Blockchain
New EU Crypto Regulations: Crypto Licensing and Transfer of Funds (2023 Update)
Dec 18, 2023
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InnReg
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6 min read
After extensive negotiations, the European Union (EU) reached an agreement on what will likely become the first major and most comprehensive global crypto regulatory framework.
The European Parliament and the Council of the EU adopted the first EU rules to trace crypto-asset transfers to prevent money laundering. They also drafted standard supervision and customer protection rules. For the first time, EU lawmakers intend to harmonize EU Crypto Regulations across all its member states.
While some cryptocurrency businesses may consider the new EU Crypto Regulations a burden, their adoption is generally welcomed across the industry, as they will bring long-awaited clarity and serve as a crypto regulatory benchmark for other major markets.
InnReg offers a comprehensive overview of the key elements of the EU’s agreement below.
Our experienced subject-matter experts wrote this analysis, not freelancers, copywriters, or ChatGPT. We are global and EU regulatory compliance experts.
See also:
What Are the Key Elements of the EU Crypto Regulations?
The EU Parliament and Council outlined two key components in the June 2023 EU Crypto Regulations publication:
Markets in Crypto Assets Regulation (MiCA): MiCA harmonizes license requirements for cryptocurrency businesses in the EU and the associated “passporting rules,” enabling an already licensed business to operate throughout the entire EU
Transfer of Funds Regulation (“TFR”): The “EU Travel Rule” establishes the monetary threshold above which cryptocurrency transactions are subject to the rule.
What Are the Key Elements of MiCA and the EU Crypto License?
The EU crypto license regulation will closely mirror that of traditional EU financial institutions, namely complying with strict capital and ongoing disclosure requirements, along with “fit and proper” incumbent and prospective management testing.
Below, we provide an overview of the key elements of the MiCA:
Harmonized crypto license requirements
Crypto-asset issuers and service providers will benefit from harmonized crypto license requirements.Crypto passporting
A MiCA license will serve as an EU passport for providing licensed crypto-asset services in EU Member States other than the home Member State.Liability
Crypto-asset service providers will be liable to their customers for crypto-asset losses resulting from malfunctions or hacks up to their market value.Market abuse
MiCA will also cover market abuse, such as market manipulation, insider trading, wash trading, and front runningEnvironmental and climate impact
Crypto businesses subject to MiCA must disclose information on their environmental and climate impact. The European Securities and Markets Authority (ESMA) is expected to develop draft regulatory technical standards on the content, methodologies, and presentation of these disclosures.Public register of non-compliant crypto-asset service providers
ESMA is expected to maintain a public register of non-compliant crypto-asset service providers (e.g., operating in the EU without a crypto license).
Who will be subject to MiCA crypto license requirements?
In scope
Natural and legal persons and certain other undertakings 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 EU, including when part of such activities or services is performed in a decentralized manner.
Out of scope
Persons who provide crypto-asset services exclusively for their parent companies, for their own subsidiaries, or for other subsidiaries of their parent companies
Non-fungible tokens (NFTs)
DeFi protocols provided in a fully decentralized manner without any intermediary
Crypto-assets that qualify as one or more of the following:
financial instruments;
deposits, including structured deposits;
funds, except if they qualify as e-money tokens;
non-life or life insurance products;
pension products; etc.
Important Notice: By December 30, 2024, ESMA is expected to issue guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments.
How Are Stablecoins Regulated?
MiCA aims to protect consumers by introducing, among others, stablecoin regulation, including:
a mandatory right of redemption;
strict requirements establishing an adequate minimum level of liquidity with a 1:1 ratio, partly in the form of deposits;
procedures on complaints-handling and market abuse and insider trading prevention; and
a segregated reserve of assets, isolated from other assets, to be held in custody by a third party.
When Will MiCA Regulation Apply?
The regulations concerning stablecoins under MiCA will take effect starting in June 2024, while the remaining provisions under MiCA will apply from December 30, 2024.
What Are the Key Elements of the TFR?
Two of the most notable elements of the EU Travel Rule are:
The threshold above which transfer of funds will be subject to the Travel Rule
The treatment of personal wallets
The Fifth Anti-Money Laundering Directive (AMLD) brought cryptocurrency-fiat currency exchanges under the scope of the EU AML legislation, requiring them to comply with the same AML obligations as traditional financial institutions.
Then, the Sixth AMLD introduced even more stringent requirements for crypto businesses by extending the liability to include legal persons and individuals. They also imposed harsher penalties, including a prison sentence of up to four years. With many regulatory changes in the last two years, it was clear that the EU started to take a more proactive and serious stance on AML/CFT compliance requirements for crypto businesses.
This is how, in April 2023, the EU Parliament, Council, and Commission agreed on the proposed Transfer of Funds Regulation to implement the Financial Action Task Force’s (FATF) Recommendation 16 (Travel Rule).
What is the Travel Rule threshold in the European Union (TFR)?
The EU is taking an onerous approach to the Travel Rule, as the threshold above which the transfer of funds is subjected to the TFR will be EUR 0. For comparison, the US’s Travel Rule threshold is currently USD 3,000. Also, the FATF has previously recommended a USD/EUR 1,000 threshold for cryptocurrency transactions.
Practically speaking, EU crypto-licensed businesses will be required to collect information about the sender and recipient identity for all transactions involving the transfer of crypto assets, regardless of their amount.
There is no transfer value exemption (de minimis threshold) for transactions involving at least one company registered in an EU Member State. This, of course, does not come without challenges.
For instance, an EU exchange may deal with a foreign exchange that is not required to capture all this information. In that case, the transaction would be delayed until a full AML due diligence is performed.
Key Takeaway: The threshold above which the transfer of funds will be subject to the TFR will be EUR 0.
See also:
How Does the Travel Rule Apply to Unhosted Crypto Wallets?
It is worth exploring how the Travel Rule will apply to transactions between a cryptocurrency business and a personal wallet not hosted by a centralized service. Contrary to what many expected, the EU is not looking to impose the strictest reporting requirements on unhosted wallets. Instead, the Travel Rule will apply under the following circumstances:
Transfers above EUR 1,000 involving a user’s personal wallet: In this case, the user will be asked to verify ownership of their wallet. This only needs to happen once. All future transfers involving the same wallet address will be exempt from re-verification.
Transfers between a crypto business and a third party’s personal wallet: In all cases, the cryptocurrency business must capture information on the personal wallet. In addition, the business should apply a risk-based approach.
The rules do not apply to person-to-person transfers conducted without a provider or among providers acting on their own behalf.
When Will the TRF Apply?
Like MiCA, the TRF will take effect starting December 30, 2024.
What are the Key Takeaways for Crypto Businesses Planning to Expand Their Services to the EU Market?
Both EU Crypto Regulations are set to be enforced by 2024.
Foreign cryptocurrency businesses planning to expand to the EU in the near future by obtaining a crypto license are advised to prepare in advance.
Key priorities should be obtaining a crypto license application under the MiCA and communicating with Travel Rule software service providers.
How Can InnReg Support Your Expansion to the EU Crypto Market?
Having strong regulatory and compliance teams with EU subject-matter experts, InnReg is well-positioned to offer the following support to comply with the new EU Crypto Regulations:
Analyze the applicability of the EU Crypto Regulations;
Plan the expansion of services, including advising on capital requirements;
Prepare the EU crypto license application, including drafting all necessary documents, policies and procedures;
Submit the EU crypto license application to the relevant regulator and follow up on all requests for additional information;
Prepare all ancillary applications like “fit and proper” assessments;
Advise on ongoing disclosure requirements;
Assist with Travel Rule implementation;
Provide employee training on the EU Crypto Regulations;
Ongoing support on compliance with the EU Crypto Regulations;
Support the CCO function and other key stakeholders in establishing an effective compliance governance and risk management framework.
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