Impact of MiCA on Cross-Border Crypto Trading Services

Question

We're planning to offer our crypto trading services to people in different countries, not just in Europe.

How does MiCA affect our business when we deal with customers outside Europe?

Executive Summary

In expanding your crypto trading services globally, understanding the reach of the Markets in Crypto-Assets Regulation (MiCA) beyond the EU is crucial. Here’s how MiCA broadly impacts such international operations:

  • Jurisdiction of MiCA: It primarily applies to entities within the EU, dictating crypto-related activities and services in the EU market. For customers outside Europe, the direct enforcement of MiCA is limited, although the regulation’s principles still influence global operations.
  • Consumer Protection and Ethical Standards: MiCA underscores the importance of client protection and non-discriminatory policies, suggesting EU service providers maintain these standards for all clients, irrespective of their location.
  • International Cooperation and Compliance: EU-based providers are expected to engage in transparent cross-border activities and cooperate with non-EU regulatory authorities, respecting international market integrity and regulatory convergence.
  • Transparency and Disclosure Ethics: EU providers are urged to uphold professional conduct globally, providing fair and clear information to clients while reflecting MiCA’s information and disclosure requirements.

Assumptions

  • Assume the crypto trading service business is based within the European Union and subject to MiCA regulations.
  • Assume the service plans to expand to both retail and professional customers internationally.
  • Assume the crypto trading services include both exchange services and custody services for crypto-assets.
  • Assume the business has existing compliance infrastructure that is aligned with European regulations and may need adaptation for services offered in other jurisdictions.
  • Assume the target countries for expansion do not have prohibitive regulations against crypto trading services based in the EU.

Legal trace

Scope and Application of MiCA in the Global Context

This Regulation applies to natural and legal persons and certain other undertakings that are engaged in the issuance, offer to the public and admission to trading of crypto-assets or that provide services related to crypto-assets in the Union. Article 2(1)

MiCA explicitly outlines its jurisdictional applicability to entities within the European Union. It governs businesses conducting crypto-asset-related activities and services “in the Union,” placing them under the aegis of the regulation when dealing within the EU market.

A person shall not provide crypto-asset services, within the Union, unless that person is a legal person or other undertaking that has been authorized as crypto-asset service provider in accordance with Article 63. Article 59(1)

Crypto-asset service providers authorised in accordance with Article 63 shall have a registered office in a Member State where they carry out at least part of their crypto-asset services. They shall have their place of effective management in the Union and at least one of the directors shall be resident in the Union. Article 59(2)

Authorization is a prerequisite for EU-based businesses looking to provide crypto-asset services, which requires maintaining a substantive presence within the EU, including registered offices and management. However, the direct application of MiCA seems restricted to the EU’s borders, as the text does not expressly extend it to services for clients outside of Europe.

Transparency and Client Protection in Cross-Border Services

To ensure consumer protection, crypto-asset service providers that exchange crypto-assets for funds or other crypto-assets by using their own capital should draw up a non-discriminatory commercial policy. Recital 85

Crypto-asset service providers that execute orders for crypto-assets on behalf of clients should draw up an execution policy and should always aim to obtain the best possible result for their clients, including when they act as a client’s counterparty. Recital 86

MiCA highlights the importance of consumer protection and ethical business practices. These principles seem to suggest a broader application, pointing towards their relevance in cross-border services. The regulation implies that EU service providers should strive for transparency and client best interest, regardless of the client’s location.

Cross-Border Cooperation and Compliance

A crypto-asset service provider that intends to provide crypto-asset services in more than one Member State shall submit the following information to the competent authority of the home Member State […] Article 65(1)

The competent authorities of Member States shall, where necessary, conclude cooperation arrangements with supervisory authorities of third countries concerning the exchange of information with those supervisory authorities of third countries and the enforcement of obligations under this Regulation in those third countries. Article 107(1)

The competent authorities shall conclude cooperation arrangements on exchange of information with the supervisory authorities of third countries only where the information disclosed is subject to guarantees of professional secrecy that are at least equivalent to those set out in Article 100. Article 107(5)

While the core of MiCA applies to the EU, Article 65 and Article 107 position EU-based providers to maintain transparency in their cross-border activities. There’s also an onus to cooperate with third-country authorities under the premise that professional secrecy standards align with those of the EU. This entails that providers’ international operations are neither segregated from MiCA nor unregulated by the provisions stipulated.

Convergence with International Standards and Market Integrity

Markets in crypto-assets are global and thus inherently cross-border. Therefore, the Union should continue to support international efforts to promote convergence in the treatment of crypto-assets and crypto-asset services. Recital 8

The global nature of crypto-assets markets is recognized in MiCA, which emphasizes a commitment to regulatory harmonization. This mindset urges EU service providers to engage with a perspective of regulatory congruence, adhering to MiCA while also considering international standards and frameworks.

Information and Disclosure Requirements with a Global Reach

Crypto-asset service providers shall act honestly, fairly and professionally in accordance with the best interests of their clients and prospective clients. Article 66(1)

Crypto-asset service providers shall provide their clients with information that is fair, clear and not misleading… Article 66(2)

Crypto-asset service providers shall make publicly available, in a prominent place on their website, information related to the principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue each crypto-asset… Article 66(5)

The directives set forth in Article 66 mandate EU-based providers to uphold stringent information and disclosure practices with clients. Notably, these instructions do not distinguish between EU and non-EU clients, suggesting a uniform application of transparency and professional conduct expected in international activities.

In conclusion, while direct MiCA enforcement is limited to the EU, the regulation’s principles, accountability standards, and emphasis on cross-border cooperation extend its influence globally. An EU-based crypto trading service provider must, therefore, consider MiCA’s mandates when operating internationally, alongside complying with varying regional legal frameworks and striving for global cooperation and market integrity.

PDF Repository

We have searched through the PDF repository of draft EBA and ESMA guidelines, draft technical standards, and other documents to provide this supplemental answer.

Details

Following our comprehensive analysis of how the Markets in Crypto-Assets Regulation (MiCA) might affect your crypto trading services to customers outside Europe, we provide additional insights from related legal documents to augment our understanding of potential indirect effects.

Legal trace

Enhancements to Reporting and Monitoring Obligations

issuers should provide the size of the reserve of assets in a broken-down manner to reflect the value and the composition of the reserve of assets, including liquidity management measures. (Draft) Implementing Technical Standards on the reporting on asset-referenced tokens under Article 22(7) of Regulation (EU) No 2023/1114 (MiCAR) and on e-money tokens denominated in a currency that is not an official currency of a Member State pursuant to Article 58(3) of that Regulation, page 18

This quote spotlights MiCA’s thorough approach to transparency requirements for asset reserves, which your company should consider when facilitating transactions involving asset-referenced tokens globally.

transaction to be reported according to Article 22(1) of Regulation (EU) 2023/1114 should include transactions settled on the distributed ledger (‘on-chain’) and transactions settled outside the distributed ledger (‘off-chain’). (Draft) Implementing Technical Standards on the reporting on asset-referenced tokens under Article 22(7) of Regulation (EU) No 2023/1114 (MiCAR) and on e-money tokens denominated in a currency that is not an official currency of a Member State pursuant to Article 58(3) of that Regulation, page 18

This delineates the scope of transaction reporting under MiCA which includes both on-chain and off-chain activities. It’s pertinent to your international operations as it indicates the level of detail that might be required in reporting procedures, potentially influencing your services to non-EU customers.

Proactive Strategies for Classifying Crypto-Assets

While this Consultation Paper does not include a draft cost-benefit analysis, ESMA has developed its draft guidelines having due regard to the principle of proportionality and being mindful about the possible costs the obligations they contain would create for market participants. (Draft) Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments, page 6

This emphasizes ESMA’s intention to ensure that regulatory obligations are not unduly burdensome, which may resonate with your business strategy for offering cross-border services while ensuring compliance with the proportionality principle of European regulations.

Implications of ARTs and EMTs Significance

Regulation (EU) 2023/1114 on markets in crypto-assets (MiCAR), confers on the European Commission (EC) powers to adopt delegated acts on the most relevant indicators in relation to specific criteria for determining whether asset-referenced tokens (ARTs) and electronic money tokens (EMTs) are to be regarded as ‘significant’ (namely the criteria on the issuer’s activities on international scale outside the EU… EBA's Technical Advice in response to the European Commission's December 2022 Call for Advice on two delegated acts under MiCAR concerning certain criteria for the classification of ARTs and EMTs as significant and the fees that are to be charged by EBA to issuers of significant ARTs and EMTs, page 5

The prominence of your services in terms of international scale is a direct factor in the European Commission’s determination of the significance of ARTs and EMTs. This might impact the regulatory oversight and obligations your firm faces as part of MiCA, even when engaging with clients beyond EU borders.

Cooperation and Standards Across Borders

issuers should provide the information on the transactions with a breakdown for geographical distribution, meaning the countries of origin of the holders involved in the transactions. (Draft) Implementing Technical Standards on the reporting on asset-referenced tokens under Article 22(7) of Regulation (EU) No 2023/1114 (MiCAR) and on e-money tokens denominated in a currency that is not an official currency of a Member State pursuant to Article 58(3) of that Regulation, page 19

The need for geographical breakdown in reporting mirrors the level of data granularity required by MiCA. This could have practical implications for your international operations, influencing how transaction data is collected and used for compliance with European standards.

Potential Cost Implications and Strategic Planning

The second part of the report presents the EBA’s advice in relation to the type of supervisory fees, the matters for which fees are due… EBA's Technical Advice in response to the European Commission's December 2022 Call for Advice on two delegated acts under MiCAR concerning certain criteria for the classification of ARTs and EMTs as significant and the fees that are to be charged by EBA to issuers of significant ARTs and EMTs, page 6

Exploring the type and scope of supervisory fees associated with significant ARTs and EMTs is meaningful for estimating future costs related to regulatory supervision within the EU framework. It indicates a factor for financial forecasting and strategic planning as MiCA’s reach evolves.

Our compiled augmentation, grounded in excerpts from relevant legal documents, enhances the informative foundation provided in the initial analysis. This should assist in plotting a forward-looking compliance strategy that respects MiCA’s principles while acknowledging its potential international ramifications for your crypto trading services.