MiCA's Approach to Beneficial Ownership and Its Implications for KYC Procedures

The Markets in Crypto-Assets (MiCA) regulation is set to transform the crypto landscape across the European Union (EU), introducing a comprehensive regulatory framework that targets not only the stability of the crypto asset markets but also the integrity of financial systems. This framework is particularly significant for any crypto asset trading platform, as it mandates adherence to transparency and governance standards to prevent market abuse and ensure the integrity of crypto-assets.

In this article, we explore how MiCA shapes the expectations for crypto asset service providers (CASPs) in addressing beneficial ownership, its implications for KYC compliance, and the broader impact on the crypto markets.

Table of Contents

• Introduction to MiCA
• Understanding MiCA and Its Relevance to Beneficial Ownership
• Scope and Application of MiCA
• Key MiCA Concepts Impacting KYC and Beneficial Ownership
• Implications for Crypto Businesses
• MiCA Authorization Requirements Related to Beneficial Ownership
• Challenges in Implementing Beneficial Ownership Controls
• Timeline for Implementation
• Interaction with Other Legislative Measures
• Best Practices for MiCA-Ready Beneficial Ownership Compliance

Introduction to MiCA

The Markets in Crypto-Assets (MiCA) regulation is a comprehensive regulatory framework established by the European Union to govern crypto-assets in Europe. MiCA aims to provide a uniform European legal framework for crypto-asset issuers and service providers not covered by existing financial services regulations. The regulation applies to the issuance, public offering, admission to trading, and provision of services related to crypto-assets. MiCA defines crypto-assets as digital representations of value or rights that can be electronically transferred and stored using distributed ledger technology or similar technology.

By establishing clear rules and guidelines, MiCA seeks to enhance transparency, consumer protection, and financial stability within the crypto markets. This regulation is a significant step towards creating a more secure and trustworthy environment for both investors and service providers in the European Union.

Understanding MiCA and Its Relevance to Beneficial Ownership

The MiCA regulation establishes uniform regulatory frameworks for crypto asset services, promoting financial stability and consumer protection while mitigating risks related to money laundering, market manipulation, and terrorist financing. Unlike previous fragmented national rules, MiCA applies across all member states of the European Union, creating a single rulebook for crypto assets.

MiCA explicitly integrates beneficial ownership checks into the broader framework for KYC and anti-money laundering (AML) obligations for:

• Crypto asset service providers (CASPs)

• Crypto asset issuers

• Trading platforms facilitating crypto asset transfers

Identifying the real individuals behind legal persons, accounts, and complex ownership structures becomes a legal requirement, building on AML frameworks already familiar to financial institutions.

Scope and Application of MiCA

MiCA applies to crypto-asset service providers (CASPs) operating within the European crypto industry. The regulation distinguishes four main types of crypto-assets: e-money tokens, asset-referenced tokens, security tokens, and utility tokens. As of 30 June 2024, only the provisions pertaining to e-money tokens and asset-referenced tokens have taken effect. MiCA does not apply to crypto-assets that qualify as financial instruments, deposits, funds, securitization positions, non-life or life insurance products. The regulation introduces liability against an issuer of asset-referenced tokens for the information contained in the white paper.

This clear categorization helps in delineating the regulatory requirements for different types of crypto-assets, ensuring that each category is appropriately governed. By doing so, MiCA aims to mitigate risks and enhance the integrity of the crypto asset markets.

Key MiCA Concepts Impacting KYC and Beneficial Ownership

1. Definition of Beneficial Ownership

MiCA draws heavily from the Fourth and Fifth Anti-Money Laundering Directives (AMLD4/AMLD5) definitions. Beneficial owners are:

• Natural persons who ultimately own or control a customer.

• Individuals on whose behalf a transaction or activity is being conducted.

This includes those who exercise control via ownership of legal entities or through other means, including portfolio management structures or voting rights.

2. Enhanced Transparency and Disclosure Requirements

Under crypto assets regulation, CASPs must ensure robust transparency and disclosure requirements. This means:

• Verifying beneficial ownership during customer onboarding.

• Maintaining up-to-date information about beneficial owners.

• Reporting suspicious activity related to unidentified or unverifiable beneficial owners.

A consultation package, detailing a series of consultation papers related to the MiCA Regulation, has been published by ESMA to inform stakeholders about the drafting of technical standards and guidelines necessary for implementing various provisions of the regulation.

These measures extend beyond just identifying corporate clients and impact retail customers involved in crypto asset markets.

3. Strengthening KYC and Due Diligence Obligations

To provide crypto asset services under MiCA, CASPs must implement:

• Risk-based KYC procedures adjusted for high-risk clients and transactions, including obtaining prior authorisation from a National Competent Authority (NCA) as part of the compliance process.

• Identity verification processes aligning with applicable national law and MiCA’s technical standards.

• Enhanced due diligence (EDD) measures when beneficial ownership structures are opaque or linked to high-risk jurisdictions.

Implications for Crypto Businesses

New Standards for Customer Onboarding

Customer onboarding processes for crypto asset trading platforms, custodian wallet providers, and electronic money institutions must adapt to the regulatory requirements for operating trading platforms under the MiCA framework. These platforms must:

• Collect beneficial ownership data at onboarding.

• Use distributed ledger technology where applicable to store customer information securely.

• Prevent market abuse by verifying security access protocols and monitoring unusual crypto asset transfers.

More Scrutiny for Certain Crypto Asset Service Providers

Particular services—such as issuing e money tokens by an electronic money institution, facilitating asset referenced tokens, or managing crypto asset white papers—will undergo increased scrutiny.

These crypto services will need to demonstrate compliance with beneficial ownership verification requirements before obtaining authorization from the competent authority or national competent authorities.

Compliance and Market Stability

By enforcing rigorous beneficial ownership checks, MiCA aims to:

• Prevent money laundering and terrorism financing.

• Enhance the resilience of the international financial system.

• Foster greater consumer trust in the crypto assets ecosystem.

For compliant businesses, this presents a competitive advantage, distinguishing legitimate actors from fraudulent operations.

MiCA Authorization Requirements Related to Beneficial Ownership

Service providers authorised under MiCA must satisfy specific conditions relating to beneficial ownership, including:

• Providing complete and verifiable beneficial ownership data in license applications.

• Ensuring transparency in marketing communications relating to crypto assets.

• Facilitating regulatory inspections by maintaining real-time access to KYC records stored electronically.

Delegated acts will provide further specifications and guidelines regarding significant issuers of stablecoins and e-money tokens, enhancing the regulatory framework's efficiency and the Commission's authority to define key aspects of compliance.

CASPs who fail to comply risk:

• Denial or revocation of authorization.

• Administrative penalties imposed by the markets authority or European Securities and Markets Authority (ESMA).

• Reputational damage that could undermine market position.

Challenges in Implementing Beneficial Ownership Controls

1. Complex Ownership Structures

Involving alternative investment fund managers, investment firms, or multi-layered legal entities complicates beneficial ownership verification.

CASPs must be prepared to:

• Uncover indirect control.

• Manage layered ownership through enhanced KYC.

2. Cross-Border Onboarding

Customers from different jurisdictions require CASPs to:

• Adapt onboarding flows based on local beneficial ownership registries in each member state.

• Align with international standards while respecting applicable national law.

3. Data Protection and Privacy

Balancing public disclosure obligations with data privacy laws, such as GDPR, demands that CASPs handle customers’ data and stored electronically records responsibly.

Additionally, the regulatory developments published by ESMA include a consultation package detailing a series of consultation papers related to the MiCA Regulation, which inform stakeholders about the drafting of technical standards and guidelines necessary for implementing various provisions of the regulation.

Distributed Ledger Technology Integration

Integrating identity verification solutions compatible with distributed ledger technology enhances transparency but requires investment in digital operational resilience.

Digital finance, as part of this integration, ensures that financial systems are robust and compliant with evolving regulatory frameworks.

Timeline for Implementation

The MiCA Regulation will be implemented in phases. The deadline of December 30, 2024, is recognized as a key implementation date for MiCA. Since 30 June 2024, any public offering or admission to trading of e-money tokens and asset-referenced tokens is subject to a strict regulatory regime. The regulatory regime applies to e-money tokens and asset-referenced tokens, but not to other types of crypto-assets. By July 2026, all CASPs must achieve comprehensive compliance with MiCA requirements. CASPs must secure appropriate licenses from their National Competent Authority and implement robust security protocols and establish operational standards that prioritize consumer protection and transparency.

This phased approach allows CASPs to gradually adapt to the new regulatory environment, ensuring that they have sufficient time to implement necessary changes and achieve full compliance.

Interaction with Other Legislative Measures

MiCA’s requirements cannot be considered in isolation, and firms must be aware of other legislative and regulatory requirements. The Digital Operational Resilience Act (DORA) becomes applicable on 17 January 2025 and sets out requirements for digital operational resilience. The Transfer of Funds Regulation becomes applicable on 30 December 2024 and introduces an obligation for crypto-asset service providers to collect and make accessible data on the originator and beneficiary of transfers. MiCA will require significant efforts in a short timeframe, and firms should start adapting to the new regime. Non-EU firms should consider the complexity of the issues and the limited reverse solicitation exemption. The European Commission is still adopting secondary legislation for technical and operational details.

By understanding and integrating these various legislative measures, firms can ensure comprehensive compliance and enhance their operational resilience in the evolving regulatory landscape.

Best Practices for MiCA-Ready Beneficial Ownership Compliance

1. Early Risk Assessment: Identify risks associated with complex ownership structures before customer onboarding.

2. Automated Verification Tools: Leverage RegTech and identity solutions for real-time beneficial owner verification.

3. Clear Policies and Training: Implement internal policies ensuring all departments understand beneficial ownership obligations.

4. Dynamic Customer Monitoring: Establish transaction monitoring systems that detect anomalies and trigger alerts for suspicious activity.

5. Regular Reviews: Update beneficial ownership records periodically or when triggers like changes in company structure occur.

6. Transparent Disclosures: Ensure full disclosure of beneficial ownership in all marketing communications relating to crypto assets.

7. Crypto Asset White Paper: Issuers must create a crypto asset white paper that meets specific content criteria established by the MiCA Regulation. This white paper should be clear, fair, and notified to national authorities prior to public offerings or trading admissions.

Conclusion

The MiCA regulation marks a watershed moment for the crypto industry across the EU, emphasizing the centrality of beneficial ownership verification in promoting financial stability, anti-money laundering enforcement, and market integrity.

Crypto asset service providers must update their KYC procedures, onboarding processes, and internal controls to comply with MiCA’s requirements. Those that act now to embrace these changes—by investing in technology, training staff, and revising policies—will not only satisfy the new regulatory framework but also position themselves as trusted players in an increasingly mature market.

The successful integration of beneficial ownership verification into daily operations isn’t just about compliance—it’s about securing a future in the evolving world of crypto assets. The European Banking Authority will play a crucial role in ensuring compliance by overseeing e-money tokens and asset-referenced tokens under the MiCA Regulation, imposing additional requirements on issuers deemed 'significant' based on specific criteria.

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References

• European Commission. (2023). Markets in Crypto-Assets (MiCA) Regulation (EU) 2023/1114. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32023R1114

• European Banking Authority (EBA). (2024). EBA's Approach to the Supervision of Crypto-Asset Service Providers under MiCA. Available at: https://www.eba.europa.eu

• European Securities and Markets Authority (ESMA). (2024). Guidelines for Crypto-Asset Service Providers under MiCA. Available at: https://www.esma.europa.eu

• European Parliament. (2023). Crypto-Asset Markets Regulation Adopted by the EU. Available at: https://www.europarl.europa.eu/news/en/headlines/economy/20230420STO80115

• Financial Action Task Force (FATF). (2023). Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. Available at: https://www.fatf-gafi.org/en/publications/Fatfrecommendations/virtual-assets-vasps.html

• European Central Bank (ECB). (2023). Crypto-Assets: Key Developments, Regulatory Responses, and Financial Stability Implications. Available at: https://www.ecb.europa.eu/pub/pdf/other/ecb.cryptoassets202305~e50a4b0cd7.en.pdf

• International Monetary Fund (IMF). (2023). The Rise of Crypto-Assets: Opportunities and Challenges for Financial Systems. Available at: https://www.imf.org/en/Publications/WP/Issues/2023/03/01/The-Rise-of-Crypto-Assets-529661

• Chainalysis. (2024). Crypto KYC and Compliance Trends in the Era of MiCA. Available at: https://www.chainalysis.com/blog/crypto-kyc-trends-mica/