#11 in the LEI Lightbulb Blog Series - EU's Landmark MiCA Framework Affirms Value of LEI in Crypto-Asset Regulation

In this blog, Stephan Wolf explores how the European Union’s new Markets in Crypto-Assets (MiCA) regulation heralds an important step forward in the use of the Legal Entity Identifier (LEI) within crypto-asset regulatory frameworks.

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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.

Happily, emergent initiatives are now being realized, and in May 2023, the European Union (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 recognized as a landmark legislative achievement that will bolster consumer protections and confidence across the crypto-asset market while promoting competition and innovation.

And given the significance of MiCA and its potential to shape and influence the future 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 for any legal entity intending to provide any of the various crypto-asset services regulated under MiCA. Within the new framework, an entity must now apply for authorization 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 pre-requisite 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 the new MiCA regulation is how, through leveraging the LEI, it addresses stringent 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 recognized 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 harmonize 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 prioritize 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 now underway, there can be no doubt that 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 realize 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.

The ‘LEI Lightbulb Blog Series’ from GLEIF aims to shine a light on the breadth of acceptance and advocacy for the LEI across the public and private sectors, geographies and use cases by highlighting which industry leaders, authorities and organizations are supportive of the LEI and for what purpose. By demonstrating how success derived from strong regulatory roots is giving rise to a ground swell of champions for further LEI regulation and voluntary LEI adoption across new and emerging applications, GLEIF hopes to educate on both the current and future potential value that ‘one global identity’ can deliver for businesses, regardless of sector, world-wide.

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