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Crypto-assets are becoming more and more common, and they are an expression of the rapidly growing digitization and globalization in the technological and financial fields. However, they have so far been subject to very limited regulation, which is why they attract a lot of interest from a legal angle, especially for companies that intend to operate within the area. Financial regulation in Denmark is generally characterized by retail regulation, which is largely based on EU regulation. This also applies in the area of crypto asset services.
The EU and the European supervisory authorities have long focused on crypto-assets and their impact on the financial system, and in 2018 the EU adopted the 5th Money Laundering Directive for e.g. ‘virtual currency’. The purpose of the directive was to meet the risks that were immediately associated with the use of virtual currencies, whereby the actors in the field were covered by the scope of the money laundering regulation. In January 2020, the directive was implemented in the Danish Money Laundering Act, which thus expanded the scope of the law to also include a number of providers of crypto asset services in the future, cf. section 2 below. Since then, the EU has accordingly put forward proposals for the Market in Crypto-Assets (MiCA) regulation in 2020, which creates an independent, supranational regulatory regime for crypto-assets in the EU, cf. section 3 below.
1. VASP registration
Under the Money Laundering Act, companies that offer a number of crypto-asset services must be registered with the Danish Financial Supervisory Authority as a Virtual Asset Service Provider (VASP), if the services are offered commercially. The Danish Financial Supervisory Authority defines a VASP as ” Companies that offer services with the exchange, transfer, issuance and storage of virtual currencies. ” Covered by the Money Laundering Act and registration with the Danish Financial Supervisory Authority are then companies that:
Provides exchange between virtual currencies and fiat currencies,
Provider of virtual wallets (An entity that provides services to protect private cryptographic keys on behalf of its customers for the purpose of storing, storing and transferring virtual currencies),
Provides exchange between one or more types of virtual currency,
Provides virtual currency transfer, and
Issuing virtual currencies (e.g. Initial Coin Offering, “ICO”)
Companies must be registered if they wish to offer one or more of the activities mentioned above, if the company is not already under the supervision of the Danish Financial Supervisory Authority in relation to other legislation. Furthermore, registration must only take place if the activity is carried out for business purposes, even if the activity is not the company’s main activity. Commercial means that the activity is offered to third parties (“customers”) or that the activity has such a scope that it constitutes a not insignificant part of the company’s turnover. If, on the other hand, it is simply a matter of individual business dispositions that have a natural connection to the company’s main activity, the company does not have to be registered, e.g. companies’ ongoing placement of surplus liquidity, where the purpose is passive asset management. The provider is then obliged to carry out risk assessment and know-your-customer procedures (KYC), and is also subject to the supervision of the Danish Financial Supervisory Authority, including a number of investigation, listing and notification obligations. Members of the company’s management and beneficial owners must also be assessed as fit-and-proper in connection with the registration request before the company can be registered with the Danish Financial Supervisory Authority.
2. MiCA
In addition to the mentioned amendment to the Money Laundering Act, which now regulates a number of providers of crypto-asset services, crypto-assets are not independently regulated, which is why they basically fall outside the Danish financial regulation. This has meant that, for a number of years, providers of crypto-asset services have found themselves in a legal gray zone, where it has been doubtful which rules – if any at all – should apply, including whether a crypto-asset should be interpreted so that it is covered by the previous regulation. However, due to new EU legislation, the Danish FSA may soon supervise companies that work with cryptocurrency and technology, as the EU legislature is currently adopting a pan-European regulation of the market for cryptocurrencies with the regulation Market in Crypto-Assets (MiCA), which they have been working on since 2019.
MiCA aims to 1) create uniform rules for players in the European market for cryptoassets and related services, 2) support innovation and fair competition, 3) ensure adequate consumer and investor protection as well as market integrity, and 4) ensure financial stability. MiCA’s scope of application is broad and thus aims to affect the entire industry and not just the players who either deal with or offer cryptocurrency. According to MiCA, crypto asset services may only be offered by companies that (i) is domiciled in the EU, and (ii) has been granted permission as a provider of crypto asset services by the relevant supervisory authority, which in Denmark will be the Danish Financial Supervisory Authority.
Crypto asset services are defined in MiCA as one or more of the following activities:
Escrow and management of crypto assets on behalf of third parties
Operation of a trading platform for crypto assets
Exchange between crypto asset and fiat currency
Exchange between crypto-assets and other crypto-assets
Execution of orders relating to cryptoassets on behalf of third parties
Location of crypto assets
Receiving and transmitting orders relating to crypto assets on behalf of third parties
Advice on crypto-assets
In MiCA, a distinction is also made between three subcategories of cryptoassets:
Asset-based tokens (ART), the purpose of which is to maintain a stable value by referring to the value of several fiat currencies (legal tender such as Danish kroner), one or more commodities (e.g. copper), one or more cryptoassets (e.g. Bitcoin) , or a combination thereof.
E-money token (EMT), whose primary purpose is to act as a means of payment. The intention is to maintain a stable value by referring to a fiat currency (legal tender).
All other crypto-assets that do not fall under the definition of ART and EMT, including so-called utility tokens that give the holder a right to a good or a service (e.g. a cinema ticket or access to a shared car, where only holders of the specific token have access) .
The regulation that providers of crypto-asset services must now comply with has certain features in common with financial legislation, including in relation to reporting and reporting requirements as well as requirements for management, but the providers will greatly benefit from the clearer guidelines in this area. MiCA will apply supranationally in all countries in the EU, and is expected to be adopted in 2023 with entry into force in 2024 at the latest.
At DreistStorgaard Advokater A/S, we have already advised a number of companies that do business with crypto assets, including providers of crypto asset services. We follow the regulation and developments closely, and we are of course available if you or your company have any questions in this regard.
You can contact us on phone 56 63 44 66 or by email kontakt@dslaw.dk.
Crypto-assets are becoming more and more common, and they are an expression of the rapidly growing digitization and globalization in the technological and financial fields. However, they have so far been subject to very limited regulation, which is why they attract a lot of interest from a legal angle, especially for companies that intend to operate within the area. Financial regulation in Denmark is generally characterized by retail regulation, which is largely based on EU regulation. This also applies in the area of crypto asset services.
The EU and the European supervisory authorities have long focused on crypto-assets and their impact on the financial system, and in 2018 the EU adopted the 5th Money Laundering Directive for e.g. ‘virtual currency’. The purpose of the directive was to meet the risks that were immediately associated with the use of virtual currencies, whereby the actors in the field were covered by the scope of the money laundering regulation. In January 2020, the directive was implemented in the Danish Money Laundering Act, which thus expanded the scope of the law to also include a number of providers of crypto asset services in the future, cf. section 2 below. Since then, the EU has accordingly put forward proposals for the Market in Crypto-Assets (MiCA) regulation in 2020, which creates an independent, supranational regulatory regime for crypto-assets in the EU, cf. section 3 below.
1. VASP registration
Under the Money Laundering Act, companies that offer a number of crypto-asset services must be registered with the Danish Financial Supervisory Authority as a Virtual Asset Service Provider (VASP), if the services are offered commercially. The Danish Financial Supervisory Authority defines a VASP as ” Companies that offer services with the exchange, transfer, issuance and storage of virtual currencies. ” Covered by the Money Laundering Act and registration with the Danish Financial Supervisory Authority are then companies that:
Provides exchange between virtual currencies and fiat currencies,
Provider of virtual wallets (An entity that provides services to protect private cryptographic keys on behalf of its customers for the purpose of storing, storing and transferring virtual currencies),
Provides exchange between one or more types of virtual currency,
Provides virtual currency transfer, and
Issuing virtual currencies (e.g. Initial Coin Offering, “ICO”)
Companies must be registered if they wish to offer one or more of the activities mentioned above, if the company is not already under the supervision of the Danish Financial Supervisory Authority in relation to other legislation. Furthermore, registration must only take place if the activity is carried out for business purposes, even if the activity is not the company’s main activity. Commercial means that the activity is offered to third parties (“customers”) or that the activity has such a scope that it constitutes a not insignificant part of the company’s turnover. If, on the other hand, it is simply a matter of individual business dispositions that have a natural connection to the company’s main activity, the company does not have to be registered, e.g. companies’ ongoing placement of surplus liquidity, where the purpose is passive asset management. The provider is then obliged to carry out risk assessment and know-your-customer procedures (KYC), and is also subject to the supervision of the Danish Financial Supervisory Authority, including a number of investigation, listing and notification obligations. Members of the company’s management and beneficial owners must also be assessed as fit-and-proper in connection with the registration request before the company can be registered with the Danish Financial Supervisory Authority.
2. MiCA
In addition to the mentioned amendment to the Money Laundering Act, which now regulates a number of providers of crypto-asset services, crypto-assets are not independently regulated, which is why they basically fall outside the Danish financial regulation. This has meant that, for a number of years, providers of crypto-asset services have found themselves in a legal gray zone, where it has been doubtful which rules – if any at all – should apply, including whether a crypto-asset should be interpreted so that it is covered by the previous regulation. However, due to new EU legislation, the Danish FSA may soon supervise companies that work with cryptocurrency and technology, as the EU legislature is currently adopting a pan-European regulation of the market for cryptocurrencies with the regulation Market in Crypto-Assets (MiCA), which they have been working on since 2019.
MiCA aims to 1) create uniform rules for players in the European market for cryptoassets and related services, 2) support innovation and fair competition, 3) ensure adequate consumer and investor protection as well as market integrity, and 4) ensure financial stability. MiCA’s scope of application is broad and thus aims to affect the entire industry and not just the players who either deal with or offer cryptocurrency. According to MiCA, crypto asset services may only be offered by companies that (i) is domiciled in the EU, and (ii) has been granted permission as a provider of crypto asset services by the relevant supervisory authority, which in Denmark will be the Danish Financial Supervisory Authority.
Crypto asset services are defined in MiCA as one or more of the following activities:
Escrow and management of crypto assets on behalf of third parties
Operation of a trading platform for crypto assets
Exchange between crypto asset and fiat currency
Exchange between crypto-assets and other crypto-assets
Execution of orders relating to cryptoassets on behalf of third parties
Location of crypto assets
Receiving and transmitting orders relating to crypto assets on behalf of third parties
Advice on crypto-assets
In MiCA, a distinction is also made between three subcategories of cryptoassets:
Asset-based tokens (ART), the purpose of which is to maintain a stable value by referring to the value of several fiat currencies (legal tender such as Danish kroner), one or more commodities (e.g. copper), one or more cryptoassets (e.g. Bitcoin) , or a combination thereof.
E-money token (EMT), whose primary purpose is to act as a means of payment. The intention is to maintain a stable value by referring to a fiat currency (legal tender).
All other crypto-assets that do not fall under the definition of ART and EMT, including so-called utility tokens that give the holder a right to a good or a service (e.g. a cinema ticket or access to a shared car, where only holders of the specific token have access) .
The regulation that providers of crypto-asset services must now comply with has certain features in common with financial legislation, including in relation to reporting and reporting requirements as well as requirements for management, but the providers will greatly benefit from the clearer guidelines in this area. MiCA will apply supranationally in all countries in the EU, and is expected to be adopted in 2023 with entry into force in 2024 at the latest.
At DreistStorgaard Advokater A/S, we have already advised a number of companies that do business with crypto assets, including providers of crypto asset services. We follow the regulation and developments closely, and we are of course available if you or your company have any questions in this regard.
You can contact us on phone 56 63 44 66 or by email kontakt@dslaw.dk.
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