Trump's election, Bitcoin's new high... At the end of 2024, the cryptocurrency industry saw a new wave of positive signals, and while the industry continued to develop, various countries were also introducing corresponding regulatory measures. Among all the measures, the most eye-catching one was the "license".

Author: Bai Qin, Song Kewai, Manqun Blockchain Legal Services

What is a license? In a nutshell, a "license" is the "passport" for Web3 companies to engage in cryptocurrency-related business. It allows Web3 companies to legally and safely engage in cryptocurrency-related activities, while also establishing trust between investors and regulators.

This article will delve into the compliance frameworks of MiCA and VARA, analyzing why for Web3 companies that want to thrive in the regulated market, holding a license is not just an option, but a necessity. Understanding this field is crucial for any company or investor seeking to succeed in the next chapter of the cryptocurrency industry.

Table of Contents

MiCA and VARA licenses are the compliance tools for Web3 companies to enter the European and Middle Eastern markets

MiCA vs VARA: A comparison of the regulatory frameworks from the perspective of license application

Overview of licensed business activities under the MiCA framework

Overview of licensed business activities under the VARA framework

Comparison of the scope of licensed business under MiCA and VARA

The strategic value of licenses: Why Web3 companies must plan ahead

Track industry trends and plan ahead for licenses

Manage compliance risks and reduce compliance costs

Enhance brand image and drive financing cooperation

License application analysis: The case of MiCA stablecoin issuance

1. Reactions of licensed institutions

Circle

SG-Forge

2. Reactions of unlicensed institutions

UpholdS

3. HashKey's attitude: "License first"

Conclusion

MiCA and VARA licenses are the compliance tools for Web3 companies to enter the European and Middle Eastern markets

The European Union's Regulation on Markets in Crypto-Assets (MiCA) is "one of the most comprehensive digital asset regulatory frameworks to date". The regulation aims to provide a clear regulatory environment, reduce compliance costs, and encourage companies to enter the EU cryptocurrency market. The MiCA regulatory framework applies to all EU member states. It also applies to the three European Free Trade Association (EFTA) member states (Iceland, Liechtenstein, and Norway) that are part of the European Economic Area (EEA), as they are part of the internal market and subject to many of the same EU regulations.

The Dubai Virtual Assets Regulatory Authority (VARA) is the world's first independent virtual asset regulator, responsible for regulating the issuance and trading of virtual assets within and from the Emirate of Dubai. Its policies are shaping the regulatory direction of the Web3 industry in the Middle East region. VARA's influence is limited to the Emirate of Dubai; other areas of the UAE and the Dubai International Financial Centre are not under its jurisdiction.

The background and global impact of MiCA and VARA

Global regulatory trend: MiCA and VARA are landmark events in the global regulatory trend. They not only signify the strict regulation of the Web3 industry by various countries, but may also become templates for regulatory frameworks in other countries.

Strategic significance for Europe and the Middle East: The European and Middle Eastern markets are key markets for Web3 companies to expand into, with a large investor base, innovative ecosystem, and development potential. The guiding role of MiCA and VARA in these two markets may become a global market trend.

From regulation to innovation: MiCA and VARA are not just regulatory tools, but may also bring more innovation opportunities. A standardized market is a double-edged sword for startups, with both constraints and incentives.

The business value of obtaining MiCA and VARA licenses

Compliance and market access: Holding MiCA and VARA licenses can serve as a legal "passport" for entering the Middle Eastern and European markets, helping companies gain the trust of local financial markets and reduce legal barriers to market access.

Enhance company image and market reputation: In the cryptocurrency industry, licenses are not only a compliance symbol, but also a symbol of a company's strength. Web3 companies that obtain these licenses will gain higher recognition in the industry.

Increase the possibility of cross-border expansion: Obtaining MiCA and VARA licenses can help companies conduct business in different regions, reducing compliance risks in cross-border expansion. They provide companies with "cross-border operating licenses" in the EU and Middle East markets.

MiCA vs VARA: A comparison of the regulatory frameworks from the perspective of license application

Different regions have different regulatory requirements and market demands for Web3 companies, and the role and importance of MiCA and VARA licenses in these regions also differ. Europe may focus more on market transparency and risk control, while the Middle East may focus more on rapid innovation and capital flow.

Overview of licensed business activities under the MiCA framework

MiCA sets out detailed compliance requirements for the issuance and trading of stablecoins such as EMTs and ARTs, but due to space limitations, this article will not go into detail on this. Here, we will only provide a basic overview of "crypto-asset services" under the MiCA framework. "Crypto-asset services" refer to any of the following services and activities related to any crypto-asset:

1. Providing custody and administration of crypto-assets on behalf of clients

2. Operating a trading platform for crypto-assets

3. Exchanging crypto-assets for funds

4. Exchanging crypto-assets for other crypto-assets

5. Executing orders for crypto-assets on behalf of clients

6. Placing of crypto-assets

7. Receiving and transmitting orders for crypto-assets on behalf of clients

8. Providing advice on crypto-assets

9. Providing portfolio management on crypto-assets

10. Providing transfer services for crypto-assets on behalf of clients

Overview of licensed business activities under the VARA framework

Any entity, whether operating within or from the Emirate of Dubai, whether serving UAE residents or providing services to a global clientele where the relevant activities are permitted, must apply for and obtain a license from VARA.

Currently, there are 8 licensed business activities under the VARA framework:

1. Advisory Services: Providing advice on virtual asset-related matters

2. Broker-Dealer Services: Facilitating the buying and selling of virtual assets

3. Custody Services: Providing custody services for virtual assets to ensure their security. (VARA has additional requirements)

4. Exchange Services: Operating a virtual asset trading platform

5. Lending And Borrowing Services: Facilitating the lending and borrowing of virtual assets. (MiCA has not yet covered this)

6. Management and Investment Services: Managing and investing virtual assets on behalf of clients

7. Transfer and Settlement Services: Facilitating the transfer and settlement of virtual assets

8. VA Issuance Category 1: Issuance of stablecoins such as FRVA (Fiat-Referenced Virtual Asset)

Applicants can apply for multiple licensed business activities and have them consolidated under a single overarching license.

Comparison of the scope of licensed business under MiCA and VARA

From the summary of the above table, it can be seen that MiCA and VARA have different regulatory scopes for licensed business activities.

In terms of lending and borrowing services, VARA provides a channel for applying for this licensed business, but MiCA does not involve it, at least in 2024, MiCA will not provide licensing activities for lending business. Therefore, MiCA has no intention to regulate lending services related to crypto assets, including e-money tokens, and does not prejudice the applicable national laws in this field.

In terms of custody services, VARA imposes additional regulatory requirements on VASPs, and virtual asset custody services are the only business activities that need to be handled separately from other licensed businesses. In this case, a VA custodian must be established as a separate legal entity with a separate license, rather than being merged into an overarching license like other businesses.

In addition, licensed institutions must ensure that they fully comply with the license activity requirements from the application stage to the conduct of business activities.

The Strategic Value of Licenses: Why Web3 Companies Must Layout in Advance

Why do Web3 companies need licenses? The most direct reason is - without a license, they will be blacklisted. In May 2024, the French financial regulator Autorité des Marchés Financiers (AMF) stated that due to BYBIT's unauthorized provision of virtual digital asset services in France, AMF reserves the right to take legal measures to block the platform's website.

Track industry trends and layout licenses in advance

With the rapid development of the Web3 industry, regulatory authorities around the world are gradually strengthening their supervision of virtual assets and blockchain technology. The regulatory policies and legal frameworks in different regions are constantly changing, which poses a huge compliance challenge for Web3 companies. If companies do not layout the license application in advance, they may miss the best window for compliant development, resulting in restrictions on their operations and expansion.

The rapid development of the industry and the lag in regulation: Globally, the Web3 industry is developing rapidly, but the regulatory frameworks of various countries are often lagging behind. This lag may cause some companies to fail to obtain the necessary licenses in a timely manner, thereby missing market opportunities. Laying out licenses in advance can help companies seize the initiative and gain market share.

The trend of stricter regulation: Currently, whether it is the VARA in the Middle East or the MiCA in the EU, they are accelerating the compliance of various virtual asset-related businesses. Understanding the requirements of these regulatory frameworks in advance and applying for relevant licenses in a timely manner will ensure that companies operate within the legal framework and avoid the risks brought by future regulatory tightening.

Avoid the risk of sudden policy changes: Governments' attitudes towards the Web3 industry are gradually shifting towards strict supervision. If companies wait until the policies are fully mature before applying for licenses, they may face more cumbersome approval processes, or even the risk of being rejected. Laying out licenses in advance means that companies can more calmly cope with possible future policy changes and regulatory requirements.

Manage compliance risks and reduce compliance costs

In the Web3 industry, compliance issues have always been a major challenge for companies. With the continuous changes in the global regulatory environment, if companies fail to obtain compliance licenses in a timely manner, they will face a series of legal risks, including penalties, lawsuits, and even business interruptions. By applying for licenses in advance, companies can not only effectively manage compliance risks, but also significantly reduce potential compliance costs.

Avoid the financial losses caused by compliance risks: If companies do not hold legal licenses and are punished by regulators, they may face huge fines, asset freezes, and even operational interruptions. Holding compliant licenses can provide legal protection for companies and reduce legal disputes and financial losses.

The complexity of the compliance review process: The regulatory frameworks of each country and region may be different. Applying for licenses in advance and ensuring compliance with regulatory requirements can help companies avoid being rejected or encountering complex review procedures due to non-compliance. In the long run, this will reduce the costs and time spent on compliance failures.

The long-term advantages of compliant operations: Compliance is not a one-time task, but an ongoing process. After companies obtain licenses, regulatory authorities will conduct regular reviews of them. Obtaining licenses in advance and successfully passing reviews will enable companies to proceed more steadily on the path of compliant operations and become more competitive.

Simplify cross-border compliance issues: Web3 companies are often multinational, involving regulatory requirements in different countries and regions. Holding licenses in multiple regions can simplify cross-border compliance issues, ensure that companies can operate smoothly in different markets, and avoid legal obstacles due to lack of licenses.

Enhance brand image and drive financing and cooperation

After the Hong Kong Securities and Futures Commission issued virtual asset trading platform licenses this year, HashKey Exchange CEO Weng Xiaoqi pointed out that the drive of the new regulations on June 1 will lead to the clearance of unlicensed platforms in the short term, bringing a user spillover effect to licensed institutions. Currently, HashKey's business end has already sensed obvious changes, with a 267% week-on-week increase in new user activations last week.

In the Web3 industry, trust is one of the key factors in attracting investors and users. Licenses are not only a symbol of compliance, but also a sign of the company's reliability and professionalism. Obtaining legal licenses can effectively enhance the company's brand image and bring more financing and cooperation opportunities.

Enhance user trust: Due to the industry characteristics, users and investors often have certain doubts about the compliance and security of Web3 companies. Holding legal licenses can demonstrate the company's compliance to the market and establish a stronger foundation of trust. This trust can not only attract more users, but also increase the investment interest of institutional investors in the company.

Enhance the credibility of the brand: Compliance licenses represent the legality and credibility of the company in the global market. Web3 companies can effectively establish their brand image and demonstrate their professionalism in the industry by obtaining regional or international licenses. Especially in highly competitive markets, licenses can help companies stand out.

Promote financing and cooperation: Licensed companies are usually more attractive for financing, especially for institutional investors and venture capitalists. Investors are more inclined to invest in compliant companies, as this means lower legal risks and higher market stability. Through licenses, Web3 companies can effectively obtain more financial support.

Expand cooperation opportunities: Many business partners, such as financial institutions, technology suppliers, or multinational companies, are more willing to cooperate with Web3 companies that hold compliant licenses. Licenses not only represent the company's compliance, but also convey the company's maturity and sense of responsibility in the industry. Therefore, obtaining legal licenses is an important condition for companies to expand cooperation opportunities.

License Application Analysis: Taking the Example of MiCA Stablecoin Issuance

Under the MiCA regulation, the new strict requirements for stablecoin issuers will take effect across the entire EU. This upcoming regulation represents a major change in the European stablecoin regulatory framework, and under this new framework, any entity issuing stablecoins in the European region must comply with the provisions under the MiCA framework, and institutions have different reactions to this.

1. Reaction of licensed institutions

Circle

In June 2024, Circle, a US-based stablecoin issuer, announced that it has fully complied with the MiCA regulations. The company has become the first global stablecoin issuer to obtain an Electronic Money Institution (EMI) license under the EU's MiCA regulatory framework, allowing it to use its license within the EU. Circle announced that its two main stablecoins, USDC and EURC, now meet the regulatory requirements of the new rules and can be used under the new European regulations. As an EMI registered in France, Circle Mint France will issue its euro-denominated EURC stablecoin "onshore" in the EU and issue USDC from the same entity to serve customers across the entire EU.

SG-Forge

Societe Generale's subsidiary Forge (SG-Forge) has also announced that it has obtained an electronic money license, and its stablecoin EURCV has now been classified as an electronic money token under MiCA. SG-Forge has updated its smart contract to remove the whitelist restriction, bringing it into compliance with the MiCA regulations. This update was primarily to improve settlement speed, enhance security, and expand its applications on public blockchains. This allows EURCV to be used in a wider market, providing more liquidity and use cases.

Now that these stablecoin issuers have taken this step and obtained electronic money licenses, we may see other stablecoin companies seeking similar approvals in Europe. This can provide more options for those who want to use stablecoins.

2. Reaction of Unlicensed Institutions

Due to the strict requirements for stablecoins pegged to the US dollar, MiCA faces the risk of many existing currencies being deemed non-compliant and forced to exit the EU market. Under MiCA, companies issuing fiat-backed stablecoins must now obtain an electronic money license within the EU. To offer stablecoins in the EU, issuers must register as an electronic money institution or credit institution. There are several key obligations, such as publishing a whitepaper, holding liquid reserves with a third-party custodian, and reporting on the value and composition of the reserves.

Many cryptocurrency exchanges operating within the EU have already taken action before the new rules came into effect. They have announced changes to their stablecoin policies and product offerings, creating significant opportunities for licensed electronic money platforms. Major cryptocurrency exchanges such as Uphold, Binance, Bitstamp, Kraken, and OKX have already started delisting non-compliant stablecoins like Tether and DAI for their European customers, or have begun restricting services to EU and EEA users, while other exchanges have promised to do so in the coming months.

Uphold

In June, the New York-based cryptocurrency exchange and custody platform Uphold announced its decision to discontinue support for multiple stablecoins in preparation for the MiCA regulations. These stablecoins include Tether, FRAX, GUSD, USD, and TUSD. Starting from July 1, 2024, these digital assets will no longer be available on the Uphold platform. We encourage users holding these stablecoins to exchange them for other cryptocurrencies before June 28, after which the cryptocurrency exchanges will automatically convert them to USD Coin. If not exchanged within this timeframe, these stablecoins will be automatically converted to Circle's USD.

3. HashKey's Attitude: "License First"

Livio Weng, Chief Operating Officer of HashKey Group and CEO of HashKey Exchange, stated in a recent interview: "We firmly believe that unlicensed financial businesses should not be attempted lightly, which is closely connected to our 'long-termism' principle. All of HashKey's businesses follow the 'license first, then operate' principle. We have already obtained licenses in Japan, Singapore, and Hong Kong, and more licenses are in the application process. We always insist on conducting business only after obtaining regulatory licenses, adhering to the principle of 'no license, no finance'."

It can be foreseen that in the future, the "license first" concept will also penetrate the industry and become an indispensable element for Web3 companies to expand their businesses.

Conclusion

This article uses the MiCA and VARA licenses as entry points, comparing the differences in licensed business operations, and analyzes the necessity for Web3 companies to apply for licenses, based on actual cases. Of course, the regulatory framework is not static, and MiCA and VARA, as pioneers, have provided a good template for licensing policies around the world, which will have a far-reaching impact on the future Web3 industry. For Web3 companies, whether they already have licenses or have not yet applied for licenses, they should re-evaluate the strategic value, risks, and costs of licenses to support the long-term development of their businesses.

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