The European financial sector is adapting to significant regulatory changes with the implementation of the Markets in Crypto-Assets Regulation ("MiCA") and its interaction with the Payment Services Directive 2 ("PSD2"). As the regulatory landscape evolves, concerns have been raised regarding overlapping requirements for crypto-asset service providers ("CASPs") dealing with e-money tokens ("EMTs"). Specifically, this is highlighted under Recitals 90 and 93 MiCA, which address the overlap between the regulation of crypto-asset services provided by CASPs under MiCA and payment services governed by PSD2 with respect to EMTs.
Regulatory Challenges for EMTs under MiCA and PSD2
In a recent letter to the European Banking Authority
("EBA") and the European Securities and Markets Authority
("ESMA"), the European Commission ("EC")
addressed the regulatory ambiguities stemming from the interplay
between MiCA and PSD2. The letter highlights the
need for clearer guidance and suggests a temporary solution in the
form of a "no action letter", which would provide
regulatory relief while broader revisions to financial laws are
being discussed.
Key Regulatory Overlaps and Compliance Challenges
MiCA, which governs the provision of crypto-asset services,
classifies EMTs as crypto-assets while simultaneously deeming them
electronic money under Article 48(2) MiCA. This classification
means that EMTs also fall within the definition of
"funds" under Article 4(25) PSD2. As a result, CASPs
offering services related to EMTs may be required to comply with
both MiCA and PSD2, leading to dual regulatory requirements.
This situation particularly affects CASPs that provide payment
services involving EMTs. According to PSD2, such entities must
either:
- Obtain authorization as a Payment Service Provider ("PSP"), or
- Partner with an already authorized PSP to provide the necessary payment services.
However, under certain business models, EMT transactions might not be intended as payment services but rather for investment or trading. Nevertheless, due to PSD2's broad definition of a "payment transaction" in Article 4(5), some crypto-asset services may still fall under PSD2, leading to unintended regulatory consequences.
Case-by-Case Authorization and the Role of Custodial Wallets
Depending on the business model, and based on a case-by-case
analysis, the provision of transfers of EMTs by CASPs may be
classified as a payment service under point 3 of Annex I PSD2
("execution of payment transactions"), requiring an
authorization. Additionally, some crypto-asset services relating to
EMTs could also be considered other payment services under points 1
and 2 of Annex I PSD2, which refer to "operations required for
operating a payment account".
This is particularly relevant for CASPs offering custodial wallets,
where clients (the holders of EMTs) are able to transfer EMTs to
and from third parties. If the CASP retains control over the
private cryptographic key on behalf of the client, the wallet could
qualify as a "payment account" under PSD2, triggering
additional compliance obligations.
In contrast, the Commission has clarified that an authorization as
a PSP would generally not be required when a CASP offers the
service of "exchange of crypto- ssets for funds" or
"exchange of crypto-assets for other crypto- ssets" (as
defined in Article 3(1), points (19) and (20) MiCA). If the CASP
operates as a buyer/seller of EMTs in its own name and does not
facilitate additional transfers of EMTs on behalf of clients, the
transaction does not constitute a payment service under PSD2.
Proposal for a "No Action Letter" and Future Regulatory Reforms
To mitigate these challenges, the European Commission is urging the EBA and ESMA to explore issuing a "no action letter" pursuant to Article 9c of Regulation (EU) No 1093/2010. This temporary measure would suspend the enforcement of PSD2 authorization requirements for certain EMT-related activities where EMTs are not used as a means of payment or for peer-to-peer ("P2P") transactions, but rather for investment or trading purposes. This issue is particularly relevant for CASPs (or entities benefiting from the transitional period under Article 143(3) MiCA), as they may be inadvertently covered by PSD2 despite not engaging in payment services.
These differences in regulatory interpretation across EU member states have raised concerns about regulatory arbitrage, where businesses may seek jurisdictions with more favorable interpretations. This inconsistency also poses risks for consumer protection, making it difficult to ensure a uniform regulatory approach across the European market. These differences in interpretation could result in an uneven regulatory environment, where certain CASPs are subject to dual authorization under MiCA and PSD2, while others operate under a more flexible framework. This inconsistency raises market fragmentation risks and compliance challenges for businesses operating across multiple jurisdictions.
Furthermore, the treatment of EMTs from a payment service
perspective is currently under discussion as part of the ongoing
revision of PSD2. The European Parliament has already proposed
amendments to the PSD3 and PSR proposals, and the Council is
actively reviewing these issues. However, even if PSD3 and PSR
eventually provide clarity, their application is still years away,
creating regulatory uncertainty in the interim period.
To address this gap, the Commission proposes that the "no
action letter" remain in effect until the application date of
PSD3 and PSR or, in the event of further delays, until at least
three years after its publication. At that point, the letter would
be reassessed based on the status of PSD3/PSR implementation.
For cases where dual authorization remains necessary, such as when EMTs are actively used for payments, goods, services, or P2P transactions, the Commission has invited EBA and ESMA to explore ways to streamline the authorization process under PSD2. This would reduce the operational burden that institutions face due to the dual compliance requirement while maintaining regulatory oversight.
Finally, the Commission has also welcomed suggestions from EBA and ESMA regarding potential legislative changes to be considered in the ongoing PSD3/PSR negotiations. The objective is to ensure that future regulatory frameworks align with the realities of digital finance and crypto-asset markets, reducing administrative burdens while maintaining financial stability and consumer protection. For this reason, the Commission has invited regulatory bodies to propose legislative changes aimed at addressing the identified challenges, ensuring that the upcoming PSD3/PSR framework reflects the realities of the evolving financial landscape.
How does this impact on Crypto Businesses and Financial Institutions?
For companies operating in the crypto and fintech sector, these developments underscore the importance of staying informed about regulatory changes. The potential regulatory relief from a "no action letter" could reduce immediate compliance burdens, but businesses should prepare for long-term adjustments under the forthcoming PSD3 framework.
Key considerations for businesses include:
- Assessing whether their activities involving EMTs may require dual authorization under PSD2 and MiCA;
- Engaging with regulators and industry bodies to advocate for
clear, practical regulations;
and - Developing compliance strategies that align with evolving EU financial laws.
Looking Ahead
As discussions around MiCA, PSD2, and PSD3 continue, regulatory clarity remains a top priority for both businesses and policymakers. While the Commission's proposed "no action letter" may provide temporary relief, companies must remain agile in their compliance and operational strategies to thrive in this changing regulatory environment.
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