Financial laws that every crypto company should know
This topic is a result of many misunderstandings of different projects I come cross, particularly asking questions what regulation applies to a certain business, should their business be licensed and how to be compliant with all the respective laws. Such questions are valid and important for the overall compliance of your business.
In one of my previous blogs “Should your crypto business have E-money license” I wrote about E-money and Payment institution licenses, should your business have one and which one, and which businesses can avoid it. The conclusion was that there are several different types, purposes, and natures of processing and holding (storing) electronic money. They dictate, which business should obtain a license, authorization or follow certain conditions and for what kind of transactions.
Each business is unique and may seem like it needs to follow a certain regulation or obtain a license, but when you take a closer look and understand the technical side of the project, one can often see that this is not the case. It is a well-known fact that EU licenses are expensive, demand a certain amount of money for initial capital, costs, and qualified human resources, to get it. My strategy is making a project compliant without having to obtain a respective license if it’s not necessary.
In this article, I focused on providing a list of all relevant legislation on the EU level, which applies to fintech and crypto business. Such businesses include fiat-to-crypto exchanges and trading platforms, investment funds, asset management portfolios, custodian and non-custodian wallets, utility, and security token issuers and similar projects.
The main financial and investment legislation will be listed below, after the explanation, how the EU legislative framework actually works.
European Union and its laws
European Union is a political and economic union of sovereign states, where the Member States have the primary responsibility for the regulation and their own laws for most matters within their jurisdiction, except in cases of unification and harmonization of law on the level of European Union.
Harmonization is a process of approximation of the national rules and standards across the internal EU market. The aim is to achieve more common standards, consistency of laws and practices, reduce administrative and compliance burdens for businesses, but still leaves national differences in place, especially in procedural and implementation meaning. You can think of harmonization as setting our a “result”, but the Member States has their freedom to decide how the result will be achieved. This makes national laws similar in result, but different in approach.
On the other hand unification of laws contemplates replacing national laws and basically substitutes several national legal systems (of Member States) for one unified legal system.
According to the above, acts of the EU are divided into two main types: (i) directives (harmonization method), and (ii) regulations (unification method). Regulations are directly applicable in each Member State and unify legal systems under the umbrella of one piece of legislation, whereas directives are merely instruction made by the EU to the Member States, how to regulate different areas of life, by setting minimum standards and eliminating major differences in the national laws.
For example, the 5th Anti-money laundering directive (5AMLD) is a way to harmonize the national laws. It sets out different “results”, for example, an obligation of each Member State to create and update a list of politically exposed persons, or an obligation to increase transparency measures, including enhanced access to beneficial ownership registers. However, it is up to each Member State to decide which approach to take in order to achieve a certain result.
On the other hand, a regulation unifies and supersedes the national laws and Member States have to follow the regulation as the highest legislative act.
EU Financial and Investment law
Let’s have a look in European financial and investment laws, that can also be fount in the EU commission website. Each piece of legislation is linked to a respective regulation or directive, so you can check the ones that interest you.
1. Payment services
- Payment services (PSD1) – Directive 2007/64/EC
- Payment services (PSD2) – Directive (EU) 2015/2366
- Single euro payments area (SEPA) – Regulation (EU) 260/2012
- Cross-border payments – Regulation (EC) No 924/2009
- E-money – Directive 2009/110/EC
2. Securities markets
- Markets in financial instruments (MiFID) – Directive 2004/39/EC
- Markets in financial instruments (MiFID 2) – Directive 2014/65/EU
- Markets in financial instruments (MiFIR) – Regulation (EU) No 600/2014
- Short selling – Regulation (EU) No 236/2012
- Prospectus – Directive 2003/71/EC
- Prospectus – Regulation (EU) 2017/1129
- Market abuse – Regulation (EU) 596/2014
- Market abuse – Directive 2014/57/EU
- Benchmark – Regulation (EU) 2016/2011
3. Investment funds
- Undertakings for the collective investment in transferable securities (UCITS) – Directive 2009/65/EC
- Alternative investment fund managers (AIFM) – Directive 2011/61/EU
- European venture capital funds (EuVECA) – Regulation (EU) No 345/2013
- European social entrepreneurship funds – Regulation (EU) No 346/2013
- European long-term investment funds (ELTIFs) – Regulation (EU) 2015/760
- Money market funds – Regulation (EU) 2017/1131
4. Post-trade services
- Derivatives (EMIR) – Regulation (EU) No 648/2012
- Securities financing transactions (SFTR) – Regulation 2015/2365
- Central securities depositories – Regulation (EU) No 909/2014
- Settlement finality – Directive 98/26/EC
- Financial collateral – Directive 2002/47/EC
5. Company reporting and auditing
- Accounting rules – Directive 2013/34/EU
- International accounting standards – Regulation (EC) No 1606/2002
- Transparency requirements for listed companies – Directive 2004/109/EC
- Audit Directive 2006/43/EC
- Deposit guarantee schemes – Directive 2014/49/EU
- Credit rating agencies – Regulation (EC) No 1060/2009
If you are running a crypto exchange, crypto trading platform, lending service, fund management service, investment service, an ICO/STO issuing platform, storage platforms, wallet providers, payment processing service or a similar service, then you must make sure to check all the relevant laws and regulations and comply with the rules of regulations if they dictate so.
I have been writing about E-money license and payment services in my previous blog. I will be going into details of other regulations in my further blogs. If you are curious to know more about it, stay tuned. If you need a technology lawyer, get a license or you are unsure if you should have one, contact us here, or call us.
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