LITHUANIA HAS THE POTENTIAL TO TRANSFORM INTO A HUB FOR US CRYPTO ASSET OPERATORS: ALL YOU NEED TO KNOW ABOUT THE NEWLY ADOPTED EU MiCA REGULATION

When observing the current regulatory environment in the US, it becomes evident that the legal framework for crypto companies lacks both accuracy and legal certainty.

Meanwhile, on 16 May 2023, the European Union took a leap forward by adopting the MiCA Regulation introducing clear rules and providing sufficient transitional period for crypto-asset providers to prepare for the upcoming regulation.

Recent cryptocurrency field developments in the US

Lately, the Securities and Exchange Commission (SEC) has been actively conducting investigations in an attempt to extend its jurisdiction over cryptocurrencies. According to SEC Chair Gary Gensler, the vast majority of cryptocurrencies are securities, with Bitcoin being an exception based on the Howey Test. Therefore, the SEC strives to establish necessary legal precedents within the US courts to enforce its policy of including cryptocurrencies within the scope of securities regulation.

However, recent judiciary milestones, such as the Ripple and Terraform Labs Pte. Ltd cases, represent intermediate court decisions that do not fully resolve the existing turmoil. The establishment of a precedent regarding the classification of crypto-assets as securities or commodities and the allegations against Bitcoin and Coinbase will likely require a verdict from the higher courts to determine their validity.

The SEC’s “regulation by enforcement” not only raises doubts among market participants, scholars, and lawyers, but this aggressive policy also poses a threat to the competitiveness of the US economy. The regulation of crypto-assets should not be determined solely by the courts, given the lack of consistency in case law. History is rife with examples where legislative inaction has resulted in various issues, including political conflicts.

Solution for US crypto companies

The existing framework for crypto-asset operators in Lithuania

Currently, Lithuanian crypto-asset operators are regulated by the Law of the Republic of Lithuania on the Prevention of Money Laundering and Terrorist Financing (AML Law). No licence is required for crypto-asset operators.

However, crypto-asset operators must comply with the following requirements according to the AML Law:

• Capital requirement. The company must have its share capital amounting to at least EUR 125,000 that can be used for any of the company’s needs.
• Impeccable reputation. The governing bodies and beneficiaries of an established crypto company must be of good repute.
• Permanent residency in the Republic of Lithuania. The company must have a permanent resident of Lithuania as its senior executive, who must not necessarily be the company CEO but may be a local manager appointed to manage processes in Lithuania.
• Acting for one crypto company only. Employees holding senior positions in cryptocurrency exchanges may not represent more than one cryptocurrency exchange at the same time.

Once the company complying with the above requirements has been set up, it must be entered on the Register of Legal Entities of the Republic of Lithuania noting that the company is authorized to operate as a cryptocurrency exchange and/or cryptocurrency depository wallet operator. Additionally, the Financial Crime Investigation Service must be notified to the effect that the person responsible for implementing anti-money laundering and anti-terrorist financing requirements within the company has been appointed.

Current regulations in Lithuania do not prohibit authorized crypto companies from doing business outside the local jurisdiction, therefore, such companies are free to carry out similar activities in other countries as well (provided that such activities fall under the regulation of the respective country).

Obtain an EU licence under the MiCA Regulation

For the time being, US companies may consider a possibility of relocating their businesses to Lithuania and establishing themselves as crypto-asset providers here should the above requirements be met.

There may be a transition period of approximately 18 months (starting at the end of 2024) during which these crypto companies may be allowed to operate without a licence under the MiCA Regulation and may be provided with additional time to prepare for the licensing process that will allow passporting within the EU. However, the Bank of Lithuania is still deliberating on whether to implement this transitional period for crypto companies authorised as VASPs in Lithuania. If the transitional period is not granted, crypto companies will be required to obtain a licence starting from December 2024.

Click for more information about the licensing process in Lithuania under the MiCA Regulation.