Cryptocurrency investments have gained prominence, especially with the launch of Crypto ETFs in late 2023. In 2024, the European Union’s new regulation, Markets in Crypto-Assets Regulation (MiCAR), aims to help banks categorize and understand the legal framework around cryptocurrencies. Despite increased attention, cryptocurrencies present challenges for banks, particularly in addressing regulatory classifications and IT system adaptations.
1.Identify the Asset Type Following Your Country’s Regulation.
2.How to Register Cryptocurrencies.
3.Commission Structures and Off-Balance Sheet Assets.
4.Handling Nominal Purchases and Price Variations.
1. Identify the Asset Type Following Your Country’s Regulation.
What type of asset is a cryptocurrency? This seemingly simple question is complex and varies by geographic area. It poses challenges, especially for US bank branches operating in Europe. In the United States, the SEC classifies most cryptocurrencies as securities, except decentralized ones like Bitcoin, which are considered commodities. Under MiCAR, cryptocurrencies can be classified as financial instruments (under MiFID II) or as E-money/Value Reference Tokens. Clarifications are pending on which cryptocurrencies qualify as financial instruments.
This classification significantly impacts issuers and banks trading cryptocurrencies, affecting how they register different types of crypto and report them under regulations like CDDP versus EMIR/MIFIR.
2. How to Register Cryptocurrencies.
Banks may trade Bitcoin, which is an exception for US regulators but can be identified as a security in Europe.
Banks must register cryptocurrencies based on their jurisdiction and the type of cryptocurrency, some seen as commodities, some seen as E-wallet, hence requiring different legal reporting requirements. This results in multiple processes for registering crypto operations. Operations units must be well trained and understand all different scenarios.
3. Commission Structures and Off-Balance Sheet Assets.
Cryptocurrencies are off-balance-sheet assets belonging to bank customers. Traditionally, banks charge commissions from client cash accounts, but in crypto trading, commissions are taken from the asset itself. For instance, if a client buys 5 Bitcoins, they receive 4.999999 Bitcoins, with the bank taking 0.000001 as a commission. This unconventional method can create IT system challenges.
4. Handling Nominal Purchases and Price Variations.
The crypto market allows purchases as small as 0.000000001 of a cryptocurrency. This necessitates IT systems capable of managing such precise transactions and dealing with uncommon price variations.
One approach to handle this point would be to use similar concept than fractional trading.
5. Update MiFID Controls and Client Knowledge.
Determining who can trade cryptocurrencies in your bank depends on whether they are classified as complex instruments. MiCAR may provide clarity, but currently, banks must decide based on their own classification: financial instruments versus virtual token money/e-money. Ensure that clients eligible to trade cryptocurrencies are identified based on their MiFID questionnaire responses.
6. Corporate Actions Are Not Standardized.
Prepare for manual processing of corporate actions since standardization in crypto is still evolving. Unlike traditional assets, dividends don’t exist in crypto. However, clients can earn rewards through staking or participating in governance mechanisms. IT systems must handle these manually, depending on the cryptocurrency’s classification and how the notification of such event will be send by the crypto platform (but it won’t be a swift 5xx format).