Already in 2020, the EC introduced its proposal for the Markets in Crypto-Assets Regulation (MiCA) as part of its digital finance strategy. MiCA provides a legal framework for crypto-asset markets within the EU by clearly defining the regulatory treatment of crypto-assets, not covered by existing financial services legislation. Early October 2022, the EC finally published the agreed text of MiCA, which is now subject to formal approval by the European Parliament.
When in force, MiCA will apply directly across all EU countries without the need for any domestic implementation laws. MiCA applies to crypto assets (i.e. cryptocurrencies, security tokens and stablecoins) with the exception of those that already fall within the scope of existing EU regulation (MiFID). More precisely, it covers the issuance, public offering, and admission to trading of crypto-assets and the provision of certain crypto-asset services in the EU.
With this new regulatory framework, the EC wants to (i) ensure legal certainty; (ii) support innovation and promote technological development in the crypto-asset sector; (iii) protect consumers, investors, and market integrity; and (iv) preserve financial stability.
Crypto-asset service providers (CASPs) must be authorised under MiCA by a competent authority in an EU member state. They are required to obtain a license before they can provide their services to their clients in the EU. CASPs will also be subject to extensive ongoing obligations in respect to (i) acting in the best interest of their clients; (ii) provide transparency in relation to costs, pricing and risks; (iii) certain prudential requirements; (iv) disclosure of environmental sustainability factors; (v) safekeeping their clients’ crypto-assets and so on.
MiCA regulation will also add to the existing Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) rules. Service providers will need to verify that the source of the asset is not subject to any sanctions and assess potential risks of money laundering or terrorism financing.
The European Banking Authority (EBA) will be required to maintain a public register for non-compliant and non-supervised CASPs. In line with EU AML regulation, CASPs whose parent company is in a high-risk country, will be required to implement enhanced controls.
The entry into force of MiCA regulation was initially expected by mid-2023. It is however likely to be delayed to 2024. There will also be a transitional regime for already existing CASPs.
Firms that plan to issue crypto-assets or provide crypto-asset services in the EU, should review MiCA carefully and consider its application to their current and future business activities.
Transfer of Funds
In addition to MiCA, the EC and the European Council are also moving ahead with the Transfer of Funds Regulation (TFR). The TFR is proposal on the identification, tracking and blocking of certain crypto transactions. It requires CASPs to collect certain information about the sender and receiver of crypto transactions. TFR makes transfers of crypto assets traceable for suspicious transactions to be easily detected and blocked if necessary. This will be the case when the information provided is either incorrect, missing, or incomplete.
Due to the risk profile of crypto-assets, the obligation to disclose will normally apply to all transfers of crypto-assets, regardless their transfer value. There is a threshold of €1,000.00 in place for traditional currency transfers. This means that for transactions where a CASP is involved (not P2P) it will result in the processing of personal data on a large scale (and potentially triggering a GDPR issue).
For transfers from CASPs to so-called ‘unhosted wallets’, verifications will only be required in case of transactions above €1,000.00. Transfers between two ‘unhosted wallets’ will fall outside the scope of the TFR for the time being. The final text of TFR regulation might be subject to further changes.
After further approval, the new framework will become applicable together with MiCA. Both TFR and MiCA are therefore expected to proceed along the same legislative timeline.
The above legal initiatives are definitely outside any legal tax framework. Income tax remains largely a domestic legal matter, whereby each Member State will need to decide (eventually) on its own tax treatment of cryptocurrencies.
However, it is a fact that the EC has already taken several initiatives to improve the exchange of information with the tax authorities (e.g. DAC 8). MiCA and TFR will further contribute to financial transparency on exchanges in crypto-assets and provide the EU with a more solid framework.
An increase in exchange of information often goes hand in hand with an increase in tax claims…