The Director has taken this opportunity to outline what the innovators should think about when engaging with the CBI, focusing on three aspects.

The use case

It is important for the CBI to understand what the product or service that is being developed is trying to achieve and what it does for its users. The CBI and other regulators are in a problematic position in regards to dealing with unbacked crypto products that have high volatility. This position will not interfere with the CBI who will adopt a more favourable to proponents of Web3 technology. Web3 has the potential to address significant challenges faced by the current version of the social media-centred mode of the web or so-called 'platform societies' and if crypto-products have an important role to play in this, then that will be welcomed

Customer-centred focus

The Director provides that at the core of financial regulation is the idea that firms are required to act at all times in  a way that the interests of their customers, and potential customers, are served and secured.

Upfrontedness

A key aspect of building trust and credibility with the CBI is a sense of upfrontedness in dealings. If a firm does this, they can expect that the CBI will reciprocate this upfrontedness towards the firm establishing a trustworthy relationship.

Implementing MiCAR

Authorisation   

Firms that will seek to provide services or products under MiCAR are encouraged to engage with the CBI at their earliest convenience. In relation to the authorisation process, the assessment is guided through the perspectives of case and utility, the risks associated with a crypto product or service and the suitability for target markets. The key aspects of a successful authorisation application are:

• Firms should act in a fully transparent and open manner both in respect to their proposed application and the MiCAR activity they are proposing to undertake including whether they are speaking with other EU regulators.

• Firms should be well-resourced and prepared to deal with the CBI in an appropriate and timely manner throughout the assessment process. They should be aware of the local regulatory law as commence this  preparation.

• Firms should operate with a strong local autonomous entity.

• Firms should ensure that securing customer interests is at the core of their business. This is particularly the case for retail facing business models.

If a firm has an existing regulatory relationship with the CBI, its supervisory knowledge and existing risk assessment will be taken into account for firms moving from an EMI licence or VASP registration to a MiCAR authorisation. However, this will be a stand-alone process and not an automatic assumption.

Supervisory expectations  

In regards to the supervisory expectations, this will be discussed at length during the industry event in July. At this event, the CBI will map out a more clear plan as to the authorisation and supervisory process in regards to MiCAR. Initially, there is an expectation that the

• Firms must have full control of all client assets, with prompt access to the reserve assets  to meet redemption demands.
• Firms must be able to demonstrate an appropriate level of substance in Ireland and be led by a local  competent executive and board and ensure high quality governance and risk management.
• Firms must know who their customers are and that their funding of crypto activities is not emanating from criminal activities.
• Firms must ensure that systems are in place which can act quickly identify and remedy conflicts in a timely manner. The principle underpinning this expectation is that no risks are posed to customer interests through conflicts of interests. 

VASPs   

The Director addressed how MiCAR would affect VASPs.

Existing registered VASPs  operating under the VASP regime will be able to avail of a 12-month transitional period post 30 December 2024 or until their CASP¹ authorisation is granted or refused. All VASPs that wish to operate after this period will be required to obtain a CASP authorisation from CBI prior to 30 December 2025.

If a firm is not currently registered as a VASP, they should move their focus towards obtaining CASP authorisation as it takes at least 10 months to conclude the assessment of an VASP application.

Next steps

As innovators are reminded to stay within the confines of the regulatory space, being open, transparent and equipped to deal with the CBI in a timely manner will ensure reciprocity of the same kind from the CBI when it comes to MiCAR authorisation. The Hogan Lovells Dublin team is available to assist you in respect of all the topics raised above.

There will be an industry event in July where the CBI will set out some welcome clarity in regards to the supervisory expectation for MiCAR. It will update the industry on how to prepare for MiCAR authorisation. Hogan Lovells will be holding a panel discussion titled 'Passport to Europe: MiCA authorizations and what to expect' on 26 June 2024. The panel will discuss the current state of the MiCAR implementation, VASP-to-CASP transition, how Member states can prepare and the interaction with DORA and the AML package.

Authored by Eimear O'Brien and Sheharyar Nawaz.

References

1 Crypto-Asset Service Providers Crypto businesses which are currently classified as VASPs (Virtual Asset Service Providers) will be classified as CASPs (Crypto-Asset Service Providers) under MiCA.