes heavier regulations on asset-referenced tokens.

For MiCAR compliance, entities must appoint a Compliance Officer (CO) responsible for:

• Organizing collection and analysis of information on unusual transactions
• Reporting suspicions of money laundering or terrorist financing
• Periodic compliance statements to the management board

COs must possess suitable education, experience and qualities, while employees are required to take specialized training on prevention measures.

Existing VASPs transitioning to MiCAR should focus on three main categories:

1. Capitalization: Meeting heightened capital requirements (up to EUR 150,000) for financial stability.
2. AML compliance and internal policies: Establishing policies for internal control, risk assessment and confidentiality.
3. Local substance: Meeting requirements for a registered office, EU management and local resident AML compliance specialists.

MiCAR introduces mimum capital requirements for CASPs divided into three classes:

Class 1 CASP – EUR 50,000

capital for basic services like:

execution of orders on behalf of clients;

placing of crypto-assets;

providing transfer services for crypto-assets on behalf of clients;

reception and transmission of orders for crypto-assets on behalf of clients;

providing advice on crypto-assets; and/or

providing portfolio management on crypto-assets.
 

Class 2 CASP – EUR 125,000

capital under class 1, and additional services like:

providing custody and administration of crypto-assets on behalf of clients;

exchange of crypto-assets for funds; and/or

exchange of crypto-assets for other crypto-assets.
 

Class 3 CASP – EUR 150,000 

capital under class 2, and additional services like:

operation of a trading platform for crypto-assets.

Please note that significant ARTs and significant EMTs should be subject to higher capital requirements.

MiCAR comes into force for crypto exchanges in December 2024, with license applications expected to open in Q2 2024. Existing VASPs may continue operations until as late as 1 July 2026, depending on Member State decisions. The license application process involves regulator assessment, potential rejection, and an estimated total duration of approximately 8 months.

The CASP license application involves legal assessments, business model analysis, shareholding structure, policy documentation, and AML compliance system evaluations. Essential requirements for documentation include a detailed program of operations, business continuity policy, internal control mechanisms, IT systems security policy and client asset safeguarding procedures.

A comprehensive set of policies and documentation tailored for each CASP license applicant includes the program of operations, client information, insurance policy, ICT systems security policy, market abuse monitoring, client complaint handling, conflict of interest, outsourcing management, custody policy, trading platform rules and more.

In-depth evaluation of your business plan and target jurisdiction

1. Objective: Comprehensive overview for MiCAR license acquisition.
2. Key areas: Company establishment ease, cost efficiency, tax regime, reputation, political/economic stability, DLT ecosystem, current CASP/VASP licensing in the EU Member States and MiCAR license transition.
3. Deliverable: Strategic foundation for your decision-making process and a broad overview of the international regulatory environment for crypto-assets.

Comprehensive policy documentation as required under MiCAR

1.  Objective: Creation of necessary policies for the license application, including, but not limited to:

• Custody policy 
• ICT systems security policy
• Market abuse monitoring and reporting policy 
• Client crypto-asset safeguarding policy 
• Client complaint handling policy 
• Conflict of interest policy 

2.  Key areas: Transparency and disclosure, consumer protection, authorization and supervision, prevention of market abuse, operation, organization and governance

3.  Deliverable: Complete set of finalized procedures, rules and policies aligned with MiCAR regulations.

MiCAR CASP license application

Objective: Prepare and submit the license application, engage in correspondence with the regulator.

Key areas: Incorporation, finalization of required documentation, completion and submission of application, interactions with the regulators/authorities, interactions with the audit firms.

Deliverable: Attainment of MiCAR CASP license, enabling operations within the European Union.

Preparation is everything in securing your MiCAR CASP license. We recommend a staggered approach for current VASP license holders to transition smoothly to MiCAR. At EY we offer specialized support for capitalization, AML compliance, internal policies and other aspects essential for a successful MiCAR licensing.

Cross-border framework: Conducting thorough assessments of client activities to ensure compliance with relevant laws, providing training to staff on regulatory obligations, and developing robust compliance strategies to mitigate risks associated with reverse solicitation practices.

Establishing the right legal form, company registration, EU passporting: We can provide comprehensive guidance on selecting the appropriate legal structure for your financial services business, assist with company registration procedures, and facilitate EU passporting where applicable to ensure seamless operation across borders.

Support with licensing/authorization requirements: Our team of legal experts can navigate the complex process of obtaining the necessary licenses and authorizations for your financial services, ensuring compliance with regulatory requirements and expediting the approval process.

Coordination with regulators/authorities: We offer professional representation and communication with regulators and authorities on your behalf, ensuring transparent and proactive engagement to address any regulatory inquiries or concerns.

Advice on MiCAR’s scope and its exemptions: Leveraging our in-depth understanding of MiCAR and its exemptions, we can provide tailored advice on the regulatory implications for your business, including determining if specific assets, such as NFTs, fall under exemptions.

Drafting of required documents: Our experienced legal team can draft all necessary documents to meet regulatory standards, including white papers, internal policies, and contracts, ensuring compliance with MiCAR and other relevant regulations.

Setting up an adequate internal organization and risk management: We can assist in establishing robust internal organizational structures and risk management frameworks tailored to your business needs, including implementing effective systems and controls to mitigate risks.

Guidance on capital requirements: Drawing on our expertise in financial regulation, we can provide clear guidance on meeting capital requirements, ensuring financial stability and compliance with regulatory mandates.

Support with AML and Money Laundering Reporting Officer (MLRO): EY offers solutions for AML compliance support, including as outsourcing partner for Compliance Officer and MLRO functions to manage reporting requirements. Compliance officers play a crucial role in information analysis, reporting, periodic statements and overall adherence to AML requirements.