Your company, operating in the crypto space, is entering a new regulatory era with the enforcement of the Markets in Crypto-Assets Regulation (MiCAR) as of 30 December 2024. This development ushers your business into an even more regulated phase, as the crypto sector becomes increasingly integrated with the broader financial industry. Navigating this new landscape may seem daunting but take comfort in knowing that you’re not embarking on this journey alone. In this 5-step guide, we'll walk you through the nuances of this transition, pointing out key considerations and potential challenges, while offering practical tips and insights to streamline the process.

Step 1: Understand the licensing landscape

First off, some encouraging news. MiCAR may be new, but we have seen all types of financial services licenses, from banking and payments to insurance and investments. At their core, they are all very similar.

To obtain a license, an applicant must submit:

• A formal license application
• Application(s) for 'Declarations of no objection (DNOs)', depending on the ownership structure
• Screening documentation for the management and the supervisory boards, if present 

These work streams may run in parallel. Each work stream involves quite some paperwork, especially the license application itself. The competent regulator will review the license application, DNO application(s), and screening documentation followed by one or more rounds of Q&As. Some directors may be invited for an in-person interview.

All in all, a CASP license application can be quite a journey, it’s up to you and your advisors to make it a rewarding one.


Step 2: Master the Essential Phases of Your Licensing Pathway

Your way to MiCA can be roughly divided in three phases:
1. an informal preparatory phase
2. the formal assessment phase
3. the ongoing supervision phase, following successfully obtaining your license

1. The preparatory phase

Scoping
Every license application starts with a scoping exercise to determine exactly which regulated services will be provided. This is needed to determine the scope of the license application and the relevant requirements, and the AFM expects applicants to provide a substantiated position on this.

Feasibility study
Once the scope is clear, it is time to perform a feasibility study. Once you know all requirements applicable to the services you provide, you can determine whether obtaining the required license is feasible for your company at this stage, or whether you may need to amend your business setup to be able to go for a lighter or even unregulated regime.

GAP analysis
A GAP analysis helps you determine what documentation and information is already in place/available and what needs to be prepared for the application. Your advisor will help you prioritize.

Pre-scan with the AFM
In the Netherlands, the AFM facilitates an informal ‘pre-scan’ for market participants, to facilitate a smooth process. This pre-scan is available as early as February 2024. For this, you’ll need at least a (relatively well advanced) business plan, including your (envisioned) governance setup. The AFM will also expect to see the outcome of your scoping exercise.

As part of the pre-scan, we can arrange an introduction meeting with the AFM to discuss your proposed setup and any identified attention points upfront. Typical attention points are governance, segregation of funds/crypto assets and AML/CFT compliance. For international or (almost) fully remote companies, substance and outsourcing are also important topics to discuss early in the process.

In our experience such meetings (and potential follow-up Q&As) with the regulator benefit the application process and ensure that potential attention points are known and tackled from the outset.

Once your business plan and governance are clear, it is time to draw up the required policies and procedures, insofar not yet available, and (re)negotiate agreements with external parties such as auditors, accountants, and other services providers.

2. The formal assessment phase
The AFM starts accepting formal license applications for CASPs per April 2024. This allows the market to be ready once MiCA applies and immediately be able to provide CASP services in the entire EU. The AFM has a statutory assessment period of 40 working days starting the day the AFM considers the application complete, which may be extended with another 20 working days. However, the AFM has already indicated that it expects the actual processing time to be at least 5 months. During the formal assessment phase, there will be one or more Q&A rounds, and the AFM may require certain amendments to your business plan, governance and documentation to ensure MiCA compliance.

Step 3: Secure declarations of no objection for shareholders

It’s not just the applicant that faces supervisory scrutiny: all direct and indirect shareholders with a ‘qualifying’ holding in a CASP will be screened on ‘reputation’ and AML/CFT risks. In case of legal entities, their board members will be screened as well.

Qualifying holdings
To obtain a license as CASP, all shareholders with a ‘qualifying holding’ – meaning a direct or indirect interest in the company of 10% or more of the capital, voting rights or similar control – need to obtain a so-called a declaration of no objection (DNO).

Acting in concert
Cooperation among shareholders aimed at creating a long-term voting policy, based on for example a shareholder agreement or family relationships, may increase a shareholders’ influence on the CASP. This is referred to as ‘acting in concert’. In such an event, the holdings of shareholders may be added up, to determine whether someone holds a qualifying holding.

Challenge: timing
Although the DNO screening is a lighter screening than the assessment of the CASP itself – and its board members, see below – the requirement can apply to a large group of persons, depending on the ownership structure. This can be problematic for complex PE structures, especially when they involve jurisdictions with a tendency for long bureaucratic processes (e.g., to obtain criminal records extracts). It is therefore recommended to start preparations early in the license process. Sometimes, remedial actions, such as restructuring of the ownership tree can be considered to avoid the risk of delays.

The actual screening takes the form of:

• studying documentation provided by the applicant (including Q&As if deemed necessary)
• desktop research
• director screening (in case of legal entities).

We discuss director screening below. Once the regulator establishes that the (envisioned) holder of a qualifying holding is of sufficiently good repute and does not create material AML/CFT risks for the CASP, it will issue a declaration of no objection.

Step 4: Master management screening

Comprehend the stakes involved for management screening

First timers often take the ‘fit & proper’ testing by the AFM (or DNB) for granted, or at least underestimate their importance. CASPs and their board members should recognize that the screening of directors brings material risks:

• Personal risks: Individuals who do not pass the screening may be disqualified from assuming or continuing in board roles (or shareholder roles for that matter). Individuals who are assessed as not trustworthy may even be disqualified to work in the financial sector at all.
• Business risks: Without a fully vetted management board, supervisory board (if any), and a shareholder base that meets the required standards (especially those holding 10% or more), your CASP will be ineligible for a MiCA license.

In practice, this necessitates proactive discussions and decision-making. Founders, directors, and investors should evaluate early on if they are likely to meet the regulatory requirements, to avoid significant delays in the licensing process. Early and informed conversations, ideally guided by a professional advisor familiar with regulatory expectations, are critical for safeguarding personal reputations and preventing ill-timed divestments.

Master management evaluation criteria

For both existing and prospective directors, a rigorous evaluation of their reputation and suitability is vital. This includes:

• Reputation: Directors must have a clean record, free from convictions related to financial misconduct or other acts that could compromise their integrity.
• Suitability: This involves demonstrating the necessary skills and experience for specific roles, evaluated by means of:
  • Individual competence: Expertise relevant to specific roles such as CFO, CTO, etc.
  • Collective expertise: The board should collectively cover essential domains like compliance, finance, or risk management, including a comprehensive understanding of the business and its systems.
  • Commitment: Directors should dedicate enough time to effectively fulfill their responsibilities. Holding multiple executive roles can be seen as a lack of focus.

Thankfully, regulators consider the specific size, nature, and complexity of a company when evaluating the suitability of its management. This means that the stringency of the requirements scales proportionately with the organization's size and complexity, ensuring a balanced and fair assessment process. This approach recognizes that different companies have varying needs and capabilities, allowing for a more tailored evaluation of management suitability without compromising on integrity standards.

Implement a comprehensive screening and adjustment strategy
To successfully acquire a MiCA license in the short term, involved parties need to undertake a systematic approach:

• Identify candidates for regulatory screening: Pinpoint all individuals requiring regulatory clearance, including
  • Management personnel
  • Supervisory board members.
• Evaluate eligibility for regulatory clearance: Assess the likelihood of these identified persons and entities passing the regulatory screening process.
• Implement remedial actions (if necessary): If there are doubts about passing the screening, consider taking the following steps:
  • Reallocate responsibilities among directors.
  • Replace certain directors where necessary.
  • Recruit additional directors with specialized expertise.
  • Provide training for individual directors or the entire board.

This structured plan is crucial to avoid delays in the licensing process, ensuring compliance with regulatory requirements and enhancing the overall governance of the organization. 

Step 5: Implement these eight rules for a smooth licensing process

1. No MVP!
You only get one shot to make a first impression. In Tech, working with minimum viable products is a common approach to most new ventures. We strongly recommend not to use this for a license application. Submitting a high-quality license application that is well substantiated and thought through but also looks appealing and is easy to read, significantly decreases process time and increases probability of success. Make the regulator understand your business!

2. Preparation is everything
Preparation is everything, make sure you really understand why you need a license, what procedures you have in place and how potential concerns of the regulator will be addressed. Make sure that you understand the hot potatoes for your organization. This could be a complicated ownership structure, an a-typical choice of directors or the way you handle certain business challenges. If you understand this, you can likely come up with a setup that works for you and the regulator.

3. Involve legal early, to avoid too much legal
Make sure that you identify legal and regulatory attention points and company specific challenges early in the process, to avoid delays and awkward conversations later. In a highly regulated environment, its best to get legal on board early in the process to determine the framework/playing field: minimum required substance, governance, etc. This avoids annoying ‘no cannot’s’ later.

4. Don’t make it a legal thing!
Get you organization on board. Make sure the organization understands why you are applying for a license, what this means for them and how they can help. The AFM expects that your organization knows and understands MiCAR, not just your legal team. In the end, it’s the business that needs to work in this environment.

5. Commitment
Understand that the license is a means to an end for you and for the regulator. A license application may look like a paper exercise, but the regulator will keep you to your word. Don’t use template policies and procedures that may look good but don’t fit you organization in practice. Not following you own policies and procedures may lead to hefty fines later. Consider the license a means to level up the professionalism at your company, and you may even enjoy the ride (or at least find it a useful exercise)!

6. Write it down
Before today, you likely had some policies and procedures, but many things were just organized as they were. Sometimes, all you need to do is write that down. In the process, you might even come up with some improvements you can implement immediately.

7. Regulators are humans too
Help them a little. Make your application stand out in clarity, ease of reading and general look & feel. Be helpful, so that the regulator can help you too.

8. Relationships
The license is just the starting point for an intense long-term relationship with the regulator. Don’t fall into Pyrrhus’ trap. You don’t want to start on a wrong foot.

Next steps
As we wrap up this overview on navigating MiCA licensing for crypto asset services, it's clear that compliance requires diligence and strategic planning. The journey doesn't end with obtaining a license; it extends into maintaining standards and adapting to regulatory updates. For CASPs, the next steps involve assessing your operations against MiCA's criteria, implementing necessary adjustments, and engaging with regulatory processes. Achieving compliance is not merely about fulfilling regulatory demands but also about enhancing your business's integrity and standing within the crypto market.

Given the complexity of these requirements, obtaining professional advice can streamline the process. For further assistance or questions about the MiCA licensing process, feel free to reach out to Willem or Eva. They can help clarify regulatory expectations, assist in preparing your application, and provide insights on best practices for ongoing compliance.