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Intersection of MiCA and PSD2 in Cryptocurrency Transactions

Writer's picture: Law AstronautLaw Astronaut

Starting in June 2024, the European landscape for digital assets will be drastically reshaped with the implementation of the Market in Crypto Assets Regulation (MiCA). As a significant portion of cryptocurrency service providers are likely to be encompassed within this regulation, the relevance of MiCA for these entities is becoming increasingly pertinent.


Cryptocurrency services resemble traditional financial services, such as payment services. However, it remains to be seen how the stipulations of MiCA align with the existing regulatory framework under the Payment Services Directive 2 (PSD2).

MiCA, PSD2, and Crypto Transactions: A Comparison


Imagine a consumer (let's call him Alex) wishing to purchase an electronic voucher (e-voucher) from a vendor (let's call her Becky) using fiat currency (say, Euros).

  1. Alex initiates the transaction on Becky's website.

  2. A third-party service provider (referred to as "TP") steps in to manage the transaction.

  3. TP collects the payment from Alex and transfers it to Becky's account.

  4. Once the payment is completed, the e-voucher is sent electronically to Alex.

This is a typical transaction overseen by the guidelines of PSD2, where the third-party entity (TP) is required to possess a PSD2 license, except for certain exemptions.


To better appreciate the impact of the Market in Crypto Assets Regulation (MiCA) on the financial transaction landscape, let's re-envision our earlier example. This time, we're introducing a twist: crypto tokens and Distributed Ledger Technology (DLT) are now involved in the transaction.


Payment in Crypto

Let's return to our previous characters: Alex (the consumer), Becky (the vendor), and TP (the third-party facilitator). Now, Alex wants to acquire an e-voucher from Becky, but with a marked difference from our previous scenario. Becky's e-voucher is offered through a blockchain network, and Alex is able to purchase it using crypto tokens.

Let's break down this new transaction structure:

  1. Alex initiates the purchase, intending to pay with crypto tokens stored in a digital wallet.

  2. TP steps in, employing 'smart contracts' to facilitate the transaction.

  3. TP manages Alex's crypto tokens, transferring the correct amount to Becky's digital wallet.

  4. Once the payment is completed, the e-voucher is sent to Alex through the blockchain, directed by TP's smart contracts.

In this case, TP's services - managing Alex's crypto assets and transferring them to Becky - are now under the umbrella of 'crypto-services' as delineated by MiCA. Consequently, TP needs to secure a MiCA license to operate legally.

Bridging the Crypto-Fiat Gap


Let's consider another permutation in our transaction scenario: this time, Alex (the consumer) wants to pay with crypto tokens, but Becky (the vendor) only accepts fiat currency (Euros). How does our third-party service provider (TP) navigate this dichotomy?

  1. Alex chooses the e-voucher and intends to pay with his crypto tokens.

  2. As before, TP manages the transaction. However, now TP has an added responsibility: converting Alex's crypto tokens into Becky's preferred fiat currency.

  3. TP carries out the exchange of crypto tokens for fiat currency, transferring the equivalent fiat amount into Becky's account.

  4. On successful payment, the e-voucher is dispatched to Alex.

In this situation, TP's role has expanded. They not only manage the crypto assets but also handle the crypto-to-fiat exchange. According to MiCA, both these functions constitute 'crypto-services.' Thus, to legally facilitate such transactions, TP would need to possess a MiCA license.


Dual Licensing for Crypto and Fiat Transactions


As we further unravel the complexities of the digital asset landscape, a crucial point of intersection between MiCA and the PSD2 directive emerges. It concerns 'crypto-related payment services,' an area where the scopes of both regulations seemingly converge.

What does this entail for our third-party service provider (TP)?


Acquiring a MiCA license might seem like a comprehensive solution for TP to legally facilitate all crypto transactions. However, MiCA makes an explicit reference to PSD2 when crypto-related payment services come into play. For TP to provide such services, it must either qualify as a payment institution under PSD2 or collaborate with an external institution that already does. This raises an important question: what exactly falls under the umbrella of 'crypto-related payment services'?


Let's clarify: managing crypto-assets, providing exchange services, or operating a trading platform are all deemed as 'crypto services' under MiCA. But does any payment service linked to providing these crypto services also qualify as a 'crypto-related payment service'? The boundaries are not yet crystal clear.


To complicate matters further, let's consider a scenario where TP facilitates payment services for transactions involving both crypto and fiat currencies. In such a case, TP essentially provides the same type of service but with different currencies. And this may lead to a crucial legal requirement: dual licensing. In other words, to legally facilitate these transactions, TP would need to acquire not one but two licenses: MiCA for crypto transactions and PSD2 for fiat currency transactions.


Interestingly, PSD2 contains an exemption for certain payment service providers: if the payment instrument is only usable within a restricted network of providers or for a select range of goods or services, providers are excused from needing a PSD2 license. However, MiCA doesn't seem to adopt these PSD2 exceptions. MiCA’s language suggests it only considers 'authorized' providers, with 'authorized' presumably meaning those who hold a PSD2 license. The term doesn’t seem to cover providers exempted under PSD2 but still able to offer payment services. In a twist, this could mean that a payment service provider, though not needing a PSD2 license for conventional payment services, could need both PSD2 and MiCA licenses when handling crypto tokens.


* * * Don't let regulatory complexities hinder your growth. Reach out to us at Prokopiev Law Group today and pave the way for a seamless future in digital finance. Your success is our mission.


DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be AI-generated. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

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