On 29 May 2024, at Blockchain Ireland Week, Gerry Cross, Director for Financial Regulation, Policy and Risk at the Central Bank of Ireland (Central Bank), updated the crypto assets industry on the Central Bank’s approach to applications for authorisation under the Markets in Crypto Assets Regulation (MiCAR).

Mr Cross confirmed that the Central Bank plans to outline its authorisation and supervisory expectations in detail at an industry event in July 2024 and that they will be published thereafter. The Central Bank intends to open its MiCAR authorisation gateway in early Q3 2024.

While further details are awaited, Mr Cross encourages firms seeking to provide services or products under MiCAR to engage with the Central Bank as soon as possible. He also took the opportunity to outline some high-level expectations for firms and to recommend steps that the industry can take now to prepare for the MiCAR authorisation process.

Approach to authorisation and key expectations

The Central Bank’s approach to assessing MiCAR authorisation applications is underpinned by consumer and investor protection risks associated with these assets and services. The assessments are guided by several perspectives, including the use case and utility, suitability for target markets and risks associated with the crypto products or services.

As a rule of thumb, the higher the inherent conduct and investor protection risks in the products offered to customers and investors, the higher the Central Bank’s expectations will be regarding a firm’s ability to manage those risks. Key Central Bank considerations/expectations include:

• Governance. Firms must be able to demonstrate an appropriate level of “substance” in Ireland and be led by a local crypto-competent executive and board with a strong grasp of the local regulatory environment. Firms must maintain high-quality governance and risk management arrangements.
• Target customer and investor base. Whether the services are retail-focused or aimed at institutional clients, shapes the Central Bank’s view of risk.
• Backed by underlying assets. It is important whether and how the crypto product/service that is issued or offered is backed by underlying assets.
• Business model sustainability. The Central Bank pays close attention to the sustainability of the business model of the crypto issuer or crypto-asset service provider. The Central Bank takes a sceptical view of business models where profitability is driven by the heavy marketing, offering, and distribution of unbacked crypto to retail customers for speculative purposes.
• Client Assets. The local firm must have full control of all client assets and prompt access to reserve assets to meet redemption demands.
• AML risks. Firms must always know who their customers are and how they are funding their crypto activities and ensure these funds are not emanating from criminal activities.
• Conflicts of interest. Conflicts of interest must be identified and managed appropriately. Firms must ensure a robust system is in place, which can proactively identify and subsequently remedy any conflicts in a timely manner so that no risks are posed to consumer interests.

Authorisation process

The Central Bank intends to ensure clarity, transparency and predictability for applicant firms looking to be authorised while maintaining the high standards the public expects for regulated financial services providers. Through that assessment, it expects firms to demonstrate, should they be authorised, that they can continue to meet the Central Bank’s supervisory expectations on an ongoing basis. Applicant firms can expect the authorisation assessments to be thorough and robust, efficient, timely and outcome-oriented, especially in the context of technological innovation where the Central Bank acknowledges that time to market is an important aspect of success.

Key factors for success

• Transparency. Applicant firms should act fully transparently and openly regarding their proposed application and the MiCAR activity they intend to undertake, including whether they are speaking with other EU regulators.
• Preparation. Applicant firms should prepare well, understand the local regulatory environment, and be appropriately resourced to engage with the Central Bank throughout the assessment process.
• Supervisibility. Authorised firms should operate with strong local autonomy and be accountable for all aspects of the local entity.
• Consumer focus. All firms – and particularly those with retail-facing business models – should ensure that securing customer interests is at the core of their business.
• Existing regulatory relationships. Where the Central Bank has existing regulatory relationships with firms, 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, application for authorisation under MiCAR is a separate process and should certainly not be assumed to be automatic.

Virtual Asset Service Providers (VASPs)

On 2 May 2024, the Central Bank published an update on the impact of MiCAR on VASPs. For further information, please see our article here.

All registered VASPs eligible to avail of the MiCAR grandfathering provisions that intend to continue to operate following the 12-month transitional period, will require a CASP authorisation from the Central Bank prior to 30 December 2025.

For firms that are not registered VASPs but are considering seeking CASP authorisation, at least ten months is required to conclude the assessment of a VASP application. Therefore, the Central Bank has indicated that such firms should focus their efforts on preparing for a CASP application rather than seeking a VASP registration at this time.  For applicant VASPs in the registration pipeline, the Central Bank will continue to assess these applications and will engage bilaterally with these firms on the progress of their applications.

How we can help

Our Financial Regulation team is already supporting firms who will be applying for authorisation under MiCAR and has extensive experience securing the registration of VASPs and the authorisation of electronic money institutions, payment institutions and other regulated Fintechs. For example, William Fry have acted for one-third of the electronic money institutions which have been granted authorisation in Ireland to date. If you are considering applying for authorisation under the MiCAR regime, please contact Shane Kelleher, Louise McNabola or your usual William Fry contact.

Contributed by Jane Balfe.