The new EU rules specify 10 crypto-asset services and our MiCAR 'deep dive' series opens with a look at transfer services.
The regulation of crypto-asset service providers (CASPs) is one of the main goals of the EU Markets in Crypto-assets Regulation (MiCAR) that entered into force in June 2023. CASPs have in principle until 30 December 2024 to obtain a MiCAR licence. The most important characteristic of CASPs is that they provide one or more crypto-asset services.
The crypto-asset transfer service is one of 10 crypto-asset services covered by MiCAR. It was not included in the original MiCAR proposal of 2020 and added during the legislative process, so might not yet be on anyone's radar.
The crypto-asset transfer service is defined in article 3 (1) (26) MiCAR as: "providing services of transfer, on behalf of a natural or legal person, of crypto-assets from one distributed ledger address or account to another". This definition can be subdivided in three criteria: (i) providing for the transfer of crypto-assets, (ii) from one distributed ledger address or account to another, and (iii) on behalf of a natural or legal person.
This is potentially a very broad scope, depending on how it should be interpreted. Further context is provided in the MiCAR recitals, most importantly recital 93, where it is stated that the transfer service does not include validators, nodes or miners that might be part of confirming a transaction and updating the state of the underlying distributed ledger.
The recitals also state that when the transfer service relates to e-money tokens, it may be considered as a payment service under the EU (revised) Payment Services Directive (PSD2); in which case the transfers should be provided by an authorised payment institution. This recital suggests that if the transfer service also falls into the scope of PSD2, next to a MiCAR licence, the CASP will need either to possess a payment institution licence or engage with another licensed payment institution.
Lastly, the recitals show that the EU legislator assumes the scope to be broad by stating that many CASPs will offer some kind of crypto-asset transfer service as part of, for instance, custody and administration of crypto-assets or the exchange of crypto-assets. This suggests that transfer services will overlap in many cases with other crypto-asset services. (We will cover these services further in these series.)
Other than the above, MiCAR does not provide many details on what is considered a transfer service. MiCAR, however, partly stems from the recommendations of the Financial Action Task Force (FATF), further laid down in the FATF's updated guidance, which provides more details for a similar service (the transfer of virtual assets) with a similar definition.
In recital 8, MiCAR also refers to the FATF by specifying that the European Union should continue to support the international efforts to promote convergence in the treatment of crypto-asset services through international bodies. This does not necessarily mean that the interpretations of the FATF will be followed word for word by the European legislator and regulators. However, they may serve as a potential help to interpret the crypto-asset transfer service.
- Criteria (i) providing for the transfer of crypto-assets. On the first criteria of the MiCAR definition, the FATF Updated Guidance may be relevant at paragraph 64, which states that a transfer has likely occurred when a new party has custody or ownership of the virtual asset, the ability to pass control of the virtual asset to others or the ability to benefit from the virtual asset's use; if a person maintains unilateral control of their assets at all times, this may indicate that the service provider is not providing the transfer service.
- Criteria (ii) from one distributed ledger address or account to another. On the second criteria of the MiCAR definition, the following FATF Updated Guidance may be relevant: "the transfer service also includes transfers between and among users of the same service provider, including where a service provider uses an off-chain internal record-keeping system and the virtual asset remains in the same on-chain omnibus wallet or account."
- Criteria (iii) on behalf of a natural or legal person. Concerning the third criteria, the following FATF Updated Guidance may be relevant: "the person for whom or on whose behalf financial services may be conducted may also be referred to as a “user” or “customer” of those services. This means, for example, that an internal transfer of virtual assets by a single legal person within that legal person (that is, within units of a particular company for example) in principle would not qualify as a covered service provider."
Osborne Clarke comment
Service providers that are directly involved in the transfer of crypto-assets would seem to fall with relative ease within the scope of the MiCAR crypto-asset transfer service, provided that the parties are considered to act on behalf of clients.
MiCAR suggests that its transfer service overlaps with many other crypto-asset services. Consequently, the transfer service will probably be the most requested MiCAR service with regulatory authorities.
Providers should in particular assess whether or not their services fall within the scope of the MiCAR crypto-asset transfer service if they:
- provide custody and administration of crypto-assets on behalf of clients.
- operate a trading platform for crypto-assets.
- exchange crypto-assets either for other crypto assets or for funds.
- execute orders for crypto-assets on behalf of clients.
- place crypto-assets.
- provide portfolio management on crypto-assets.
This is the first in a series of Insights that will "deep dive" on MiCAR and crypto-asset services. If you would like to discuss any of the issues raised in this article and series or on the MiCAR , please contact the authors or your usual Osborne Clarke contact.