Ready for MiCA? How to Deal with MiCA as a Swiss Web3 Company?

Transcript

our next session is a round table on the topic of Mika how to prepare for Mika from the perspective of a Swiss web 3 company just briefly in the interm it sounds like there is at least one company which is not a Swiss web 3 company but which is preparing for MAA I don't know if any of you saw in the news recently that binance has announced they will start to delist non-regulated stable coins in the European Union sounds like somebody at binance is getting ready for MAA but to help you think about how to get ready for ma let's welcome our four roundt guests

first of all Andreas cler from mme then Franchesco Paulo Pati from Pati legal oh one second Andreas will get comfortable he will sit back relax prepare his questions enjoy a cup of tea perhaps and S we have also Trang Fernandez then from holistic legal and finally Thomas Ney from Neal legal it is important to

mention that Thomas comes to us from lonstein this small often forgotten country next to Switzerland but in the context of Mika uh a rather important location ladies and gentlemen over to you thank you thank you introduction good morning everybody uh pleasure to be here today and um discover maika and the implications on Swiss companies a bit it's always great to be back here each year it always feels a bit like uh being at the University in this room so uh kind of brings up old memories so what are we covering today uh I think you know most of you I would assume have heard that MAA is coming most of you are

familiar what the key concept around that is so we don't want to spend too much time on the boilerplate topics uh I think what we want to focus on really is the implication topic so kind of a do a little bit of deep di what the time allows us to do and uh look at two key use cases um one use case a very typical one for Switzerland would be a company establishing like a foundation or something and issuing a token out of Switzerland uh with the aim that to be a utility token on the Swiss law so we're going to look at that what's the impact on MAA on that setup and another um use case we're going to look at is more of a

financial service use case a company providing out of Switzerland custody and trading services for digital assets and we're going to look at what does that mean uh on the MAA for the Swiss company and how could we solve that solution but before we go into these two use cases and we have a a great panels of European legal experts we have Italy uh on on the place we have lonstein and we have a tax view with Tron uh who can cover the whole range so we want don't want to only look it from legal side we also want to look it from a tax side because as you're going to see particularly with regard to the Second Use case tax is highly important um but before we go into use case discussions I I I think

would be good to get a bit a holistic overview where we currently stand on MAA implications we have two deadlines one has approached and the other one is coming in January so maybe Franchesco you can shed some light on the latest developments the future developments and in particular what the June deadline means on in MAA for stable coins yeah thank you very much Andreas so Mika was published last year in in May but uh it will enter into force in two different stages the first one will be 30 June 2024 and um it will enter into force with respect to the uh legislation on

stable coins and uh in MAA stable coins have two different definitions electronic money tokens and asset reference tokens and uh so by the end of this month it will enter into Force issuance of uh this stable coins will be regulated under MAA whereas the general um date for the rest of the legislation is by the end of this year so 30 December 2024 although one has to say that there is a grandfathering period up to 18 months which will depend on the single European countries so for instance it is possible for a country to give a bit more room to the vasp that already took

the authorization that are already authorized to operate in the National countries H up to 18 months after the 30 2024 but it depends on the single country and so it's a bit interesting to see like how the countries are deciding what they're going to do and uh we're going to have the full picture by the end of this month because the countries that want to opt out this grandfathering period have to do it before 30 June 20124 another like it's not really connected to our topic but uh about stable coins it's very interesting to see like what will happen in the next uh days because we know that we have two major players in the stable coin markets

we have uh usdt Teter which I think Swiss people know very well and uh and usdc circle and and uh Circle adopted an approach to be fully compliant with the MAA and so they went to France and applied for an electronic money institution license in order to issue electronic money tokens in Europe where ster publicly declared that they're not going to undergo MAA legislation because they find that the legislation has some shortcomings and predominantly the fact that you create a very strong dependency on banks like there are some mandatory uh cash deposits that the issuers of

stable coins have to do they don't like it they don't see it proper for their business and also risky because of the dependency on the bank and they mention Silicon Valley Bank as an example of risks that a stable coin issuer can encounter what does it mean for Europe like does it mean that all the exchanges will theist uh Teter the situation is very chaotic like in the last days B has declared that they're going to theist usdt in Europe whereas other exchanges are following a different path for example Kraken also a major player said ma did not enter into Force yet like we are not obliged as exchange under MAA it

will happen by the end of this year and so for now until there isn't a Prohibition that is set by an authority we're going to go on and offer t on our exchange but uh it will be interesting to see what will happen in the next but whenever we have this kind of Gray Zone situations on the legal side the question is also well on an enforcement level what is likely going to happen what what is our guess that in Regulators in Europe will do in in enforcement proceedings so who of you dares to give a estimate on that actually I want to add something what franches just said and it's kind of interesting to see that tether has the approach of yeah actually we do not want

to comply with this very strict regulation and my personal view on maybe the the stable coin regulation is a little bit too tough but that is for for a reason um and it's interesting to see that our industry was relying on uh the maor stable coin tether for years uh for all of the trading pairs like if you want to drisk and um to to get a lot of transparency now how this is actually secured and ped right I think that is a good approach um it's also interesting to see that uh binance says we will D list but there's actually at the moment no really obligation to deal this because CPS are not enforced yet and then you see Kraken which says no no we

don't have to deal this now we will wait until the end of year so our industry is also changing a little bit right the strategy had always the tendency to be over complied thank you you said that no but that is exactly the thing right and that that comes to now coming back to your point about enforcement first of all um that is something which we don't know yet so we will not we don't know how how uh the the the national competent authorities in the European market will enforce uh M um that that's going to be developed but like normally and like that is why it's interesting maybe even like if strategies of companies change

strategies of regulators do tend like do not tend to change as much right so I think we will have a German buffin which will be rather on the strict end right with enforcement um they did also already enforce some uh passporting uh so for for example when we passported some products um they they they they said that's not suitable for the local market so they are rather strict right uh but we don't know how the big picture will look like with M and there are a lot of questions around enforcement actually reverse solicitation is one thing I think will we might cover later yeah wonderful and maybe also you know we talked about different Regulators being different on the enforcement side but also I think we need to be aware

that when we talk about MAA and being ready for MAA that doesn't only apply to the industry it also applies to The Regulators so they need to set up their teams they need to gain the knowhow the processes the internal ons um to be efficient in granting licenses in the future on the ma and I would be interested to hear from you Francesco um which jurisdictions did you see that the regulator is actually putting in the amount of Staffing and resources needed to to get ready by that yeah so I think that uh one has to consider one big division that exists among European countries you know that the the European legislation before MAA was only an AML

CFT legislation and so they every country had to comply with some parameters setting up a register for the for the vasp and also controlling that they comply with AML and CFT legislation what happened in Europe was that in some cases the authorities that deal with financial um services and banking law they they were competent also for this authorization for this registrations whereas in other countries they did not and so they created a register with different authorities and in this countries VPS are not under theorder oversight of the authorities that will be competent with MAA so I make a

comparison for example like one of the countries that was more proactive apart from Lin but I can't say nothing on lonstein of course because there's thas and I'm not allowed Andre said do not Pitch Lenin so beh so for it is France like France was very proactive because you have the authority IMF that was in charge also to Grant this AML authorization right now and so they created a path to to M they are used to deal with vasp and so they presented themselves as the ones that were more ready to deal with this aspects and they also created like really like Bas that want to apply with MAA know already what they what they have to do it's started

with the third quarter of last year and so they began this conversations with the authority Italy is completely the on the other side because the authorities in Italy Bank of Italy and conop they said we don't have a full uh legislation dealing with this players we don't want to deal with them it's not our business we want to wait until there is a comprehensive set of rules and so in Italy the registration is with another Authority which is called omam which does not really have a presedential oversight on the vas and so in Italy you had to create from scratch like a division that deals with FAS that was not there from the beginning and that's the case in in many countries now put

this difference what I see is that there will be a big distinction between countries that are more organized at a level of authorities for instance Italy was incredibly quick in doing it I have to say like now at the bank of Italy you have experts at conso you have experts so if you have the staff to do it it's quite easy then to set up everything but there are countries that are less organized the smallest countries like for instance we have a member in our association from Romania and they not even began to organize themselves to approach MAA and this will give I think a lot of Arbitrage at the beginning because uh obviously you cannot get an authorization but you could operate from a country that is very slow in

implementing MAA on a reverse solicitation basis with feeds in in Europe okay so top three countries in terms of being Speedy in implementation Thomas you may mention Lin I I may mention Lin okay I'm I'm fully biased obviously no but we put we like for me um and uh as as far as I I I see the the implementation going in in Europe I think it's lonstein uh France and that actually uh took me a little bit as a surprise Germany uh because uh Germany for years had the the strategy to treat everything as a financial instrument so they even they put like Bitcoin on their

banking laws and uh now they are actually uh getting ready for uh for MAA um speaking of Lin obviously we we already had a very um comprehensive legislation in place our blockchain act which has a lot of service provids which are very similar our regulator stayed the same all the time so it was our financial Market Authority uh which actually was very um very much in discussion with the the finma in Switzerland as of like they started to to collaborate in 2016 so we have a very similar approach um and therefore I think we are very well prepared right we we did put a lot of efforts in we changed our local laws to be to have them ready already so we changed that uh that's enforced since

February you can have new service providers uh we even went a step ahead and said like not let's just not get ready only for M but if you listen to the talk before of Demetrios he was mentioning what is missing in Mika and what we will see in mik 2 uh he mentioned uh staking and lending U or staking he mentioned and the second thing he mentioned was nfts both we already have in our legislation so you can start a staking and Landing service provider and get a registration based on our local uh law and you can start that now right so yes I I think these are the three France and France was uh that not a lot of people know that but they were really very active some from from quite

early on yeah good now before we I think we need to look at the time a bit I think before we go into this two use case maybe for you TR do you have any particular kind of more general tax considerations uh on maika that you want to share with the audience or is it more on the use case level then um yeah maybe a few General um comments about um uh the taxation uh across the different countries because on the one side because of the very nature of the uh blockchain technology on the businesses related businesses we we they are more and more hybrid situations so on the one side it's more flexibility but it means

what is expected from the tax authorities is on the contrary more certainty I give an example for example if you are because of the MAA based in two countries you have to be very precise to indicate for example what is the Nexus you cannot say it's still a bit ler a bit here you have really to be clear what is the substance what is the Nexus and you have also to be very clear what is the function because for years it was easy to say this is a bit here this is a bit here but now it's no longer that easy and also there is a change in the way you define the functions and what are the substantial function because maybe before it was

more the banking relationship it was more certain aspect uh more economically based but now a lot of focus on the AML but compliance aspect so nowadays there is a lot of focus on essential function on the compliance aspect it wasn't the case before so if the taxation principle stays the requirement in term of clarity but also in terms of function will change and this is about um the allocation of the taxing rise because you probably have heard that uh we are implementing you know a minimal uh taxation rate across uh the oecd countries so you have

also to Define exactly who does what in which country so that you know exactly where the flows of income goes or where you can deduct whatsoever the taxation obligations are okay thanks and we're going to Deep dive into that a bit further when we look at the Second Use case now the first use case a very simple one um Swiss company issuing a utility token so I think an easy scenario will be a Swiss Foundation intending to deploy a layer one protocol similar kind of a proof of stake like a ethereum style layer one uh token functionality very clear gas

functionality you needed to run a validator you need to stake so under Swiss law nonregulated utility token which I can freely issue of course I'm doing some AML kyc checks part of the sale to make those proceeds bankable to comply with sanction laws but kind of a very neat use case until today uh so far no big crossborder issues related to the EU other countries there maybe but we going to carve them out for today now assume that this takes place after January 25 now Francesca utility token from a Swiss understanding under MAA what is that yeah that's that's a good

question I have to say that although Switzerland was a model for Europe I think in the end the legislation looks differently in Europe we have a definition of utility token but the reference in MAA are the so-called assets other crypto assets other than uh electronic money token and asset reference tokens so we adopt a kind of residual understanding of this token category which is a crypto assets that is not a financial instrument and that is not electronic money token and that is not an asset reference token so that's a bit weird within this broader category we have the utility tokens if the utility of the token is existent at Token Lounge then it's fine like it is

considered as something which belongs more to the area of consumer law than to the area of financial law and so you don't have to write a white paper which is the new uh burden that European law has imposed whereas if you launch a token that might be a utility token in the future and that will not be a financial instrument you have to undergo this uh duty to publish a white paper to notify it to the authority when you do it from outside the EU you have to indicate a hosting Authority that will then basically publish this white paper in a joint register at a European level so that there will be a kind of scrutiny

of all the tokens what is the problem of this uh of this practice like you can do it in primary sales like if you do a public offering directly from your website in Switzerland from sish the other issue is that if you want to list a token on a trading platform in Europe you need to have a white paper so it's it's really a requisite in order to to be listed in our trading platform may I just quickly to avoid confusion now when we talk about why paper in the context of mixi it's not this Five sheet document we've seen in the I days of 161 17 with a nice picture and some smilees it's really very close to something what we normally refer to as a prospectus so

there's more content and work on this white paper that you may have seen in the past yeah it's a white paper only in the name there are also indications about the technology that uh will be used by the project but it is very similar to the prospectus so a lot of information about the issuers and the background and the goal is also similar like trying to eliminate as far as possible information Symmetry and also building a liability on the issuer or the offerer and and that's something which obviously might be very challenging for a project that perhaps is not uh funded in a way which is incredible because it might be expensive to provide such a white paper right so

good news is we don't need a licens in to issue a utility token out of Switzerland into Europe they may be a need for a white paper depending on the kind of development status of the token of the functionality of the token there is a caveat but I'm sure that thas yeah I was just about to refer to Thomas now um if I do that and I say okay you know I have a fully functional token normally if you have a layer one and you deploy the layer one the token is functional because otherwise the whole layer would not really work um so you technically don't need a white paper and could I say well I'm not really targeting the

youu so yeah um I I think what you referring to is the the challenge we have with with a reverse solicitation and Demitrius also like in the panel before touch briefly on it um and I think that is a a very interesting change of how the European Union actually provides uh like framework and and and supervisory law because in the past we were used this this like to operate under this reverse solicitation so for the ones who do not know like I want to to make that very simple so if you issue out of Switzerland right and you don't have like a a a very targeted website and you don't Target and actively solicit in Germany um you can

actually operate under this reverse solicitation exemption and that was actually accepted right uh in in in most countries and what is now different is that the European Union said no no with MAA we will actually limit this operation under the reversal elicitation dramatically right which we don't know yet in every aspect how this will like finally actually look like and how this will be enforced that's the second question so one is to come up with a rule that you are not allowed to do something the second question is like who is then actually going to enforce that and and and what enforcement is going to look like um so that is a big challenge so if you Dan issue a token

out of Switzerland uh and you do Target the European market as you did before uh that might be a big challenge the same is actually too for all of the other casts right it's not only about is so that is a very big challenge but let me uh say something uh with uh respect of if you'd like step one step back because I think that is crucial imagine now we have for the first time ever a very big economic area like the European digital single Market with 450 million people and 33 million businesses which says we don't stop you from issuing token we will not disallow that we will not put you in prison and we will not do that after five years when you did the issuance five years later will come to

your office and say there's a subpoena uh you you will end up in court no the European Union said we will provide a framework and you don't even have to publish a white paper paper in in some some instances but you are allowed to do that if you follow the rules and I think that is really a very very good statement for our industry yeah thank you for summarizing that so from a regulatory side key takeaways for you on this utility token use case um probably reverse solicitation will not apply so you need to because that's very nrow so you need to comply with maika which means either depending on the token uh filing a white paper or not and if you need to file one you can choose a

regulator of your choice so you can do some Forum Shopping and so the last question on the use case on the tax side now the proceeds which you receive as a Swiss company out of this utility token sale into the is there any tax impact on the EU level or is it treated like any other income for a Swiss company so is is like Mika contain any kind of tax impact for the Swiss company if the uh introduction of MAA has impact on Swiss companies yeah if the if I sell as a Swiss company the utility token into the U I receive funds do I need to tax that in the U I assume not but I just do have that

confirmed well um if maybe again maybe depends on uh through uh which parties you are buying or uh selling uh there may be V8 aspect because they are changing at EU level they are a new law so uh you always have to consider that better be safe than not saying not anyway um and there might be also some uh transfer pricing aspect because um if you are to create because now by because of M you have to have something in you right so um and it can be completely a third party but maybe for some strategy business strategy aspect it can be recognized as an

Associated uh company so so then uh you have to consider whether you sold it uh at arms length or not uh so you have also to Define what are the relationship it can be considered you you may think it's not uh the the same company the same group but there are certain requirements or certain factors that the authorities may consider that you have something in common or associate aspect so these are would I would say the two main thing and when you mention about the the the time um actually uh especially in transport fing you don't like to look back and say wow I I I did all this transaction and didn't you know

prepared it actually it's way better to do a few agreements before so that when you start fresh and then somehow you are clean and then you apply the requirements in terms of transfer pricing these are the two main thing I see perfect yeah thanks a lot now maybe I add something from perspective because that is actually something which we identified we have the same vat right so shine and and and Switzerland so you just like get rid of one added complexity in that respect true and I think because I wanted I do want to cover the last four minutes the Second Use case at least briefly and now the Second Use case again just it's a Swiss based exchange payment utility token

only no Securities uh aiming to operate into MAA so MAA will apply and obviously we're going to need a MAA based license uh and so I need to set up a company within Europe I can't get the license out of Switzerland um now we before said there a couple of jurisdictions which are going to be interesting to look at lonstein being one of them and maybe Thomas you can explain us what would the process look like what kind of license you need how long long would it likely take and where do you see the benefit of having this structure having a company in Switzerland and a line entity serving the European market so first of all Lin is not a member of the European Union uh

and I don't want only to talk about the good things of Lenin one one challenge we have is that we are only a part of the European economic area so uh in lonstein as of now we think that MAA is going to be applicable uh um 1 of February uh we are working on that with Iceland and Norway so there is that's just a a small disclaimer let's assume that it is already enforced in lonstein um then you can get your your license with your National competent Authority and that's our financial Market Authority um and I want to to keep that really brief um so depending on which type of license you're are actually looking for you could also start today and get the local registration under the old regime and then apply for an easy

change of the local registration into a to a m license um if you start after m is enforced uh is is enforced uh you have to fulfill all of the requirements uh based on MAA and it's not uh that you don't have to comply uh if if you if you start now if you start now you fall under the grandfathering and then you have to actually top up what is actually under the of of the level of of MAA um and how long that takes we don't know right so we are working on that we have like uh companies in that proceeding we do even see uh quite some interest from Switzerland we so we have swiss companies uh doing exactly that path now but we don't know cost and time wise that's something we can tell you in a

year or two yeah and and one of the great things about Lenin and Switzerland in the combination is don't sh Lenin please Andreas behave all right about the small uh part of Switzerland uh no uh that L acknowledges that substance based in Switzerland can also be substance that is LIN substance because you know there's not that much room in this neighboring country um and so the question always is you know if you have a hybrid structure where you have the core team in Switzerland and you have a subsidiary in lonstein which kind of feeds on the substance or key substance in Switzerland um where is the

effective place of management from a tax perspective so TR I think what are the key elements that the thiss company needs to assure sure that suddenly uh the swix tax authorities don't see the Lenin company to have the effective place of management in Switzerland and be taxable in Switzerland yes so um usually I would say the the traditional way to see substance is always uh where is the effective uh management uh taking place usually we talk about the offices or the number of employe Etc um this St stays of course um but because of these um you know double uh hybrid nature um you have really to show uh also uh way

more what the presence that is very important because because of the covid a lot of people have just offices you say you can save a lot and then uh as long as you put uh a available offices it should be enough but that won't be enough you have really to show presence and you have also um an adequate number of expenses that uh will be uh expected from you you and also the qualification because the one way uh it's very common for foundation or other companies is of course to have um uh an address uh to have a director but it won't be sufficient because the topic is so technical uh there will be also expectation in terms of qualification of

the people and also for example this is more tax aspect or accounting aspect is because usually the tax Au trity they consider three type of substance um they consider the functional uh of substance which is uh where you do what the operational which is indeed where the the management or or the decision the key decision are made and also the accounting or financial aspect is how is your company structure in term of financial resources and cont accounting uh aspects okay thank you now I see our time has lapsed so uh maybe a quick summary on the Second Use case key takeaways so in this use case make sure

you get an appropriate license within a European economic area or European Union jurisdiction to Target the European market if you build it partially with a substance in Switzerland in the example of Lin where you can do that you need to make sure that the team is split up in a way that you don't have negative tax consequences so tax planning and structuring will be highly important and also of course the vi topics now I think maybe one last round any final comments on the topics we had from your end Franchesco anything you want to add um no I think that custody is also

important because it's the first time that we have a reserved activity for custody whereas in Mei it was not really the case and so now we have some legal parameters they're not so precise so what really custody means in terms of technology is something which is debated because a lot of players are a bit afraid of being captured by this uh definition which is kind of generic and and so this will also be one of the challenges of the next months too I think I just want to say that last year we started the discussion about what MAA means for Switzerland and I think it's one of the biggest opportunities uh because Switzerland has a lot of strengths and they will keep

them it's uh globally the the the best brand I actually you hear about Switzerland everywhere so I think the combination of having access to Europe uh and and having a Swiss company that's really the the best thing you can do so be proud uh of of what what swiland has to offer and I'm I really mean that right it's not that m is a threat we don't know a lot of things about M how it's going to be enforced how it's going to be look like uh you have a very Vivid ecosystem in Switzerland and that is something something to be proud of thank you Dr any um yes uh to conclude so basically um you still of course uh can structure and have different part but

let's say for for Europe or lanstein you have to think about indeed the people where are the key people where are they based and where are the decision made uh where are the infrastructure operation taking place and also what are the source of income or I would say the the assets so those are the the main things I would say that maybe secure uh the the present in certain countries and the next question indeed once you have in that country where how do you manage to then um allocate the different resources between the different countries be it in Personnel or in income and other uh functions wonderful thank you that was a wonderful discussion I could continue it

forever um no not forever um we don't really have time for questions I'm afraid I believe but we're going to be over here hanging around and take questions there on a direct level thank you a lot for attending and enjoy the rest of the morning thank you so much thank you