Up until a few years ago, legally speaking, cryptocurrencies were an unusual free-for-all 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 in the legal field such grey areas.”
That is about to change.
In 2020, the European Union’s executive body proposed a set of new rules to fill the legal vacuum surrounding cryptocurrency service providers. With its Markets in Crypto Assets regulation (MiCA)—part of a broader legislative package to regulate fintech—the European Commission wants to protect investors and ensure market stability by requiring that cryptocurrencies meet the same transparency, disclosure, licensing, compliance, authorization and oversight conditions as other financial products, while at the same time harmonizing the cryptocurrency legal framework across the bloc’s 27 member countries.
The new EU-wide regulation will help the cryptocurrency market build credibility, said Olivier Van den broeke, a senior associate in Baker McKenzie’s Antwerp office. “If it’s better regulated and better supervised, there will be more confidence from investors [and] financial markets in particular. That’s going to help everyone involved in the market.”
The new regulation will also introduce a new European “passport” that would allow non-EU cryptocurrency platforms and other service providers to apply for a license that will enable them to operate across all 27 member countries.
At the moment, that is not possible, said Christian Hissnauer, counsel at Clifford Chance’s Frankfurt office. Large crypto-asset trading platforms from the U.S. and Asia are “very interested in accessing the European market and especially the German market, but the problem they have is [that] they have to look into various national regimes and verify whether there is any sort of regulation,” he said.
That is why the new EU-wide license is “an important game-changer” Van den broeke said. “Because it will really open up the European markets and help currently existing players to scale up and roll out their business into other member states.”
Most lawyers interviewed for this story said the draft law, frequently referred to as MiCA, struck a reasonably good balance between consumer protection and market intervention.
“MiCA, I would say, is positive in the sense that it gives a clear framework without being extremely limiting on the use and basically existence of cryptos,” said Mayer Brown’s Kost De Sèvres.
But as in other parts of the world, the regulation’s ultimate effectiveness will depend on how well it is able to keep up with the fast-paced world of cryptocurrencies, lawyers said. The EU bill was first proposed in 2020 and will likely take effect in 2024.
“There’s definitely a risk that as soon as the regulation enters into force, there might be things that fall outside the scope of the MiCA regulation because everything is so rapidly evolving when it comes to cryptocurrencies,” Van den broeke said, adding that it’s possible EU lawmakers will have to amend the MiCA regulation right away.
A Law Firm Boon
Regardless of whether the new regulation proves effective, lawyers said that MiCA would definitely generate a lot of work for law firms in the years to come.
“When MiFID II and MiFID II were introduced, that really brought along 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 previous pieces of legislation regulating financial instruments in the EU. “The same will apply [for] MiCA.”
Although the EU has only recently proposed cryptocurrency regulation, some Western European countries have already tried to police cryptocurrency providers at the national level. Countries such as 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 stringent requirements, Hissnauer said. Under Germany’s Banking Act, companies that want to do cryptocurrency trading or custody services, or broker between cryptocurrency investors and sellers, require a German banking license and are essentially subject to 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 cryptocurrencies are still a niche area in the legal market, with the demand for legal expertise outweighing the number of firms with a true digital finance offering. But she expected it to rapidly become a “much more important area to law firms” in the coming years.
“Those [lawyer] teams that are seeing [that shift] and are ready will be the winning ones,” she said. “Because they will be moving as quickly as the market.”
In Germany, on the other hand, most international law firms have understood the importance of cryptocurrencies, Hissnauer noted. Because 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 rules, they have approached German law firms for advice.
“The big international law firms—be it the Magic Circle from the U.K., the American law firms, or the big German law firms—they all have some sort of fintech or crypto-asset expertise, or at least are trying to build that,” he said.
It’s something that clients are demanding, Hissnauer said. And it’s not only traditional cryptocurrency platforms that need their services. Their traditional clients are interested in using crypto assets as a sort of product to “tokenize” certain assets, meaning they want to convert assets into a token that can be recorded on a blockchain, he explained.
Given the varied nature of cryptocurrency legal work, large firms have taken a multidisciplinary approach.
“What we see and do at Clifford Chance, and what I also see at other firms, is that you really try to combine various levels of expertise in one group,” Hissnauer said, noting that the firm had recently established a fintech group. “That’s something which obviously all the big law firms, but also smaller boutique law firms, are looking to do.”
In Belgium too, most international firms have taken notice.
“I haven’t seen a lot of local law firms offering anything around cryptocurrencies. But the most prominent international law firms in Belgium have definitely been focusing on this particular area of law,” said Van den broeke. “Financial services lawyers and fintech lawyers have been expanding their knowledge and their capabilities to this particular area.”
Most of the legal work related to cryptocurrencies is currently regulatory advisory work—making sure that a cryptocurrency players’ activities comply with the rules already in place or those likely to be adopted in the future, and also advising non-EU clients on which national regulations will apply to their activities.
It’s also a typically cross-border and cross-practice subject. Advising on cryptocurrencies 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 to be able to really grasp it, you would also need knowledge of other regimes,” she said. “Otherwise, it will not be solid advice.”