On April 20, the European Parliament adopted a regulation MiCA, covering the regulation of many components of the crypto industry in the European Union. On the same day, the EU adopted another act that will affect companies in the segment and owners of cryptocurrencies. We are talking about the regulation of information accompanying the transfer of funds and certain crypto assets.
The updated regulation may provide for enhanced tracking of digital currency transactions. This commitment is also the result of pressure from the Financial Action Task Force (FATF) to apply the so-called “travel rule”.
To implement the latter, the EU has formulated provisions Regulation of funds transfers (TFR) in addition to MiCA. The regulation will become applicable in January 2025 (18 months after it enters into force). According to this act, CASP will be able to identify addresses that are subject to sanctions, and provide full identification and tracking of transfers of crypto assets.
“Transactions with crypto assets will be tracked in the same way as traditional money transfers,” — noted in the European Parliament.
Anna Voevodina, lawyer, CEO and founder of Manimama Legal & Growth Agency, spoke in more detail about MiCA and TFR especially for Cryplogger UA.
Creation of a single European market for virtual assets
The regulation of the European cryptocurrency markets is one of the most significant and profound documents in the field of regulation of virtual assets, says Vojvodina. It is designed as part of a broader regulatory effort, including initiatives such as the Digital Operational Resilience Act (DORA), the DLT Pilot, and the Funds Transfer Regulation (TFR).
Before the adoption of the regulation at the European level, there were no general rules governing the crypto market. The current regulations are based on different legal acts, interpretations and guidelines in the legislation of different EU Member States. There are separate anti-money laundering rules for services related to unregulated crypto assets, including the operation of platforms for trading, exchanging or storing cryptocurrencies.
In addition, the EU does not have a single legal definition of the nature of crypto assets. This situation makes their owners vulnerable to risks, limits the development of the market and the possibilities of innovative digital services, alternative payment instruments, becomes a platform for market manipulation and the basis of financial crimes.
MiCA aims to change this.
- MiCA was first proposed in September 2020 as part of a massive digital finance regulatory package aimed at boosting the competitiveness of the EU financial sector, as well as providing consumers with greater access to innovative products.
- On November 24, 2021, the EU Council approved the negotiating commitments for MiCA.
- The next step was the holding of negotiations between parliamentarians, which began on March 31, 2022 and ended with a preliminary agreement on June 30, 2022.
- MiCA and TFR are expected to come into effect in July 2023. Stablecoin regulations will apply from July 2024, the rest (together with TFR) from January 2025.
MiCA will be applied throughout the EU without the need for national implementing laws. This approach is in line with protecting consumer rights and ensuring effective and harmonized access to the innovative segment of crypto assets in the market. Thus MiCA will become an act of direct action.
Basic concepts of MiCA
Types of crypto assets
According to the regulation, “cryptoasset” means a digital representation of value or rights that can be transferred and stored electronically using distributed ledger technology or similar.
MiCA anchors three types of tokens:
- utility tokens are crypto assets designed to provide access to the goods and services of the issuer;
- asset-referenced – crypto assets that provide a stable price based on the value of several fiat currencies, goods, crypto assets, or a combination of such assets;
- e-money – crypto assets whose main purpose is to be used as a medium of exchange and which must maintain a stable price, referring to the value of fiat currency, which is legal tender.
For the last two, MiCA introduces the concept of “significance”. Meaningful asset-referenced and e-money tokens are assets that exceed certain limits of use and meet higher prudential, governance and liquidity requirements.
Issuers
An issuer of crypto assets is a legal entity that offers any type of crypto assets to the public or seeks to ensure their admission to the trading platform.
Among the main requirements for issuers of the three above types of assets are the development of a detailed white paper and the notification of the document to the competent authority, the prevention of potential conflicts of interest, etc.
CASP Requirements
A Crypto Asset Service Provider or CASP is any person who provides one or more services related to such assets to third parties on a professional basis.
Among these:
- storage and administration of crypto assets, execution of instructions for them on behalf of third parties;
- operation of a trading platform for crypto assets;
- exchange of crypto assets for fiat currency, which is legal tender, or for other digital assets;
- placement of crypto assets;
- providing advice on virtual assets.
CASPs are required to register an office in one of the EU Member States, obtain service provider authorization, meet organizational and reputational requirements, as well as minimum standards for the storage of crypto assets. The minimum authorized capital must vary from €50,000 to €150,000 depending on the services provided.
Will tracking transfers put an end to anonymity?
The regulation on information accompanying transfers of funds and certain crypto assets will apply to transactions that are sent to or received by a payment service provider or intermediaries in the EU, says in an explanatory document of the European Parliament:
“It should also apply to crypto asset transfers made through crypto ATMs if the crypto asset service provider, originator or beneficiary intermediary has a registered office in the EU.”
The regulation shall not apply if:
- the initiator and recipient are the providers of crypto-related services themselves;
- when transferring crypto assets between individuals, carried out without the involvement of service providers.
Vojvodina noted that EU CASP companies will be required to comply with the rules for the transfer of funds in each transaction, regardless of its amount.
There is no de minimis threshold, and there are no simplifications of EU transaction requirements.
At the same time, the amount of information about the sender and recipient that CASP must provide does not change depending on the amount of the transaction. Paragraph 27 of the regulation explains this approach, referring to the “inherent limitless nature and global scope of crypto asset transfers and the provision of related services.”
In addition, it is noted that it “complies with the FATF requirement to consider all transfers of crypto assets as cross-border”, which invalidates any difference in the volume of obligations when conducting transactions in the EU and outside it.
Second, the CASP needs to fulfill its obligations to comply with the travel rule before making a transaction. According to the TFR, sender CASPs are required to communicate information to the recipient CASP before sending the corresponding cryptotransaction. In turn, the latter must make sure that the necessary information has been obtained before making the transfer of funds available to the end client.
Operations with non-custodial wallets
Transactions between individuals with non-custodial wallets (self-hosted wallet/unhosted wallet) in excess of €1000 require verification of the owner of the wallet.
According to the FATF recommendations, transactions with such wallets are subject to the TFR. When making transactions with a self-hosted wallet, European CASPs must collect the necessary information about the sender and recipient, as well as fulfill the following additional obligations to verify wallets when making transfers in excess of €1000:
- when sending a transfer to a non-custodial wallet, the sender is obliged to check whether this wallet is owned or controlled by the sending client;
- when receiving a transfer from a non-custodial wallet, the recipient must ensure that the recipient client is the owner or controller of the sending wallet.
The non-custodial wallet identification tool defines the jurisdictional requirements for each transaction. It collects data on counterparty clients from the withdrawal page, creating an archive for sanctions compliance, record keeping and reporting of suspicious activity.
The next question is: how can non-custodial wallets be brought into line with FATF rules on moving funds?
The Funds Transfer Rule requires Virtual Asset Transfer Service Providers (VASPs) to collect and share certain data about their customers and the transactions they process. This information includes the name and address of the sender and recipient of the transaction, as well as their account numbers. This rule applies to all VASPs, including those that work with non-hosted wallets.
To align a non-custodial wallet with FATF rules for transferring funds, one approach is to use a third-party service provider that specializes in compliance with these rules.
These providers may act as intermediaries between users of non-hosted wallets and VASPs, collecting and transmitting the necessary information on behalf of users. This allows the latter to continue to use them while respecting the rules.
Another approach is that users of non-custodial wallets must collect and transfer the necessary data personally. However, they can use a standardized format of information and ensure its secure transmission to the VASP participating in the transaction. This approach can be more complex, but allows users of non-custodial wallets to retain full control over their accounts and transactions.
Compliance with FATF rules on funds transfers is an ongoing process, so VASPs and users of non-custodial wallets must remain vigilant to ensure compliance with the requirements of the rules as they are updated.
As a final note, CASPs will be required to properly screen all clients:
- identify the client (name, address, date of birth, place of birth, etc.);
- ensure that the client is not a sanctioned person;
- store personal data and information on the prevention of money laundering and terrorist financing;
- transfer data along with the transaction;
- depending on whether the CASP conducts the transaction on behalf of the sender or the recipient, it will be required to collect and transmit personal data and information on the prevention of money laundering and terrorist financing, or receive such from the sender and verify it.
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Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
On April 20, the European Parliament adopted a regulation MiCA, covering the regulation of many components of the crypto industry in the European Union. On the same day, the EU adopted another act that will affect companies in the segment and owners of cryptocurrencies. We are talking about the regulation of information accompanying the transfer of funds and certain crypto assets.
The updated regulation may provide for enhanced tracking of digital currency transactions. This commitment is also the result of pressure from the Financial Action Task Force (FATF) to apply the so-called “travel rule”.
To implement the latter, the EU has formulated provisions Regulation of funds transfers (TFR) in addition to MiCA. The regulation will become applicable in January 2025 (18 months after it enters into force). According to this act, CASP will be able to identify addresses that are subject to sanctions, and provide full identification and tracking of transfers of crypto assets.
“Transactions with crypto assets will be tracked in the same way as traditional money transfers,” — noted in the European Parliament.
Anna Voevodina, lawyer, CEO and founder of Manimama Legal & Growth Agency, spoke in more detail about MiCA and TFR especially for Cryplogger UA.
Creation of a single European market for virtual assets
The regulation of the European cryptocurrency markets is one of the most significant and profound documents in the field of regulation of virtual assets, says Vojvodina. It is designed as part of a broader regulatory effort, including initiatives such as the Digital Operational Resilience Act (DORA), the DLT Pilot, and the Funds Transfer Regulation (TFR).
Before the adoption of the regulation at the European level, there were no general rules governing the crypto market. The current regulations are based on different legal acts, interpretations and guidelines in the legislation of different EU Member States. There are separate anti-money laundering rules for services related to unregulated crypto assets, including the operation of platforms for trading, exchanging or storing cryptocurrencies.
In addition, the EU does not have a single legal definition of the nature of crypto assets. This situation makes their owners vulnerable to risks, limits the development of the market and the possibilities of innovative digital services, alternative payment instruments, becomes a platform for market manipulation and the basis of financial crimes.
MiCA aims to change this.
- MiCA was first proposed in September 2020 as part of a massive digital finance regulatory package aimed at boosting the competitiveness of the EU financial sector, as well as providing consumers with greater access to innovative products.
- On November 24, 2021, the EU Council approved the negotiating commitments for MiCA.
- The next step was the holding of negotiations between parliamentarians, which began on March 31, 2022 and ended with a preliminary agreement on June 30, 2022.
- MiCA and TFR are expected to come into effect in July 2023. Stablecoin regulations will apply from July 2024, the rest (together with TFR) from January 2025.
MiCA will be applied throughout the EU without the need for national implementing laws. This approach is in line with protecting consumer rights and ensuring effective and harmonized access to the innovative segment of crypto assets in the market. Thus MiCA will become an act of direct action.
Basic concepts of MiCA
Types of crypto assets
According to the regulation, “cryptoasset” means a digital representation of value or rights that can be transferred and stored electronically using distributed ledger technology or similar.
MiCA anchors three types of tokens:
- utility tokens are crypto assets designed to provide access to the goods and services of the issuer;
- asset-referenced – crypto assets that provide a stable price based on the value of several fiat currencies, goods, crypto assets, or a combination of such assets;
- e-money – crypto assets whose main purpose is to be used as a medium of exchange and which must maintain a stable price, referring to the value of fiat currency, which is legal tender.
For the last two, MiCA introduces the concept of “significance”. Meaningful asset-referenced and e-money tokens are assets that exceed certain limits of use and meet higher prudential, governance and liquidity requirements.
Issuers
An issuer of crypto assets is a legal entity that offers any type of crypto assets to the public or seeks to ensure their admission to the trading platform.
Among the main requirements for issuers of the three above types of assets are the development of a detailed white paper and the notification of the document to the competent authority, the prevention of potential conflicts of interest, etc.
CASP Requirements
A Crypto Asset Service Provider or CASP is any person who provides one or more services related to such assets to third parties on a professional basis.
Among these:
- storage and administration of crypto assets, execution of instructions for them on behalf of third parties;
- operation of a trading platform for crypto assets;
- exchange of crypto assets for fiat currency, which is legal tender, or for other digital assets;
- placement of crypto assets;
- providing advice on virtual assets.
CASPs are required to register an office in one of the EU Member States, obtain service provider authorization, meet organizational and reputational requirements, as well as minimum standards for the storage of crypto assets. The minimum authorized capital must vary from €50,000 to €150,000 depending on the services provided.
Will tracking transfers put an end to anonymity?
The regulation on information accompanying transfers of funds and certain crypto assets will apply to transactions that are sent to or received by a payment service provider or intermediaries in the EU, says in an explanatory document of the European Parliament:
“It should also apply to crypto asset transfers made through crypto ATMs if the crypto asset service provider, originator or beneficiary intermediary has a registered office in the EU.”
The regulation shall not apply if:
- the initiator and recipient are the providers of crypto-related services themselves;
- when transferring crypto assets between individuals, carried out without the involvement of service providers.
Vojvodina noted that EU CASP companies will be required to comply with the rules for the transfer of funds in each transaction, regardless of its amount.
There is no de minimis threshold, and there are no simplifications of EU transaction requirements.
At the same time, the amount of information about the sender and recipient that CASP must provide does not change depending on the amount of the transaction. Paragraph 27 of the regulation explains this approach, referring to the “inherent limitless nature and global scope of crypto asset transfers and the provision of related services.”
In addition, it is noted that it “complies with the FATF requirement to consider all transfers of crypto assets as cross-border”, which invalidates any difference in the volume of obligations when conducting transactions in the EU and outside it.
Second, the CASP needs to fulfill its obligations to comply with the travel rule before making a transaction. According to the TFR, sender CASPs are required to communicate information to the recipient CASP before sending the corresponding cryptotransaction. In turn, the latter must make sure that the necessary information has been obtained before making the transfer of funds available to the end client.
Operations with non-custodial wallets
Transactions between individuals with non-custodial wallets (self-hosted wallet/unhosted wallet) in excess of €1000 require verification of the owner of the wallet.
According to the FATF recommendations, transactions with such wallets are subject to the TFR. When making transactions with a self-hosted wallet, European CASPs must collect the necessary information about the sender and recipient, as well as fulfill the following additional obligations to verify wallets when making transfers in excess of €1000:
- when sending a transfer to a non-custodial wallet, the sender is obliged to check whether this wallet is owned or controlled by the sending client;
- when receiving a transfer from a non-custodial wallet, the recipient must ensure that the recipient client is the owner or controller of the sending wallet.
The non-custodial wallet identification tool defines the jurisdictional requirements for each transaction. It collects data on counterparty clients from the withdrawal page, creating an archive for sanctions compliance, record keeping and reporting of suspicious activity.
The next question is: how can non-custodial wallets be brought into line with FATF rules on moving funds?
The Funds Transfer Rule requires Virtual Asset Transfer Service Providers (VASPs) to collect and share certain data about their customers and the transactions they process. This information includes the name and address of the sender and recipient of the transaction, as well as their account numbers. This rule applies to all VASPs, including those that work with non-hosted wallets.
To align a non-custodial wallet with FATF rules for transferring funds, one approach is to use a third-party service provider that specializes in compliance with these rules.
These providers may act as intermediaries between users of non-hosted wallets and VASPs, collecting and transmitting the necessary information on behalf of users. This allows the latter to continue to use them while respecting the rules.
Another approach is that users of non-custodial wallets must collect and transfer the necessary data personally. However, they can use a standardized format of information and ensure its secure transmission to the VASP participating in the transaction. This approach can be more complex, but allows users of non-custodial wallets to retain full control over their accounts and transactions.
Compliance with FATF rules on funds transfers is an ongoing process, so VASPs and users of non-custodial wallets must remain vigilant to ensure compliance with the requirements of the rules as they are updated.
As a final note, CASPs will be required to properly screen all clients:
- identify the client (name, address, date of birth, place of birth, etc.);
- ensure that the client is not a sanctioned person;
- store personal data and information on the prevention of money laundering and terrorist financing;
- transfer data along with the transaction;
- depending on whether the CASP conducts the transaction on behalf of the sender or the recipient, it will be required to collect and transmit personal data and information on the prevention of money laundering and terrorist financing, or receive such from the sender and verify it.
Found a mistake in the text? Select it and press CTRL+ENTER
Cryplogger Newsletters: Keep your finger on the pulse of the bitcoin industry!
