VASP and MiCA Regulation: The Empire Strikes Back

Transcript

hello everyone thanks to be here for the one who are who are not uh in front of italic you are really the pure legal fan of crypto regulation so i'm i have funded a law firm three years ago in paris and uh so it's a digital law firm named orwell and we are working a lot on the crypto asset regulation actually we advise a lot of crypto asset projects both on the like classic or traditional uh virtual asset services such as uh selling bitcoin purchase bitcoin or ethereum and also on the defy on the d5 part for instance we have read we have

accessed more than 50 percent of the vsp registered in france regarding my my my meet so i'm in charge of the compliance practice so in the in the law firm we are three partners the other ones they are in tax and uh and and public public law actually and uh my job is uh is to find it's more than just to be a lawyer on compliance i i try to have to manage all the help assist the project to manage all the legal issues regarding french and european law and understand like helps them understand the legal environment

so i have do like some some very boring stuff regarding uh giving lectures uh talking with the politics and i'm uh i'm i'm participating to the htc since the beginning so it's it's a conference i i like very much um i'm doing this talk because uh but the first reason is i'm very curious about uh of course like like everyone else here about crypto crypto assets and blockchain why because for a lawyer and for someone who is working on a on the on the legal uh on the legal area it's a technology that is very interesting both because this technology and especially the crypto asset

like utility token and and cryptocurrency they are evolving on a new totally new regulatory environment and a very unstable actually and shifting environment which is for a lawyer it's quite fun maybe a little bit more less for the folded projects and the other the other things i think i i find interesting with crypto it's uh it's because like there is like very pure technical properties that have a very huge legal impact uh digital value uniqueness decentralization i prefer them peer-to-peer relation and and this like technical characteristic have a huge impact regarding the legal classification if we compare for instance about what

happened with internet at the beginning this talk is not like a master class about the french and the european regulation because there is a lot of very good articles on internet about it but it's more like presenting the what i have understand about it like very globally and give you some tips and some advice about uh what what the lawyers think about this this regulation what does it mean for this uh industry and especially what does it mean for the next like two three four five years so there is basically the regulation i'm talking about virtual asset service provider regime and mika so mikhail

is a the coming like european regulation but you have to understand that there is three main categories of regulation when someone enter into my my firm i always ask him about the tax the the tax issue raised by the project especially if we are in defy or if there is a the token issuance because it's something very important for warrior everybody is very focused on security regulation and coicml because it's kind of like intriguing and sexy but the tax they will never forgive you and they are like they're operating right now and they don't care about what you are doing they just like you just need to pay your tax if you are in france for instance or if you're in uk and it's something very important and and some people have to

have some time forget about it because they are too focused on the other side of the regulation when we are talking about crypto regulation we are talking about two things on the one hand there is the aml cft so anti money laundering and control finance and terrorism on the on the uh which is a really like an independent regulation there is a lot of people that are subject to this regulation in crypto but also me as a lawyer for instance i'm subject to this regulation without being like a financial intermediaries so it's very something independent and in the other on the other side you have really the financial regulation who have a very different purpose it's not like fighting fire uh the the

financing of the terrorism for instance it's to um it's to really like protect the investors and and protect like the the yeah the common investors and and eventually even if we are not at this stage yet in the crypto industry protects the the market the transparency of the market but it's really different it is very interesting to to separate so the visp regime i will talk about the french one but it's basically the same in france and uk and germany it's a regime like it's a registration actually a license if you prefer we are we applied to virtual assets so i said legally it's a quite close notion

actually it's really like utility token including some governance token but we will talk about it later and cryptocurrencies so the idea is why to to to to to target for instance ether and the token in in the initial kind of rings so when we when we when we when we say that we exclude actually security token and by security token i talked about something quite uh quite blurry because security token it's both like a security that you have put into a token if i may say but it also includes a token that have the the same characteristic

of a security so there is uh i i will not give the name but there is some token into the d5 which which are in my view security token without be branded as a security at all and the non-fungible token which is a very interesting uh topic and very like hypey topic this year they are also excluded at least in france because the absence of fungibility does not make them uh in line with the with the mean of payment that cryptocurrency is and like if you want to launder something like using your main of payment is better than using something that is unique

so in france like selling nft for instance or be a nft issuer it's not you are not subject to the visp regime and then you are not subject to anti-money laundering regulation why because the the vsp regime actually target only few services like the most high risk activity so there is basically four activity right now like custody when you keep the the crypto of someone else uh fiat to crypto and crypto to crypto when you are selling fiat against crypto or selling crypto against chat um crypto crypto is the same with with two different crypto assets

and operating an exchange platform so be an exchange everyone else is not regulated uh uh yet in france and and even even even elsewhere if you are giving financial advice for instance on crypto asset it's not regulated so you just need a contract and and let's go it will be it will be under mika but we will talk about it later so the the characteristic of the visp regime is first it's a regime where you are registered so there is a white list for instance the fcn london have a white list of the projects that are that are virtualized provider in front we have also this white list

uh in front the little like the little pane it's that you need to be you need to to be registered and to be into the list before providing your service which is not very business friendly in the fcs they are more like like pragmatic i think they are they are putting everybody on the list and they they let the project like like continue to to operate and one day they will maybe kick off some some project maybe uh register some others but anyway there's not this cliff as as it isn't enter the french register procedure so the isp regime is not i mean like properly a financial regulation because

90 percent of the of the regime it's about kycml so it's just a way for the regulator to ensure that you apply kyc and proper kyc and ml procedure providing your service of course if you have if you have questions during the presentation uh really feel free and because we are we are not so much so so very feel free to ask and i will be glad to answer and to bounce to bounce back as the mlk awaits under the set um but it's basically what you have to understand it's mostly the same exactly the same procedure as with any other financial services with chat so there is a lot of procedures like you need to train your

people you need to to understand where the where the funds come from you need to identify your client uh so in france it's for from the first euro the main difference it's about two things and it's our job as lawyer we are like proficient in cryptocurrency is to uh is to uh adapt some specification based on the on the on the on the technical aspect of the blockchain so we are talking about the the chain analysis like the the know your transaction services which which are like totally mandatory in front if you want to become a dasp and also there is some specific red flag regarding like laundering pattern uh which which most of them are in the virtual asset

red flag indicators published by the by the financial election test tax force so for instance it's um when people use a multiple different crypto uh public key when you have like when you have pattern into the the generalizes you see that someone is uh receiving a lot of payment of i don't know 100 euros of of bitcoin it's maybe means that there is a run somewhere behind it all this kind of off of red flag you need you need to understand them and to translate it into your policy to become a desk so it's quite a big job actually and if you don't do that you are not registered as a desk and you could not operate in france so mika it's the first thing it's

mika it will be like a complete change for the gisp the digital asset service provider in in europe for for multiple reasons and it will have a huge impact on on all the industry the first uh the first uh thing to to to say it's that mika will uh there is two part in mika there was a the first part that i call the auntie libra part because it's all about stable car and basically they assimilate stable coin with imoni which is something that is uh that makes sense and that's very uh it will it's a way to to kick libra off the market in europe and and all the other stable coin unfortunately

um and the other part is about the the vsp regime and they created a super vsp regime so they they they put in line the vsp regime which is now a very like light regime because it it's only about iml kyc and they will make it in line with all the the the email institution for instance or e-money payment services or investment firm like this same level of supervision so it means that the cost to become a vasp the duration to become a vast so the people you you will need to have to to be a vast and to stay a vast uh will will will rise a lot actually this is for instance some some

requirements that is uh under the mickey regulation and that do not exist right now for the gsp so for instance the the regulator will ask like to to have a i.t security and system policy it seems quite nice when it's right down on my presentation but basically in france it means that you have to be to have a visa from from the nc it takes a month it's cost for maybe 30 000 euros and you have a multiple back and forth with the nc only on the ita and and system and security policy and you have all other requirements on prudential for instance you will need to have insurance or to have a prudential funds to cover a loss for instance if you if you lose money of

your client you will have to you if you're a platform you will need something that is like very complex actually to do is to have a procedure to detect and to struggle against market abuse we know that in the current cryptocurrency market there is a lot of fake volume wash trading and these kind of things this is absolutely prohibited on the farm it exists but it's absolutely private on the financial instrument under on the track fee and the the exchange the the the exchange we want to find we will um we will address the european market which is not the smallest one of the world after amica will need to be registered in europe and

to show that they are able to struggle to to fight against this this this bad practice and this is just like i i i don't put all the requirement but you understand that we are we are we are like stepping into something completely new in terms of regulation and the consequence will be it will be much more difficult to compete with with the registered players because the the the the step to to for the the barrier will be will be very high and at the same time i think there will be a huge competition between the vast the current vastness themselves between because the smallest one

we will not be able to to to to raise this level of of supervision so they will be both i think by by by other verbs there will be a lot of concentration so mika have fun it's uh it's uh very interesting on the legal aspect but there is also there is also a huge economic aspect uh i'm still learning about it so and we will see what happens of course of course under uh mika license you will be you will have uh something uh in counterpart it you will have a direct access to the to the european market so like like this you will be you if you are registered in paris you will be able to without even a passport procedure

you will be able to have clients and to do promotion after service in estonia and poland in malta everywhere so it's something that when i was talking about the competition between the vasp it will be i think it will be quite bloody on the first years of the of the mecca regulation for the for the vas that is currently regulated there will be a bridge it will be more i think more easy easiest for them basically because they are they are already regulated so they know the mindset of the regulators they have they have they start working on procedures and they will have a special reach farming in france at least to becoming a licensed under mika

any question about mikaoba no it's okay this is the other leg i was talking about the financial regulation on the alarm this slide is quite empty because the package was published this morning so i i put it in in emergency but just we know that the the european union will adopt a new package of money laundering with the beginning of a strong harmonization between the european country because as you can expect the koacml is not exactly the same in france in germany in london and in estonia in poland in italian it's it's a little bit a mess and there is some some providers are doing like like regulatory

shopping to find the the nicest regulation for the for the french german and i don't talk about the english one because they are not concerned anymore but i mean at least for the french and german uh vsp this is a good news because actually they are in my view they are already on the top of the regulation regarding ml uh especially in france it's a very sensitive topic because we have uh some we have uh we are we france will be at the forefront of the observant money laundering and fine and very simple financing so the requirement is quite harsh so it's quite good for the french actors it will be maybe a little bit painful for the

other actors which are in the regular in the jurisdiction we are late or we are more soft um of course regarding specifically the crypto and the virtual asset the the kcml application will be will be rise up actually because uh as you know it's all about money laundering and finding some terrorism this is some principle like some some advice i want to tell you as a lawyer because i talk a lot a bit about cryptocurrency so it's a community i i i like very much but i also listen a lot of and and and witness actually a lot of very strange reflects about the crypto project

regarding regulation so it is a common advice for my last three years of practice uh advising this kind of project the first one is especially if you are like a for instance a default project which are like out of the oven not out of the scope of the regulation but out of the box of the regulation it's just me i used to i used to say to this kind of project like you have to be careful about two things when you are in a regulated market first the man of the street and wall street the manuscript it means that if your project is targeting people who are not like you the crypto geek who are currently listening vitalik instead of me uh you are you you you you will you will necessarily have

more scrutiny from the regulator because the regulator is not here to protect us if i may say but the regulator protects the man of the street actually the regulator is here to protect the people who don't understand what they are doing so this is this is something i i i i say a lot because there is a lot of defy project that actually is very expert the user are experts everybody's expect is very close actually and for this kind of project for me the regulatory risk is quite low i mean from now and the other thing is when you are in a regulated market you have to be very careful of your competitors because if your neighbor is regulated and you are not he will he will and and i know that because it's very is something very common on the unregulated

market you will it will instantaneously it will complain to the regulators and you have to understand that the regulators never leave his desk he's just waiting in the mailbox complained from the from the people in the market and after sending letters and calls the cops it's how it works and it's it's terrific but but it's it's like this this is something i it's it's always like like like uh impress me it's there i i sometimes i i met some projects they told me okay i'm registering to the bvi or in the seychelles so it's okay now of course the regulations apply

where the service is provided so if you are an american project and you provide your service in france you have to comply with a french regulation if you are french and you are and of course if you are registered into the british virgin island it's a very nice place where the tax rate is very low and the regulation is inexistent but if your service is available in uh in france and and and target to the french market it doesn't make sense so that's why i say like like like incorporate your project on a paradise island for different reasons attacks doesn't make sense at all and it's even worse with a criminal offense and for instance being an unregistered

vasp it's a criminal offence and with the criminal offence it's automatic if the victim is in front for instance the french law applier if the victim is in mexico the mexican law with apply whatever your your location or whatever you are registered a regulator on force regulation so it seems quite simple but i i see a lot of project in cryptocurrency because they are lost and because some of the regulators especially in france are very nice we are talking to the regulators and seeking advice from the regulators is is something you should never do really i mean a regulator is not here to

help you it can be very nice but it's not here to help you and he will never put a risk uh for you actually so and even my me my advice is never ask a regulator something if you don't have the answer the answer first actually the right way to deal with the regulators the regulators is you know what you want you know that you can have it because you are clever because you're a very clever lawyer i i don't know why but you know it and you ask the regulator just to confirm this all the other damage is something very like you don't know where you where where where you will land actually so what to keep in mind it's like there is basically

two two different kind of of companies in the industry you have the vas which are on the on under the regulation and the regulation will increase with mika and you are all the deaf free project we are which are we do not fit actually with the regulation but this project for them it's very interesting because they need to build actually a legal strategy on the long run so maybe what they are doing right now it's not it's not in line with the relation but the idea is to find a way to land i don't know maybe in two or three years maybe during the mika application and there always a lot of possibilities for this kind of project you can you can

fail you can succeed you can exit you can be by by regulated actors you can becoming regulated or you can becoming a pure technical provider without front end without direct contact with the man of the street and in this situation you are you are out of the scope of the of the regulation and yeah techno take your time because the the time frame of the regulation and the regulators are not not not the same as as as as crypto community and even mine i mean when i talked with the regulators he told me okay we are here for more than 200 years and we will still be here in 50 years and we we don't we are not in a hurry

actually and in the crypt in crypto community everything moving very fast but being fast and thinking about the legal regulation is something that is not very compatible thank you very much for for listening if you have any questions i will be happy to answer [Applause] thank you i have two questions one is [Music] do the regulators issue like official opinions in france like official opinion that is like a clarification of the law and the second question is you mentioned the front ends so did you mean to say that if you are

uh if you just build a smart contract and you don't build a front end you are safe from regulation hello regarding the thank you very much for your for your question regarding the first question yes the the french regulators and i mean all the the biggest regulation in cryptocurrencies they are issuing uh uh guidelines actually and and the understandment of the law it is something we are sometimes we are we do not agree with them for instance my my love team we have uh we have uh we have a attack this this uh explanation uh at the beginning of the year because regarding some delay because it is just the the position of the administration it's not the law

but it's quite interesting because they are yeah they are giving a lot of highlight about how they treat the file what they expect from the people who want to be regulated so it's it's quite it's quite interesting and in france especially they are the regulators is working a lot with the with the association like the the the add-on which is around today and uh so it's it's quite it's quite clever actually the way they are addressing the this topic and regarding the frontend yeah actually when you are a dust for instance or when you are when you want to sell bitcoin in france you have to be registered but you are you can work as a subcontractors that are not registered

at all it's not a problem so the really the regulators the regulation right now is focused on the front-end i mean under the legal and technical relationship between the provider and the client that makes sense actually because the the the risk of money laundering is here and the risk of i don't know like a legal problem is here it's not between the subcontractors and so on any other questions do you have um thoughts on the fatf

paper that is being uh written in paris i think uh actually yes so the if atf it's uh for for those who don't know where it is it's uh it's the international organization which uh which is working on on the anti-money laundering recommendation so it's basically like the the song of the aml uh in the world like the big boss and the the worst part is they are quite good actually they are working a lot on crypto assets they understand quite well how it works i have heard a lot of criticize very freelance during this evening during the lccc telling that the frtf don't understand the technology they understand it very well

and they have one goal is to enforce maximum of function money laundering so we we don't have the same goal in the life but the goal is very clear it's just every services that is uh touching cryptocurrency allowing people to buy cryptocurrency to to to monitor with one way or another should be subject to regulation so it's exactly what they are doing they're of course fighting the the privacy coin because the money laundering regulation is the purpose of the money laundering regulation is to fight against the privacy i mean even if in the privacy there is a good reason to to want to stay private

but but uh the this regulations the the the i mean the first step of this regulation is to identification is to identify your client so telling to a regulator that you are you like your doors now then and and you want to to to pray to to protect your privacy does not make sense and for the fhf it doesn't make sense so that's why they are like struggling to expand as much as possible there aren't humanity on the recreation and the last part is that they are very very followed by everywhere i mean when fatf do something me with the french market authority what three months later i have to apply what the ftf have said and it's the same in london

same in u.s so but it's it's the the anti-money laundering regulation never forbid to do something you just have to have the right policy and the right procedures and uh and it's okay i mean for the traditional services and if you're a defeat project of course it's a little bit more complicated thank you william um sorry quick question um what are some effective ways you see d5 project implement like travel rule

um i guess compliance is a i was curious if you see any mechanism that's built in the protocol to fulfill travel requirements but regarding the travel rule actually it's a very complicated the travelers for for those who don't know what it is it's just uh the fhtf and and the regulators want to have a trustability i mean with your name and your surname when you are when you are sending cryptocurrency from from one point to another for me it's it's it's actually i don't know how it will be implemented except between vasp so between vasp it's okay because they will they will have the people to do that they will have the technology but the the meaning of the cryptocurrencies to allow people to withdraw the

cryptocurrency put them on their ledger and uh and keep them by themselves and for for me it's something that is like hardly compatible with the with the travel in front the regulators ask the vasp when someone want to withdraw crypto to check a box like uh assessing that it's it's their own address but everybody knows that it's uh it's uh it's just a way to to be nice with ftf and it's not working it's not work at all so i don't know maybe in in few years we will have two worlds one with defy and and i mean uncharted or unregulated uh crypto services

and the other between vasp will be a closed loop with uh travel rules and like exactly the banking system right now thank you very much thank you [Applause] you