As the European Union strides towards comprehensive crypto regulation, MiCAR stands out as a cornerstone of this new landscape. However, the true impact of MiCAR, alongside other critical regulations like the Transfer of Funds Regulation (TRF) and the Digital Operational Resilience Act (DORA), will only begin to unfold in 2025. To delve deeper into these transformative changes, Mihhail Sherle, Head of Legal Practice at fintech law firm Gofaizen & Sherle, provides invaluable insights into what the future holds for the EU crypto market.
Understanding MiCAR
Companies have generally acclimated to MiCAR and comprehend its primary frameworks. However, the application of MiCAR will develop distinctly across various countries starting in 2025. Although MiCAR standardizes key regulatory principles for crypto companies across the EU, each member state will adopt its local legislative acts, resulting in unique legislative frameworks within MiCAR’s scope.
Moreover, MiCAR is not the sole regulation crypto companies must consider. Other significant legislative measures include the Transfer of Funds Regulation (TRF) and the Digital Operational Resilience Act (DORA).
The Transfer of Funds Regulation (TRF)
The revised Transfer of Funds Regulation (TFR), published on 9 June 2023, extends the obligation to accompany transfers of crypto-assets with detailed information about the originators and beneficiaries to crypto-asset service providers, in alignment with the Financial Action Taskforce (FATF)’s recommendations.
For crypto companies, this necessitates the implementation of additional frameworks to ensure compliance, given the anonymous nature of crypto transactions. The required information includes the originator’s name, distributed ledger address, account number, address, official personal document number, customer identification number, or other equivalent identifiers. This information must be securely transmitted in advance or concurrently with the transfer to the recipient’s financial institution or virtual asset service provider (VASP).
Additionally, the TFR mandates procedures to detect and address missing or incomplete information, requiring internal policies, procedures, and controls to prevent, detect, and investigate money laundering and terrorist financing. Compliance will demand specialized software solutions, blockchain analytic tools, and robust compliance teams. The TFR, alongside MiCAR, will be fully implemented by the end of 2024.
The Digital Operational Resilience Act (DORA)
Another critical regulation is DORA, which applies to a broad range of financial entities, including banks, payment institutions, and crypto companies, specifically CASPs. DORA aims to ensure these entities are prepared to handle ICT-related risks and incidents, enhancing the financial system’s overall stability and resilience. By implementing robust ICT risk management practices, conducting regular testing, and collaborating with regulators and peers, crypto companies can better protect themselves and their clients from cyberattacks and other ICT disruptions. DORA is expected to be enforced starting January 2025.
Practical Challenges and Future Outlook
The practical application of these regulations will present challenges, especially given the local variations across countries. Even now, the Travel Rule is interpreted differently across jurisdictions, leading to legal uncertainties that companies must navigate.
Currently, crypto companies and VASPs are actively preparing for MiCAR’s implementation, which is a significant undertaking. However, the real changes will start in 2025, when MiCAR is put into practice and each EU country’s regulators begin to enforce it. Key questions include whether regulators will be market-friendly and how specific areas, such as Portfolio Management, will be governed. Each regulator may adopt a unique approach to risk management under MiCAR.
Another consideration is whether MiCAR will maintain its intended technological neutrality, avoiding potential restrictions at the code and technology levels. These aspects will become clearer as MiCAR’s application is analyzed in practice.
The comprehensive regulation coming into effect for crypto companies in the EU in 2025 signifies their full integration into the EU financial system. It also highlights the growing importance of crypto infrastructure within traditional finance, accompanied by stricter regulations and increased transparency in crypto-related processes. This new regulatory era will undoubtedly shape the future of the crypto market in the EU, driving innovation and establishing a robust framework for sustainable growth.
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Source: Bitcoin
