MiCAR and PSD2 Regulation: ESA Insights
Letters from the European Commission and EBA address challenges in aligning MiCA Regulation and PSD2 Regulation, proposing measures to ease compliance and harmonize frameworks for crypto-asset services.
The regulatory environment in Europe continues to evolve, with the Markets in Crypto-Assets Regulation (MiCA Regulation) and the Payment Services Directive 2 (PSD2 Regulation) leading the way in defining how financial and crypto-asset services operate within the European Union. As these frameworks mature, the intersection between MiCA and PSD2 has become a focal point of discussion among regulators, market participants, and policymakers.
This interplay was highlighted in a recent letter by John Berrigan, Director-General for Financial Stability at the European Commission, addressed to the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). This correspondence brought attention to the challenges associated with overlapping regulatory requirements and the implications for financial institutions and crypto-asset service providers (CASPs).
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Background of MiCA Regulation and PSD2 Regulation
Before delving into the specifics of the correspondence, it’s essential to understand the foundational elements of MiCA Regulation and PSD2 Regulation. MiCA, introduced as part of the European Union’s digital finance package, provides a comprehensive framework for the regulation of crypto-assets across the EU. Its goals include creating uniform standards for crypto-asset services, ensuring investor protection, and fostering innovation while maintaining market stability.
PSD2, on the other hand, has been instrumental in transforming payment services within the EU since its adoption in 2015. By enabling open banking, PSD2 facilitated secure data sharing between banks and third-party providers, promoting competition and improving consumer experiences. It also set the standard for the regulation of payment service providers and introduced strong customer authentication (SCA) requirements to bolster payment security.
The overlap between these two frameworks becomes particularly apparent when addressing the treatment of e-money tokens (EMTs). MiCA considers EMTs as crypto-assets, while PSD2 classifies them as "funds," which fall under its payment service regulations. This dual classification has given rise to several challenges, as highlighted by recent regulatory correspondence.
MiCAR and PSD2: Challenges Highlighted
On December 10, 2024, John Berrigan addressed a letter to the EBA and ESMA, emphasizing key concerns surrounding the overlap between MiCA Regulation and PSD2 Regulation. Specifically, the challenges lie in the treatment of e-money tokens (EMTs), which are crypto-assets under MiCA but also classified as "funds" under PSD2. This dual nature creates several issues:
- Dual Authorization Requirements
One of the most significant challenges is the requirement for CASPs to obtain dual authorization under both MiCA and PSD2. This is particularly relevant for CASPs that offer services involving EMTs, which are used as a means of payment or in peer-to-peer (P2P) transactions. Such dual authorization creates operational complexities and administrative burdens, as service providers must comply with two distinct sets of regulatory requirements. - Regulatory Arbitrage and Consumer Protection Risks
Another concern is the risk of regulatory arbitrage due to diverging interpretations of MiCA and PSD2 across EU Member States. This inconsistency could allow service providers to exploit regulatory loopholes, undermining consumer protection and market stability. A harmonized approach is necessary to mitigate these risks and ensure fair competition within the EU. - Ambiguity in Business Models
The rapid evolution of business models in the crypto-asset space adds another layer of complexity. For instance, CASPs that operate custodial wallets or provide payment-like services involving EMTs may inadvertently fall under the scope of PSD2. This creates uncertainty for service providers, who must navigate overlapping regulatory requirements while innovating in a highly competitive market.
To address these challenges, Berrigan proposed several measures, including the issuance of a “no-action letter” by the EBA. Such a letter would temporarily defer the enforcement of PSD2 requirements for EMT-related services provided by CASPs until the implementation of PSD3 or the Payment Services Regulation (PSR). This approach would provide much-needed clarity and relief for service providers while regulators work toward long-term solutions.
Insights from the Letter to ESA
The European Commission’s letter to the EBA and ESMA reflects a pragmatic approach to addressing the challenges associated with the interplay between MiCA Regulation and PSD2 Regulation. It underscores the Commission’s commitment to fostering innovation in financial services while ensuring that regulatory objectives are met.
The proposal for a no-action letter is particularly noteworthy. By deferring the enforcement of PSD2 requirements, regulators can reduce compliance burdens for CASPs and financial institutions. This approach also aligns with the EU’s broader goal of creating a supportive environment for digital finance, where innovation is encouraged without compromising consumer protection or financial stability.
Additionally, the Commission invited the EBA and ESMA to explore potential legislative changes that could harmonize MiCA and PSD2 provisions. This proactive stance highlights the importance of aligning regulatory frameworks to ensure consistency and predictability for market participants.
ESA’s Reply
In its reply dated December 12, 2024, ESA Chair José Manuel Campa acknowledged the challenges and confirmed that the EBA would deliver its assessment by April 2025. However, reliance on this timeline leaves market participants in limbo, especially given the pace of innovation in the crypto-asset space. The lack of immediate clarity could disproportionately affect sectors relying on rapid adaptation, such as payment processors and custodial wallet providers.
This response from ESA reflects several emerging trends in the financial and crypto-asset sectors:
- Harmonization of Regulatory Frameworks
ESA’s commitment to addressing diverging interpretations across Member States signals a shift toward greater harmonization of MiCA and PSD2 provisions. This trend is expected to reduce regulatory fragmentation and create a more unified market for financial services within the EU. - Efficiency in Compliance Processes
The potential streamlining of authorization processes under PSD2 demonstrates a focus on reducing compliance burdens for CASPs and financial institutions. Simplified processes will enable service providers to focus on innovation while maintaining regulatory compliance. - Legislative Evolution
The ongoing discussions surrounding PSD3 and the PSR indicate that future regulations will aim to address the ambiguities and challenges associated with EMT-related services. ESA’s engagement with these discussions suggests that legislative changes are on the horizon, which could significantly impact the regulatory landscape.
If the EBA eventually issues a no-action letter, it will provide temporary relief for CASPs and financial institutions, deferring enforcement of PSD2 requirements for EMT-related services. However, businesses must remain vigilant and agile as they navigate the complexities of these overlapping frameworks.
Implications for Financial Institutions and CASPs
The interplay between MiCA Regulation and PSD2 Regulation presents both challenges and opportunities for financial institutions and CASPs. While the EBA’s cautious approach suggests that immediate action may not be necessary, businesses should take proactive steps to prepare for potential regulatory changes.
- Monitor Regulatory Developments
Financial institutions and CASPs must stay informed about the EBA’s assessment and the progress of PSD3 and PSR discussions. Regular updates from regulators will provide valuable insights into the evolving regulatory landscape. - Evaluate Business Models
Companies should analyze their current operations to determine whether their services involving EMTs fall under the scope of PSD2. This evaluation will help identify potential compliance gaps and areas for improvement. - Engage with Regulators
Open communication with national competent authorities and EU regulators can provide clarity on regulatory expectations and foster a collaborative approach to compliance.
If the EBA eventually issues a no-action letter, it will provide temporary relief for CASPs and financial institutions, deferring enforcement of PSD2 requirements for EMT-related services. However, businesses must remain vigilant and agile as they navigate the complexities of these overlapping frameworks.
The Path Forward for MiCA Regulation and PSD2 Regulation
The interplay between MiCA Regulation and PSD2 Regulation highlights the complexities of regulating innovative financial ecosystems. While MiCA provides a robust framework for crypto-assets, PSD2 ensures the secure and transparent functioning of payment services. Aligning these frameworks is essential to fostering innovation while maintaining market integrity and consumer protection.
The recent correspondence between the European Commission, EBA, and ESMA reflects a commitment to addressing these challenges through collaborative efforts and legislative evolution. By focusing on harmonization, efficiency, and predictability, regulators are paving the way for a more integrated financial services market in the EU.
For financial institutions and CASPs, the road ahead requires proactive engagement with regulators, a thorough understanding of the regulatory landscape, and a commitment to compliance. By embracing these strategies, businesses can navigate the challenges of MiCA and PSD2 while seizing opportunities in the rapidly growing digital finance sector.
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