Crypto-asset service providers are on the move to find their residence: will Latvia make the “shortlist”?
Early this summer the Crypto-Asset Services Act was adopted in Latvia – the concise legislative act consisting of only ten articles specifies a few aspects of application of the EU legal framework governing crypto-assets and related services, and does not introduce fundamental changes in this field per se. Tectonic changes in the area of crypto-asset services have been introduced by the EU MiCA Regulation*, which will apply from 2025. For the EU crypto-asset service providers it also means, among other things, a need to soon make a choice regarding their future residence. Latvia seems to be working hard to become their destination.
Until adoption of the MiCA Regulation, there was no common legal framework in the EU for provision of crypto-asset services. Each EU Member State introduced its own legal framework or tried to make use of the existing one. As a result, until now the EU crypto-asset market has been comparatively fragmented, and cross-border transactions are frequently challenging: investors are cautious of whether their rights are sufficiently protected, whereas crypto-asset service providers must be constantly ready to comply with often varied (sometimes even contradictory) requirements of each EU Member State.
EU regulations – including the newly adopted MiCA Regulation– are directly applicable legislative acts of the European Union. It means that from 2025 on, the crypto-asset service providers will be directly subject to provisions of the MiCA Regulation. In addition to the provisions of the voluminous MiCA Regulation itself, they will also have to comply with a number of other EU level legislative acts, which are adopted based on the MiCA Regulation to further specify various crypto-assets related requirements **.
In the light of this vast scope of EU legislation, crypto-assets related matters whose regulation is left at the discretion of Member States are extremely limited. Thus, Member States are mostly required to resolve certain issues of administrative nature. Nevertheless, since the MiCA Regulation allows crypto-asset service providers to provide services in all Member States based on a licence obtained in just one Member State, these seemingly insignificant issues may play a crucial role. Namely, in the nearest future the crypto-asset service providers must decide in which Member State to anchor their business and apply for the license, hence they are critically evaluating, analysing and comparing the offerings of different countries to determine which one suits them best.
Our neighbours – Estonia and Lithuania, seemingly have some advantage on the starting line. Thus, according to the publicly available information, there are currently less than ten crypto-asset service providers in Latvia; and, most probably, only a few of them are actively operating. In Estonia, the number of crypto-asset service providers is around 50, whereas in Lithuania – close to 500. Obviously, when it comes to licensing, the service providers will primarily consider the market where they have already laid certain groundwork.
As for our own advantages, the desire to accommodate crypto-asset service providers is voiced by both politicians and the supervisory authority (Bank of Latvia). Most importantly though, the support is demonstrated not only through words, but also through practical actions.
Thus, one of the issues of paramount importance when choosing country of residence is the so called supervisory fee – a kind of “tax” which is payable annually by crypto-asset service providers to the supervisory authority of the country of residence. Models for calculation of the supervisory fee applied by various countries differ significantly, hence they are difficult to compare. Nevertheless, supervisory fee prescribed by the initial draft Crypto-Asset Services Act was seemingly higher than the ones foreseen in Lithuania and Estonia. Latvian politicians were, however, willing to act upon concerns voiced by the industry (its most influential representative being the Latvian Blockchain Association (LBAA)) and eventually agreed to the supervisory fee model which has a competitive edge over the ones applicable in Estonia and Lithuania.
The Bank of Latvia has also shown a proactive approach in trying to resolve possible challenges faced by crypto-asset service providers. Thus, MiCA Regulation obliges those crypto-asset service providers who hold clients’ funds to safekeep such funds by placing them with a credit institution or a central bank. A similar obligation to safekeep clients’ funds has been long applied with regard to other nonbank financial service providers (payment service providers etc.) and it has emerged that in practice such an obligation is difficult to abide by – for various reasons credit institutions are reluctant to collaborate with nonbank financial service providers. In response, the Bank of Latvia announced in December 2023 its initiative allowing nonbank financial service providers, including licensed crypto-asset service providers, to hold clients’ funds in the Bank of Latvia starting from June 2024. Although this initiative was put on hold due to objections voiced by the European Central Bank (ECB) the willingness of the Bank of Latvia to welcome crypto-asset service provider is clear.
There are, of course, many factors to consider when choosing which country will be the home for your business, but in Latvia, the goodwill of both politicians and the regulator seems to be assured.
Soon enough we will be able to draw initial conclusions as to where the crypto-asset business is heading. Thus, one of the issues left at discretion of the Member States was setting the transition period at the end of which existing crypto-asset service providers have to undergo the complicated and expensive licencing process. In Latvia, this transitional period will last until 30 June 2025. Namely, the crypto-asset service providers which have launched their business in Latvia, under supervision of the State Revenue Service (SRS), until 30 December 2024, will have to submit by 30 June 2025 a licence application to the Bank of Latvia to be able to continue provision of crypto-asset services.
Our neighbours – Estonians – have opted for the maximum permissible transitional period: 1 July 2026. It might be due to the fact that comparatively strict requirements for the registration are already being applied to crypto-asset service providers in Estonia. On the other hand, Lithuania initially contemplated abstaining from application of the transitional period altogether (consequently, the licence would have to be applied for as of the date when MiCA Regulation starts to apply, namely, beginning of 2025). Eventually, however, Lithuania decided to proceed the same way as Latvia, establishing that the transitional period will run until June 2025.
The winds of change brought about by the new EU level legal framework is a wonderful opportunity for Latvia to become one of the destinations of this perspective industry by actively offering attractive conditions for the establishment and operation of companies, as long as sufficient supervision of the crypto-asset service providers licenced in Latvia can be ensured.
* Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets).
** For more detail about requirements of the regulation please refer here:
https://ellex.legal/mica-regulation-stricter-terms-in-the-markets-in-crypto-assets/
Publication: The Baltic Times
