knowledge 20 March 2024 |

Virtual Asset Regulation In Ireland

In particular, legislation was recently passed:

1.  To prevent money laundering and counter the financing of terrorism through virtual assets such as crypto currencies.
2. To increase protection for investors, including new rules prohibiting unlawful disclosure of inside information, insider dealing in crypto-assets, and actions that are likely to lead to disruption or manipulation of crypto-assets.

As a member of the European Union, Ireland has integrated these new rules into its strong existing regulatory framework.

This article explores the regulatory landscape, the implications of anti-money laundering obligations, the registration process, and the significance of the EU Markets in Crypto-Assets Regulation EU 2023/1114 (MiCA) for VASPs operating in Ireland. We expect these legal developments to strengthen confidence in the virtual asset market in Ireland.

Why Ireland?

Aside from Ireland’s position as a FinTech hub, there are a number of advantages to operating in the virtual assets space in Ireland, including:

1. A strong regulatory framework with a credible and experienced regulator, the Central Bank of Ireland.
2. EU Membership which provides a gateway to and from the EU market.
3. A common law (rather than civil law) legal system which has similar roots to the British and American legal systems, which can be more comfortably familiar for some applicants.
4. The ability to engage with the Central Bank of Ireland through its Innovation Hub.
5. A favourable tax regime, due to a combination of a 12.5% corporate tax rate and an exceptionally extensive and comprehensive set of double tax agreements.
6. Access to a sophisticated financial services ecosystem with a deep pool of staff, managers, professional advisers and service providers including not only native English speakers but a sizeable international population.

Anti-Money Laundering And Countering The Financing Of Terrorism Obligations

The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021 extends the application of the Criminal Justice (Money Laundering and Terrorist Financing) Acts 2010 to 2021 (the CJA 2010) to VASPs operating in Ireland. The CJA 2010 transposes several EU Directives on anti-money laundering into Irish law.

Importantly, all VASPs established in Ireland are required to register with the Central Bank of Ireland for Anti-Money Laundering and Countering the Financing of Terrorism purposes. The process for registering as a VASP with the Central Bank of Ireland is set out below.

 

The Process for Registering as a VASP in Ireland
Stage	Details
Pre-registration	An applicant should complete the VASP Pre-Registration Form. Once complete, this should be submitted to the Central Bank of Ireland. The Central Bank of Ireland then issues an email to the applicant containing an Institution Number, a Reporting Date and details on how to access and submit a VASP AML/CFT Registration Form via the Central Bank's Portal system. The applicant then submits a VASP AML/CFT Registration Form and all supporting documentation through the Portal system.
Acknowledgment	In our experience, the Central Bank of Ireland will acknowledge receipt of the applicant's VASP registration submitted on the Portal system within a few days.
Information Check	The Central Bank of Ireland will check that the application for registration information and documentation submitted is complete (i.e. contains all the required information and documentation). The Central Bank of Ireland will either then: advise the applicant that the registration contains the required information and documentation to proceed to the assessment phase; or advise the applicant that the registration application does not contain all the required information or documentation. If this happens, details of any information omitted from the registration application will be provided to the applicant who will then have an opportunity to provide this information.
Assessment Phase	Once all required information and documentation is provided, the Central Bank of Ireland conducts an assessment of the registration application against the registration requirements. During the assessment phase, the Central Bank of Ireland will issue comments and/or questions to the applicant based on its assessment and review of the application for registration. The Central Bank of Ireland may also request further documentation to be provided by the applicant.
Notification of Assessment	The Central Bank of Ireland notifies the applicant of the outcome of the assessment process. If applicable, the applicant will be given the opportunity to address concerns arising at this stage of the process.
Notification of Decision	The Central Bank of Ireland will notify the applicant of its decision to grant or refuse the registration. Registration may be subject to specific conditions.

The number of VASPs registered with the Central Bank of Ireland more than doubled between 2022 and 2023, which reflects the Irish regulator’s recent experience processing these applications and interest in virtual assets in Ireland.

The CJA 2010 defines a VASP as “a person who by way of business carries out one or more of the following activities for, or on behalf of, another person:

1. exchange between virtual assets and fiat currencies;
2. exchange between one or more forms of virtual assets;
3. transfer of virtual assets, that is to say, conduct a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another;
4. custodian wallet provider;
5. participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset or both;

but does not include a designated person that is not a financial or credit institution and that provides virtual asset services in an incidental manner and is subject to supervision by a national competent authority, other than the [Central Bank of Ireland].”¹

A ‘custodian wallet provider’ means “an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies”.

A ‘virtual asset’ means “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include digital representations of fiat currencies, securities or other financial assets.”

Registered VASPs are “designated persons” for the purposes of the CJA 2010. Therefore, they must have effective anti-money laundering and countering terrorist financing policies and procedures. For example, VASPs must meet customer due diligence requirements, identify the ultimate beneficial owner of customers who are legal persons and identify whether any clients are politically exposed persons (PEPs).

MiCA

MiCA brings crypto-assets, crypto-asset issuers and crypto-asset service providers (CASPs)² under a pan-EU regulatory framework which increases protection for investors and customers. As an EU Regulation, MiCA has direct effect in EU Member States including Ireland, although certain matters are left to the discretion of Member States.

CASPS are required by MiCA to safe-guard funds, meet prudential requirements themselves or via an insurance policy, and have policies regarding business continuity, complaint handling, management of conflicts of interest and outsourcing. Under MiCA, there must be clear warnings regarding the risks of transactions involving crypto-assets and no misleading information.

MiCA prohibits market abuse regarding any form of crypto-asset transaction or service. This includes unlawful disclosure of inside information, insider trading and actions that are likely to lead to disruption or manipulation of crypto-assets.

Additionally, MiCA sets out obligations in respect of:

1. Asset-Referenced Tokens (ARTs) which purport to maintain a stable value by referencing another value or right or combination thereof, such as a basket of currencies.
2. E-Money Tokens (EMTs) which purport to maintain a stable value by referencing an official currency.

MiCA explicitly excludes crypto-assets that are unique and not fungible with other crypto-assets.

On 29 January 2024, the European Securities and Markets Authority (ESMA) began a consultation process on the classification of crypto-assets as financial instruments. The key point emphasised by ESMA throughout its analysis is that the classification of crypto-assets as financial instruments depends on the specific characteristics and nature of the crypto-assets. It is a case-by-case, ‘substance-over-form’ approach that is required, regardless of labels and technology.

This also applies in respect of ‘hybrid’ tokens which may span MiCA and Markets in Financial Instruments Directive 2014/65 (MIFID) characteristics (eg the token could be both utility-type and investment-type). In such cases, ESMA suggests that if the token meets the “financial instrument” criteria, this categorisation should prevail (so that the instrument will be regulated according to MiFID rather than MiCA). This analysis appears to be consistent with the approach taken by the Central Bank of Ireland to date.

The Future

Market indicators suggest that there is a growing appetite for virtual assets in Ireland, with a growing number of VASPs registered in Ireland. We anticipate increased interest in virtual assets in Ireland with the introduction of MiCA.

The regulation of VASPs in Ireland is evolving in line with the EU's efforts to enhance the oversight and protection of investors in the virtual asset sector. VASPs and CASPs will need to comply with the Irish regulatory system in order to leverage the opportunities and advantages of operating in Ireland to expand their businesses across the EU.

Also contributed to by Eunice Collins

*This article was first published by the IFC Review on 28 February 2024