By Stephan Wolf, CEO of the Global LEI Foundation.
With the crypto-asset market experiencing sustained instability and volatility following the high-profile collapse of the cryptocurrency exchange FTX, regulatory activities have taken on new intensity and urgency. Emergent initiatives are being realised, and in May 2023, the EU finally adopted the long-awaited and much-debated Markets in Crypto-Assets (MiCA) regulation.
By bringing together crypto-assets, crypto-asset issuers, and crypto-asset service providers under a single EU-level regulatory framework, MiCA is widely recognised as a landmark legislative achievement that will bolster consumer protections and confidence across the crypto-asset market while promoting competition and innovation.
Given the significance of MiCA and its potential to shape and influence the regulatory landscape, the inclusion of the Legal Entity Identifier (LEI) as a means of bringing increased trust and transparency to both crypto-asset service providers and crypto-asset transactions is a powerful endorsement of its unique capabilities as a global identifier.
MiCA regulation and the LEI
As part of sweeping rules intended to protect investors, the legislation brings far greater scrutiny to legal entities intending to provide any of the crypto-asset services regulated under MiCA. Within the new framework, entities must apply for authorisation as a Crypto-Asset Service Provider (CASP) to the competent authority of their home Member State and, as part of the rigorous application requirements, an LEI must be obtained and provided.
Put simply, an LEI is now a prerequisite for providing crypto-asset services in the EU – marking a hugely significant milestone for LEI uptake and a clear demonstration of its utility and value within the wider crypto-asset space.
Another fundamental element of MiCA is how, through leveraging the LEI, it addresses so-called ‘Travel Rule’ compliance considerations. The Financial Action Task Force (FATF) Travel Rule (Recommendation 16) is a crucial component of the FATF’s Recommendations, which set out a framework of measures that countries should implement to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction.
Specifically, the FATF Travel Rule aims to mitigate the risks associated with the transfer of virtual assets, especially in ownership identification. It achieves this by mandating financial institutions and crypto firms involved in virtual asset transfers, known as Virtual Asset Service Providers (VASPs), to acquire and exchange precise and reliable details of the originator and beneficiaries of the transaction before or during the transfer.
Since the recommendation was first published in June 2019, the private sector and several jurisdictions globally have been working on implementing FATF’s Travel Rule and establishing robust regulatory frameworks to prevent money laundering and ensure customer protection in virtual asset transfers.
MiCA marks the most comprehensive and wide-ranging implementation to date. It addresses the FATF Travel Rule by extending the scope of the existing EU Transfer of Funds Rule (TFR) – first adopted in 2015 and applicable to traditional transfers of funds – to include transfers of crypto-assets.
Under the recast TFR, the CASP of the originator must ensure that transfers of crypto assets are accompanied by various data points on the originator and beneficiary (for non-individuals). Importantly, this includes the current LEI or, in its absence, any other available equivalent official identifier.
Again, this represents a powerful endorsement of the value of the LEI and is a clear affirmation of its unique ability to deliver the consistent, high-quality, and globally recognised entity identification needed to combat nefarious activity effectively.
It also signals a huge opportunity for national and global regulators to leverage the LEI to help harmonise divergent Travel Rule requirements across borders. Given the significant amount of information required, every opportunity to simplify and streamline compliance throughout the wider crypto-asset ecosystem to accelerate adoption should be seized, and, in this regard, the adoption of the globally recognized LEI is a no-brainer. This is particularly timely given the FATF’s renewed call urging countries and jurisdictions to move faster and prioritise the implementation of the Travel Rule.
More broadly, MiCA and the recast TFR dovetail with other regulatory developments in the EU that are championing the trust and transparency benefits delivered by the LEI as part of a coherent, complementary ecosystem.
This includes tackling the complex issue of how to tax crypto-asset service providers. Following the Organization for Economic Cooperation and Development’s (OECD) recognition of the LEI as one of the accepted identifiers to identify crypto-asset service providers, the EU has mirrored this LEI recognition in its proposed Directive on Administrative Cooperation (DAC8), introducing rules for the exchange of tax information on crypto-assets among national tax authorities.
Promoting broader LEI adoption across the crypto-asset industry
With these and other regulatory developments underway, the LEI should play an important role in emerging regulatory and governance frameworks across the globe, moving the world closer towards a fully digitally enabled financial ecosystem that works optimally for all stakeholders.
As regulatory momentum builds, opportunities abound for RegTech solution providers and crypto-asset platforms to promote broader LEI adoption to realise various benefits for themselves and their clients. By becoming Validation Agents and obtaining and maintaining LEIs for their clients in cooperation with accredited LEI Issuers, the compliance burden and risk profile is reduced as LEI data can be used to streamline client identification and facilitate accurate counterparty identification, while VASPs can get out ahead of upcoming regulatory deadlines.
Given these advantages, there is already movement from market participants in this direction. VerifyVASP, a Singapore-based RegTech solution provider to VASPs, recently became the first Validation Agent to operate exclusively in the crypto and digital asset trading space.
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