Crypto News: EBA Warns Crypto Firms May Exploit Loopholes During MiCA Transition

EBA warns crypto firms may exploit loopholes or engage in “jurisdiction shopping” during MiCA’s transition, risking EU financial system integrity.

The European Banking Authority (EBA) recently issued a significant warning. It concerns the MiCA transitional period for crypto firms. Specifically, the EBA says some crypto service providers who have obtained a license may try to take advantage of regulatory gaps. They could also “forum shop” within the bloc. This poses new threats to the stability of the financial system.

EU Regulators Flag Risks of “Forum Shopping” in MiCA Rollout

The EBA indicated that some firms opt to register in certain member states of the EU. These are countries that are considered to have a weaker regulatory environment. As a result, these companies could then work throughout the whole bloc. They would do this by using passporting rights granted under MiCA. This form of practice leads to serious risks of complicated fund flows. Furthermore, it allows for a lack of transparency in governance structures.

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This warning is the summary of lessons learned from previous actions. It is related to the detection and control of Money Laundering/Terrorist Financing (ML/TF) risks. In fact, this applies to crypto-asset businesses both before and after the full implementation of MiCA. The report considers approaches that entities used to evade AML/CFT oversight.

These tactics include unauthorized activities and “forum shopping.” In addition, the reverse solicitation exemption was inappropriately applied by firms. Other issues include ineffective AML/CFT institutions. Multi-entity structures and non-transparent ownership were also a concern. Often, the structures involved high-risk counterparties.

EBA Warns of Ongoing Evasive Practices Among Crypto Firms

The EBA purposely refrained from naming any crypto companies. However, it cautioned that evasive practices may persist. The agency said this behavior is dangerous. It may have a “significant and negative influence” on the EU financial system integrity. This is to show the seriousness of the potential problem.

One type of risk is formally known as forum shopping. This includes companies that are seeking to obtain regulatory approval in one country. The reason this country is selected is that it has less stringent approval mechanisms. Furthermore, the firm will be able to legally trade in all other parts of the EU. This practice is also popularly known as “passporting.”

The case was before the adoption of MiCA. An unknown party made several license applications in different countries one after the other. Specifically, it immediately pulled back applications in which officials posed detailed questions. The company only went out to the country where it was undefeated in. This tactic is proof of clear intent to avoid scrutiny.

MiCA Framework to Enforce Stricter AML and Governance Rules

The EBA identified a particular risk structure. A Virtual Asset Service Provider (VASP) applied for EU licences in several EU countries. One crypto authority found that this VASP was jointly owned by more than 20 different entities. Importantly, the vast majority of these entities were not set up at all within the EU. They were also functioning outside the regulatory framework.

AML/CFT rules are strengthened, and a key safeguard is set out by MiCA. These include a harmonized authorization regime and passporting regime. In addition, they also require tougher governance conditions. They also need more transparency in the beneficial ownership. Successful implementation requires extensive integration of AML/CFT requirements.

Close attention is necessary for the implementation. This monitoring should be done to closely monitor unauthorized activities. Furthermore, there is a need for a comprehensive review of the legacy AML/CFT challenges. There is a need for ongoing risk identification and oversight of the related entities. Unfortunately, effective cross-border cooperation is also key.

The sharing of information by competent authorities (CAs) is key. Transparency in the public is also a factor of success. This teamwork also helps avoid regulatory loopholes. Ultimately, the report is intended to help ensure that these new frameworks are used effectively. It encourages a strong approach to financial crime risk management.