Until a few years ago, legally speaking, cryptocurrencies were common practice in many European countries.
“There was no regulation at all,” Nicolette Kost De Sèvres, a partner at Mayer Brown in Paris, told Law.com International. “It is rare that we see such gray areas in the legal field.”
That is about to change.
In 2020, the executive body of the European Union proposed a set of new rules to fill the legal vacuum surrounding cryptocurrency service providers. with his Regulation of markets in crypto assets (MiCA)—part of a broader legislative package to regulate fintech—the European Commission wants to protect investors and ensure market stability by requiring cryptocurrencies to meet the same transparency, disclosure, licensing, compliance, authorization and supervision conditions as other financial products, while harmonizing the legal framework of cryptocurrencies in the 27 countries of the bloc member countries.
The new EU-wide regulation will help the cryptocurrency market build credibility, said Olivier Van den broeke, a senior associate at Baker McKenzie’s Antwerp office. “If it is better regulated and better supervised, there will be more confidence on the part of investors [and] financial markets in particular. That will help everyone involved in the market.”
The new regulation will also introduce a new European “passport” that would allow non-EU crypto platforms and other service providers to apply for a license allowing them to operate in all 27 member countries.
At the moment, that’s not possible, said Christian Hissnauer, a lawyer at the Frankfurt office of Clifford Chance. The big US and Asian crypto-asset trading platforms are “very interested in accessing the European market and especially the German market, but the problem they have is [that] they have to investigate various national regimes and check if there is any kind of regulation,” he said.
That’s why the new EU-wide license is “a major game changer,” Van den Broeke said. “Because it will really open up European markets and help existing players today to expand and roll out their business in other member states.”
Most lawyers interviewed for this article said the bill, often referred to as the MiCA, struck a reasonably good balance between consumer protection and market intervention.
“MiCA, I would say, is positive in the sense that it provides a clear framework without limiting the use and basically the existence of crypto too much,” said Kost De Sèvres of Mayer Brown.
But as in other parts of the world, the ultimate effectiveness of the regulation will depend on how well it can keep up with the fast-paced world of cryptocurrencies, the lawyers said. The EU bill was first proposed in 2020 and is likely to take effect in 2024.
“There is definitely a risk that as soon as the regulation comes into force, there will be things that fall outside the scope of the MiCA regulation because everything evolves very quickly when it comes to cryptocurrencies,” Van den broeke said, adding that it’s possible. EU lawmakers will have to amend the MiCA regulation immediately.
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Regardless of whether the new regulation proves effective, the lawyers said that MiCA would definitely create a lot of work for law firms for years to come.
“When MiFID II and MiFID II were introduced, that really brought a lot a lot a lot of work,” said Pien Kerckhaert, a partner in Dentons’ banking and finance practice group in Amsterdam, referring to the adoption of two earlier laws regulating financial instruments in the EU. “The same will apply [for] Mica.”
Although the EU has recently proposed the regulation of cryptocurrencies, some Western European countries have already attempted to police crypto providers at the national level. Countries like the Netherlands and, more recently, Belgium, for example, have used existing EU anti-money laundering rules to introduce a registration requirement for virtual currency service providers. “These are almost disguised licensing requirements for these virtual currency service providers,” Van den broeke said.
Germany, meanwhile, has been something of an outlier, with cryptocurrencies already subject to strict requirements, Hissnauer said. Under the German Banking Law, companies wishing to perform cryptocurrency custody or trading services, or intermediaries between cryptocurrency investors and sellers, require a German banking license and are subject to essentially the same requirements as investment firms.
“Germany is, when it comes to crypto assets and cryptocurrencies, a fully regulated country,” he said.
Law firm interest in cryptocurrencies similarly varies from country to country. In France, Kost de Sèvres said crypto remains a niche area in the legal market, with a demand for legal expertise outpacing the number of companies with a true digital finance offering. But he expected it to quickly become a “much more important area for law firms” in the years to come.
“Those [lawyer] teams that are watching [that shift] and be ready you will be the winners”, he said. “Because they will move as fast as the market.”
In Germany, on the other hand, most international law firms have understood the importance of cryptocurrencies, Hissnauer noted. As many international crypto custody and trading platforms have wanted to access the German market and required a license to do so under the country’s national regulations, they have approached German law firms for advice.
“The big international law firms, whether it’s the UK Magic Circle, the American law firms or the big German law firms, all have some sort of fintech or crypto-asset background, or are at least trying to build that. ” he said.
It’s something customers demand, Hissnauer said. And it’s not just traditional cryptocurrency platforms that need your services. Its traditional customers are interested in using crypto assets as a kind of product to “tokenize” certain assets, meaning they want to turn assets into a token that can be registered on a blockchain, he explained.
Given the varied nature of cryptocurrency legal work, large companies have taken a multidisciplinary approach.
“What we see and do at Clifford Chance, and what I see at other companies as well, is you really try to combine various levels of expertise into one group,” Hissnauer said, noting that the company had recently established a fintech group. “That’s something that obviously all the big law firms, but also the smaller boutique law firms, are looking to do.”
Also in Belgium, most international companies have taken notice.
“I haven’t seen many local law firms that offer anything crypto related. But the leading international law firms in Belgium have definitely focused on this particular area of law,” Van den broeke said. “Fintech lawyers and financial services lawyers have been expanding their knowledge and capabilities into this particular area.”
Most of the legal work related to cryptocurrencies is currently regulatory advisory work, making sure that the activities of cryptocurrency players comply with the rules already in place or those that are likely to be adopted in the future, and also advising clients. outside the EU on which national regulations it will apply to its activities.
It is also a typically cross-border and cross-cutting issue. Cryptocurrency advice requires knowledge of a variety of investment services regulations, banking regulations, and knowledge of other EU financial regulations and customer due diligence rules, Dentons’ Kerckhaert said.
“You can read the MiCA regulation and interpret it, but in order to really understand it, you would also need knowledge of other regimes,” he said. “Otherwise, it won’t be sound advice.”