EU Banking Regulators Define Cryptocurrency Shareholder Obligations

European Union regulatory authorities have initiated a consultation process to address various aspects that will fall under the regulation of the EU's forthcoming crypto law, known as MiCA (Markets in Crypto Assets).

The proposed measures encompass several areas, including restrictions on ownership, governance, and bonuses for individuals working within cryptocurrency firms.

One significant aspect of the proposed regulation is the scrutiny of crypto company shareholders who hold more than a 10% stake in the company. Under the suggested regulations, these major shareholders would be subject to vetting processes similar to those used in traditional banking. Specifically, they would be examined for previous criminal convictions or sanctions.

These rules come at a time when prominent figures in the cryptocurrency industry, including Sam Bankman-Fried of FTX, Alex Mashinsky of Celsius, and Changpeng "CZ" Zhao of Binance, are facing legal challenges in the United States. These individuals are accused of misleading or defrauding customers and failing to comply with federal securities laws.

The upcoming MiCA regulation, set to take effect in December 2024, introduces stringent requirements for prospective cryptocurrency license holders. One key requirement is that owners and executives must have an impeccable reputation. Failure to meet these reputation standards could result in the withdrawal of MiCA authorizations. The consultation on these regulations is open for feedback until January.

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), the rulemaking agencies responsible for banking and securities markets law, have stipulated that shareholders and board members of crypto asset service providers should not have any prior convictions related to money laundering, terrorist financing, or any other offenses that could tarnish their reputation. This condition must be upheld continuously.

In a parallel with regulations in the traditional financial sector, these proposed measures aim to prevent individuals with certain criminal convictions from owning significant shares in crypto firms. A notable example in the traditional financial world is the attempt to limit former Italian Prime Minister Silvio Berlusconi's ownership of a significant stake in a bank due to his prior tax fraud conviction.

Additionally, the proposed regulations suggest that companies issuing stablecoins, which are cryptocurrencies pegged to the value of other assets like fiat currency, should also be subject to restrictions on staff bonuses. These measures mirror previous banking-sector regulations designed to mitigate excessive risk-taking.

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