On 9 August 2023, the Minister for Finance, Michael McGrath, launched a Public Consultation on the exercise of national discretions contained within the Markets in Crypto-Assets Regulation ("MiCA"). While EU Regulations have direct effect in Ireland, within MiCA, there are a number of provisions to which full harmonisation does not apply and Member States have discretion in how they apply these provisions. It is these provisions which are the subject of the Consultation Paper ("Paper").
Below is Matheson's response to the Paper as submitted to the Department of Finance. In addition, partner Ian O'Mara and professional support lawyer Claire Scannell recently discussed the contents of Matheson's submission in a Matheson Talks Financial Regulation Podcast, which can be found here.
The comments we make below discuss and analyse a possible way forward in terms of how Ireland should transpose MiCA into its national law in a way which provides legal and regulatory clarity, a well sign-posted transitional period for market participants, and ensures Ireland's international reputation as a robust jurisdiction for financial services regulation continues.
Article 88(3) - Public disclosure of inside information
Article 88 is part of the new market abuse framework that will apply to crypto-asset trading under MiCA. Article 88(3) states that when an issuer, offeror or someone seeking admission to trading of crypto-assets has delayed the disclosure to the public of inside information, they are obliged to inform the National Competent Authority ("NCA") (which in Ireland will be the Central Bank of Ireland ("Central Bank")) about the delay of disclosure and provide an explanation. However it also contains a discretion that allows Member States to provide that a record of such an explanation is to be provided only upon the request of the NCA. The Paper asks whether the discretion in Irish law should be exercised and if so, how it should be transposed.
This discretion is identical to the one set out under Article 17 of the Regulation on Market Abuse ("MAR"), which applies to insider information on traditional securities and financial instruments rather than insider information on crypto-assets. The Department of Finance chose not to exercise the equivalent national discretion when transposing MAR into Irish domestic law in 2016 and on balance it appears reasonable to assume the Department of Finance should also opt not to exercise the discretion provided in Article 88(3) of MiCA in order to ensure consistency across market abuse law for market participants.
In the event that Ireland chooses not to implement this discretion, the Irish law position will default to that set out in Article 88 of MiCA – namely that an explanation on any delay related to the disclosure of inside information must always be provided by the person concerned to the NCA. This is arguably a more stringent standard than the discretion provided for by Article 88(3) of MiCA in any case and therefore, a better rule for the regulation of crypto-markets in Ireland.
Article 111(1) - Administrative penalties and other administrative measures
Article 111(1) of MiCA allows Member States to provide for NCAs to have the power to take appropriate administrative penalties and other administrative measures in relation to a number of infringements where the associated infringement is already subject to criminal penalties set down in national law. Article 111(6) of MiCA permits Member States to supplement the powers given in 111(2) to (5) and allows Member States to impose higher levels of penalties than those provided for in the Article.
The Paper notes however that in respect of the criminalising of certain breaches, it is important that an option exists for such matters to be pursued by the Central Bank as administrative breaches and for the Central Bank to be able to use its supervision and enforcement powers under the Central Bank (Supervision and Enforcement) Act 2013 ("2013 Act") in respect of such breaches. The Paper asks whether the discretion should be exercised and how it should be transposed.
This discretion is identical to the one set out in various other EU financial services regulations, such as (for example) MAR or the more recent EU Crowdfunding Regulation 2020/1503.
We note that when transposing EU financial services law into national law, Ireland has consistently opted (i) not to gold-plate the already stringent criminal penalties set out down in EU law frameworks and (ii) has generally inserted an enabling provision in national transposition measures which allows the Central Bank to make full use of its supervision and enforcement powers contained in the 2013 Act.
Given this settled precedent, we suggest it makes sense for the Department of Finance to adopt a similar approach for MiCA and not to avail of the discretions offered under Article 111(1). Instead, we would suggest that the Central Bank be able to enforce breaches of MiCA primarily through its existing supervision and enforcement powers under the 2013 Act and for any criminal sanctions to be adopted in Irish transposition measures for MiCA to simply cross-reference the penalties already set down in Article 111 of MiCA itself. Regulation 9 of S.I. No. 702/2021 – the European Union (Crowdfunding) Regulations 2021 is a good example of how the Central Bank's existing powers can be adapted to apply the administrative penalties set out at EU law level in Irish transposition measures and we submit that there is merit in following this approach for MiCA also.
Article 143(3) - MiCA transition period
Article 143(3) of MiCA provides a default transition period for Crypto-Asset Service Providers ("CASPs") that are providing their services in accordance with "applicable law" prior to Title II of MiCA entering into force on 29 December 2024. The default transition period permits these CASPs to continue to provide services for up to 18 months after the date of application of MiCA (i.e. to June 2026), or until they are granted or refused an authorisation, whichever is sooner.
While the default transition position in MiCA is as stated above, Article 143(3) provides discretion for Member States to either not apply this transition period at all or to reduce its duration in circumstances where they consider that their existing national regulatory framework is "less strict" than that set out in MiCA for CASPs. The Paper asks whether the discretion should be exercised in Irish law, how it should be transposed and how long should the transition period be.
Almost all of the multinational groups operating in this sector in Ireland have, mainly due to supervisory expectations set by the Central Bank in the years prior to MiCA being finalised, structured their Irish operations across two legal entities incorporated in Ireland, with the result that one Irish group company acts as a "fiat currency on-ramp/off-ramp" (and typically is authorised as an e-money institution (or "EMI" and which allows it to issue e-money and to provide regulated payment services under Payment Services Directive 2) by the Central Bank under the European Communities (Electronic Money) Regulations 2011); and another related group company provides "virtual asset services" (and is registered as a Virtual Asset Service Provider (or "VASP") under Part 9A of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) ("CJA 2010").
Where this is done, both Irish companies in that group tend to service the same customers in Ireland and (where the regulatory environment permits, in other EEA countries too) as part of the wider global platform operated by their parent group, with the delineated role and status of each entity clearly demarcated in customer-facing terms and conditions provided to customers on the global platform's regional website. As of August 2023, according to the Central Bank's online registers, we note that there are only two groups that have an Irish subsidiarity that holds an EMI authorisation and a VASP registration concurrently – the vast majority have opted for a structure where their operations are structured across two Irish subsidiaries, one an EMI and the other a VASP.
It would therefore be logical for the Department of Finance to recognise in the Irish transposition measures the particular operational structure that has developed in this sector in Ireland, arising from prudent supervisory requirements set out by the Central Bank at a time when there was no prudential framework in Irish or EU law to supervise such business models and to provide such groups with a flexible pathway to become authorised under CASPs under MiCA.
Suggested wording of transposition measure for transition period
This could be easily accommodated by the Irish transposition measures enabling any company or "group of companies" (as that term is defined in Section 8 of the Companies Act 2014) established in Ireland on or before 29 December 2024 and which were (i) registered as a VASP under Part 9A of the CJA 2010 or (ii) authorised as a payment institution under the European Union (Payment Services) Regulations 2018 or as an e-money institution under the European Communities (Electronic Money) Regulations 2011 and which were providing services wholly or mainly to support the provision of virtual asset service providers and/or their customers within the European Economic Area, to be deemed transitionally authorised for the duration of the transition period set down by Article 143(2) of MiCA.
In general, given the higher regulatory threshold placed on EMI entities compared to VASPs under existing financial services law, almost all of the multinational groups with subsidiaries operating from Ireland in this sector should be able to organise themselves in a reasonable period of time during the transition period to meet the authorisation standards expected of CASPs by Article 62 of MiCA. We make this argument on the basis that at least one of their Irish subsidiaries – typically their EMI – is already supervised under a prudential framework which is based in EU law and has similar, if not completely identical, authorisation requirements. The main challenge for these EMIs will be to implement additional compliance policies and procedures that meet the bespoke authorisation requirements for CASPs set out in Article 62 and the prudential and conduct requirements set out in Chapters 2 and 3 of Title V of MiCA (discussed later below) for CASPs.
Such a flexible approach would preserve Ireland's reputation as a centre for well-regulated financial service providers conducting cross-border activity from Ireland into the EEA; and it would minimise the possibility of existing Irish operations in the virtual assets sector having to move elsewhere in the EEA for their business operations solely due to limitations in the legal drafting of the Irish transposition measures required to give effect to the transition period.
A flexible transition period that allows groups in the sector already operating from Ireland to avail of it without necessarily predetermining at the outset which of their Irish entities would be best suited to hold the CASP authorisation on an ongoing basis. We expect this would also make sense for the Central Bank in the sense that it would most likely result in the Central Bank having fewer legal entities to supervise under MiCA if all such activities can be sensibly housed, over the course of the transition period, within one legal entity while a more robust internal governance and organisational structure aligned to MiCA requirements is implemented by that entity.
The above point in relation to flexible transitional measures for groups is without prejudice to the entirely valid concern that firms in the virtual assets sector need to do more to address risks arising from their various business activities and to do so in a timely manner now that MiCA is settled and the regulatory expectations clarified.
IOSCO, the international securities regulator, has noted that many CASPs typically engage in multiple activities under "one roof" and has recommended that CASPs need to have effective governance and organisational requirements to effectively address and mitigate issues on conflicts of interest from vertical integration, including the possible need for measures such as legal disaggregation and separate registration1. Our suggested approach to the wording of the transition measures here to accommodate groups does not prevent the Central Bank from scrutinising and challenging groups on these points about their business models during any transition period.
In fact, the main purpose of the transition period should be to give groups and the Central Bank adequate time to clarify these important issues once and for all. Given their complexity, an 18 month transition period does seem appropriate for firms already in the Irish market seeking to transition to CASP status under MiCA. Failure to do so successfully will result in those groups ultimately not obtaining a CASP authorisation on a permanent basis for some or all of their Irish subsidiaries once the transition period eventually expires. This is a good incentive for market participants to seek to comply with MiCA promptly, while recognising it cannot be done instantly without risking potential disruption to valued services which their customers rely on.
Nonetheless, it would be short-sighted for the Irish legal measures which give effect to the MiCA transition period to preclude the possibility of those groups already possessing an Irish EMI availing of the MiCA transitional measures simply because the EMI entity in the group structure has not itself held a VASP registration beforehand.
In relation to those groups that have an Irish VASP but which lack an Irish subsidiary that is already authorised as an EMI (of which there are only two in Ireland as of August 2023), the Department of Finance and Central Bank may well conclude that these groups, in the round, have been subject to "less strict" supervision than what MICA contemplates for CASPs and so determine that the transitional period for such groups could be shortened on policy grounds in accordance with Article 143(2) of MiCA.
Even if this were the case, groups in this category would still likely need some transitional period precisely because they will have more ground to cover prior to being granted a permanent authorisation under Article 63 of MiCA. Groups in this category will need to hire more local staff, develop their internal governance arrangements to encompass a full three lines of defence model, and build out their compliance and risk management frameworks (amongst other tasks) if they are to successfully transition to a full CASP authorisation under MICA. In our experience, having advised our clients on a significant proportion of the VASP and EMI authorisations undertaken in Ireland over recent years, these projects arguably need a 12-18 month lead-in time at a minimum.
Therefore if a shortened transitional timeline were to be introduced for those groups who only have an Irish company with a VASP (and lack an EMI), then the terms and nature of any truncated transition period likely to be on offer must be communicated to those groups as a priority, and certainly well before the MiCA transition period even starts on 30 December 2024, so as to give them as much time as possible to prepare themselves accordingly. There is nothing preventing the Central Bank and Department of Finance from communicating their policy intentions on this point even if the relevant transposing legislation may take some time to draft and then enact. Otherwise, we suggest the default transition period set down in Article 143(2) of MiCA also be applied to these groups to ensure they have adequate time to prepare.
Finally, as part of its communications to industry, the Central Bank and Department of Justice should also signal as to whether or not it is willing to register any new VASPs under Part 9A of the CJA 2010 between now and MiCA entering into force because it is clear (from related amendments made to the 4th & 5th EU AML Directives by the revised Transfer of Funds Regulation2) that Ireland will soon be obliged to repeal wholesale Part 9A of the CJA 2010, which is the framework underpinning the regulation of VASPs in Irish law at present.
Due to the amendments made by the EU in the revised Transfer of Fund Regulations in tandem with the enactment of MiCA, a huge question mark now stands over the future status of that domestic Irish legislation and to the best of our knowledge no public statement from the Irish government has been made on its future status to date. This point was not addressed in the Paper but is an additional one which really needs early clarification for all parties interested in this area, not least those firms contemplating establishing operations in Ireland between now and MiCA entering into force during 2024.
Article 143(6) - Simplified authorisation procedure
Article 143(6) contains a provision that Member States may apply a simplified procedure for applications for authorisation by CASPs under Articles 62 and 63 of MiCA by entities that on 30 December 2024, were authorised under national law to provide crypto-asset services. This provides an opportunity for NCAs that have an existing crypto-asset regulatory regime to leverage information already gathered, thus simplifying the procedure and potentially shortening the authorisation processing time. Under this procedure, the Central Bank will still need to be satisfied that all prudential and conduct requirements set out in Chapters 2 and 3 of Title V of MiCA are being complied with before full authorisation is granted.
For context here, Chapter 2 of Title V sets down prudential obligations for all CASPs regardless of business model, such as the obligation to act honestly, fairly and professionally in the interests of clients; prudential requirements; governance arrangements; safekeeping of clients' crypto-assets and funds; complaints-handling procedures; conflicts of interest; outsourcing; and wind-down planning. Chapter 3 of Title V sets down conduct obligations in respect of specific crypto-asset services provided by CASPs depending on their particular business model, such as when providing custody and administration of crypto-assets on behalf of clients, operating a trading platform for crypto-assets, or receiving and transmitting orders for crypto-assets on behalf of clients.
The Paper asks whether the discretion should be exercised, how should current regimes be evaluated and by whom and how should divergent opinions on the compliance of current regimes be challenged. The Paper seeks responses on whether or not these discretions should be availed of, how they should be availed of and a clear reasoning for the positions.
We think it would be better for the Department of Finance not to exercise this discretion, on the grounds that it would be easier to treat all groups in this sector on a level playing field basis by having a single standardised authorisation process for all concerned. Furthermore, it is difficult to see how the current VASP regime set out in the CJA, viewed in isolation, fully aligns with the requirements that a CASP will be expected to meet under Chapters 2 and 3 of Title V of MiCA once it enters into force.
We note that the ESMA is currently consulting on authorisation forms for CASPs under MiCA and we think it would be simpler to work off the harmonised authorisation documents that are now being consulted on at EU level, rather than have bespoke Irish licensing processes and documentation to consider under a simplified process. Even without availing of this simplified authorisation process, the Central Bank can still opt to calibrate its assessment of each firm's authorisation application depending on the quality of the application submitted and taking account its familiarity with the firm or group concerned. Arguably this does not need to be prescribed in any transposing measures set down by the Department of Finance in legislation.
Ultimately, we think the better approach here would be for the Department of Finance and the Central Bank to give the sector a clear, public signal as to whether the transition measures provided for under Article 143 of MiCA will be sufficiently flexible and provide sufficient time to enable them to reorganise and consolidate their existing activities into entities which have substance and are capable of meeting the authorisation requirements and new conduct standards expected of CASPs under MiCA on an ongoing basis after any transition period ends. The Central Bank's approach to authorisations could also be clarified in a Dear CEO Letter addressed to firms in the sector.
2Article 38 of Regulation (EU) 2023/1113 mandates a number of legislative amendments to the CJA 2010.