MiCA, DCA8 and the Travel Rule: How to Bypass Strict New Cryptocurrency Regulations in the EU

Strict regulation of cryptocurrencies gathers pace

Following in the wake of the Anti-Money Laundering Act and the Asset Register, the Markets in Cryptoassets Regulation (MiCA) has arrived.

MiCA was adopted in June 2023, but the regulations will not be fully implemented until December 2024. In addition, a new amendment was introduced in April 2024 that imposes enhanced due diligence obligations and comprehensive customer checks on all cryptoasset providers: identity checks, continuous monitoring, and verification of customers’ economic background; as well as knowing their intended use of such cryptoassets.

The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) are developing “technical standards and guidelines” to ensure that the regulations are applied uniformly. In other words, the EU wants to harmonize cryptocurrency regulation so that there are no discrepancies between the laws applicable in different member states.

Any company wishing to offer cryptocurrency services in the EU (be it custody, trading, portfolio management, or advisory services) will have to be authorized by one of the EU’s 27 national financial regulators. In addition, any company offering cryptoassets to the public will have to draw up a white paper, which must be “fair and clear,” cannot contain “misleading information” and must transparently set out the “potential risks.”

This means that neither decentralized token generation events (TGEs) with non-custodial cash, nor Initial Exchange Offerings (IEOs) or Initial Dex Offerings (IDOs) with anonymous issuers will be possible anymore —although smaller token offerings could be exempted from this requirement. If a token has no issuer, such as Bitcoin, the white paper produced by the exchange will have to inform users of the potential risks, and the exchange will assume responsibility for the token. MiCA also provides clear guidelines on how these white papers should be designed to eliminate any potential ambiguity.

The regulation establishes three main categories of cryptoassets:

1. Asset-Related Tokens (ART): these tokens are backed by assets such as commodities, or by one or more currencies.
   2. E-money tokens: they are backed by a single fiat currency and offer similar functions to those of traditional e-money.
2. Other tokens: this category includes utility tokens that fulfil specific functions within a network or ecosystem. In addition, MiCA regulation could apply to an NFT that functions as a utility token or financial instrument.

Cryptocurrencies, mining, and decentralized autonomous organizations (DAOs) are not explicitly covered by MiCA: as DAOs are a type of decentralized application (dApp), the regulation does not apply to them.

The paradox is that CBDCs (digital currencies issued by a country’s central bank) are not explicitly regulated either… after all, every law has a loophole.

More obligations and information

A central point of the MiCA regulation was the application of the so-called “Travel Rule”: a framework that is part of a broader package of EU legislative proposals to strengthen protection against money laundering. The recommendations of the Financial Action Task Force (FATF) – the global supervisory authority on anti-money laundering and combating the financing of terrorism – are firmly anchored in law.

These regulations require that information on the origin of the asset and the beneficiary be transmitted with each transaction and stored on both sides of the transfer. The Travel Rule goes even further than the requirements of some other countries when it comes to the transfer of funds by banks and money transfer services.

This requirement is especially problematic, as the main attractions of cryptocurrencies are often anonymity and the ability to transfer money quickly and easily on a global scale.

All cryptoasset service providers (CASPs) are required to comply with the Travel Rule, which means that they must transmit relevant sender and recipient information for all crypto transfers —regardless of the amount of the transaction. In addition, EU CASPs must ensure compliance with the Travel Rule for every transfer to another CASP. On top of that, the EU’s General Data Protection Regulation (GDPR) also needs to be complied with and implemented.

However, the rules do not apply to direct person-to-person transfers without the involvement of a service provider or between service providers acting on their own behalf.

According to MiCA, CASPs are prohibited from offering accounts to anonymous users. This also applies to the use of privacy-coins such as Monero, which are designed to “opaque” transaction details. CASPs must also verify the identity of users making transactions over EUR 1,000 and apply risk mitigation measures to transactions involving self-custodied wallets.

This should work as follows: for transactions up to EUR 1,000, CASPs collect and store certain information, which they use to verify the identity of the payer or recipient; for transactions over EUR 1,000 where the wallet holder is a customer of the CASP, the CASP must verify the customer’s control or ownership of the wallet using at least two methods. For transactions above EUR 1,000 where the wallet holder is not a CASP customer, the ownership or control of the wallet must be verified, the risk of the transaction must be assessed, and appropriate risk mitigation measures must be implemented.

CASPs must comply with specific rules when making commercial communications, as well as implement practices to prevent market abuse and properly handle complaints. These measures are intended to avoid cases such as Terra Luna and FTX.

Service providers must make public their pricing, cost, and commission policies; as well as information on the environmental impact of their cryptoasset activities.

Algorithmic stablecoins are also prohibited.

The new regulations impose very strict limits on cash transactions:

• All cash payments exceeding EUR 10,000 are prohibited. Each EU member state can set limits below this figure.
• Anonymous cash transactions above EUR 3,000 are completely banned in order to prevent illegal financial activities.

Patrick Breyer, MEP and digital freedom activist, had this to say:

“The fact that from now on anonymous payments and donations in digital currencies will be banned completely and from the first euro has no significant impact on crime, but deprives precisely law-abiding citizens of their financial freedom. The police and judiciary are already successfully pursuing criminal crypto transactions without widespread suspicion. The manifest goal of combating money laundering and terrorism seems to be nothing more than a pretext for a few to gain more and more control and knowledge about our private spending in order to gradually abolish cash… and we won’t allow it!

Now imagine how we feel at Denationalize.me… we who fervently defend freedom and maximum privacy for all citizens, who want people to be safe from any kind of coercion, control, or modern slavery!

The MiCA regulation is completed by the eighth update of the Administrative Cooperation Directive (ACD8), which aims to improve the exchange of information regarding income from crypto-assets and electronic money between tax authorities and the EU. All this clarifies the legal status of cryptoassets and allows Member States to set appropriate tax rules. However, the exact tax rules will not be finalized until MiCA enters into force.

 

Financial institutions and cryptoasset service providers must report annually to national tax authorities information on persons resident abroad for tax purposes for whom they hold financial accounts or for whom they have carried out transactions with cryptoassets. The information is automatically exchanged with the tax authorities of the respective countries of residence. The update of the EU Administrative Assistance Directive (Directive (EU) 2023/2226 of 17 October 2023), known as DCA8, already provides for the application of both sets of rules and the automatic exchange of information between EU Member States.

A significant part of MiCA is dedicated to stablecoins.

A stablecoin is considered relevant to the system if three out of seven defined criteria are met. These include, among others, that the stablecoin is backed by fiat currency reserves worth more than EUR 5 billion. In addition, it must process more than 2.5 million transactions per day or have a daily transaction volume of more than EUR 500 million. Another criterion is that the stablecoin has more than 10 million users.

Stablecoins that are widely used as a means of payment must ensure that their transaction volume does not exceed certain thresholds so as not to endanger the financial system. An example of the importance of transaction volume can be seen in stablecoins such as Tether (USDT), USD Coin (USDC) and Dai (DAI):

The government believes that the euro needs to be protected, as many stablecoins are backed by US dollars, so “measures for greater transparency, better governance and safe custody of stablecoins should be introduced.” More specifically, MiCA sets limits on the use of stablecoins based on foreign currencies, such as the US dollar. The regulation stipulates that daily transactions of such stablecoins will be limited to EUR 200 million per day. This limit is intended to prevent these assets from “undermining the financial stability and monetary sovereignty of the EU.”

According to MiCA:

– Issuers of stablecoins must hold liquid reserves at a ratio of 1:1. This means that for every stablecoin issued, a corresponding amount in the form of fiat currency (or similar liquid asset) must be deposited.

– Issuers are obliged to offer their customers free redemptions, which means that stablecoin holders can exchange their tokens for the corresponding fiat currencies at any time and without additional fees.

As of June 30, 2024, Binance will gradually restrict the use of unauthorized stablecoins in the EEA in order to comply with MiCA regulations. From then on, users will only be able to sell these stablecoins, but will no longer be able to buy them – they will also be able to exchange them for other digital assets, regulated stablecoins or fiat currencies. Spot trading of unauthorized stablecoins will continue for the time being, along with trading of regulated stablecoins; and custody and wallet services for these stablecoins will remain available. Competing exchanges such as Kraken and OKX are also studying the potential impact of MiCA regulation. According to a Bloomberg report, Kraken was actively considering delisting USDT last month. The “unauthorized stablecoins ” already exist in the market, but do not qualify for regulation, so they could be subject to additional restrictions in the EU.

For German customers, Kraken will have to move to a German entity. As the location of the cryptoassets would clearly be Germany, they could also trigger an extended limited tax liability for Perpetual Travellers if the requirements for this were met. To avoid suffering further impact from MiCA and DCA8, centralized crypto-exchanges should definitely be verified with a non-German address, or even better if it is with a non-EU address.

Solutions to MiCA and DCA8

Both Bitcoin and other cryptocurrencies are becoming honeytrap scams due to these new regulations in the EU. Anyone who has not transparently declared and taxed their Bitcoin in the past could face big trouble, as Bitcoin is nothing more than a pseudonym. The entire transaction history can be traced in the public Bitcoin ledger. With just one reference to an exchange that has been verified with at least one passport, other transactions could also be linked to that verification. The blockchain analysis tools used by tax and law enforcement authorities have become incredibly sophisticated, and can make connections and tie up ends quickly. Anyone wishing to continue to officially cash in with an EU residency should make sure they have properly analysed their crypto history, otherwise the past could cost them dearly. In addition, a tightening of the taxation of cryptocurrencies is expected once the main avenues for tax avoidance have been eliminated. We expect the 1-year tax-free holding period for speculative gains from cryptocurrencies to be eliminated soon in Germany as well —if so, cryptocurrency investors in the country will face glacial times.

What can be done about this now, apart from continuing to invest anonymously in tangible assets such as works of art via cryptocurrencies? Art is not yet subject to the strict money laundering laws we have discussed in this article —as long as the investment is made outside the EU. In Switzerland, where our partner specializing in this type of investment is based, anonymous cryptocurrency purchases of tangible assets such as art are still perfectly possible – and will be until at least 2026. Art is an asset with similar mobility to cryptocurrencies, only in the analog world. It is less volatile, but offers very similar asset protection. Like Bitcoin, art is tax-free in Germany after a one-year holding period, but unlike Bitcoin, it is very likely to remain tax-free in the long term. The best thing is that, when you sell the art you previously bought with crypto, you will cleanly get your money entered into the fiat system, with its corresponding proof of net worth. The Government will still not be able to find out that it actually came from crypto speculation. One of the best ways to keep your crypto-savings safe is to invest in art as a commodity and store it in the appropriate duty-free bonded warehouses. You do not need to know anything about it: our team and partners will advise you in detail so that you not only protect your wealth through art, but also make it grow with not inconsiderable returns. You can learn more about art as a tangible asset and how to invest in it anonymously with cryptocurrencies here.

Leaving the EU as soon as possible is of course the best option: it is not just MiCA and DCA8… there are many other repressive measures that are taking away all the attractiveness of entrepreneurship and entrepreneurship in Europe! In many third countries you get rid of these measures and can simply continue to trade crypto and stablecoins with the usual limits and verification. Some of the favourite countries of residence for crypto investors outside the EU include Panama, Paraguay, Georgia, and the United Arab Emirates. At Denationalize.me we can also get you residency permits, among other services, for any of these countries.

This does not necessarily have to imply a full emigration to the countries you choose to invest in: in order to create more leeway on centralized exchanges, investors with primary residence in the EU can set up a fictitious residence as a secondary residence outside the EU with which to verify themselves on cryptocurrency exchanges. Both DCA8 and MiCA will be nothing but history for you. Naturally, exchanges do not apply EU regulations in countries that do not have the legal basis to do so. For address verification in countries outside the EU, no tax identification number is needed: you only need to specify it as a second verification criterion for EU addresses in order to facilitate their assignment to national tax offices. With addresses in countries not yet subject to these regulations, a simple utility bill is still sufficient for most exchanges. For cryptocurrency exchanges that explicitly exclude EU users via IP address (as is often the case lately with US customers), a passport, or no verification at all, may be required in the future.

Obtaining a utility bill or comparable proof of residence from another non-EU country is comparatively simple: neither a tax identification number nor a residence permit is mandatory, which saves you additional costs and efforts. Naturally, this does not officially exempt you from your tax and reporting obligations. Only a real relocation of your main residence can avoid such obligations, which is why this is the procedure we recommend whenever possible in your circumstances.

The only alternative is a structural solution through business constructions in non-EU countries. However, for cryptoasset management in particular, German additional taxation and the Foreign Tax Act are very restrictive: there are practically no legal options to optimize your taxes through non-EU countries. In Austria and Switzerland, only the management factor is considered, which is not at all easy to apply to the crypto sector either. After all, what crypto-investor would hand over control of their money to a foreign manager? The fact is that this is precisely the crux of the matter when it comes to recognizing the foreign business substratum.

The exceptions are legal forms without owners, such as family foundations. In Germany, where only EU and EEA legal forms are recognized, the only exception is the Liechtenstein family foundation. However, sooner or later Liechtenstein will switch to a similar regulation – it’s only a matter of time. If you want to have real peace of mind, you will have to leave Europe altogether. A long-term solution could be to set up a recognized foundation with foreign non-EU companies managing the cryptocurrencies. Foreign tax laws could be overridden by the foundation as a holding company. Until 2026, a Liechtenstein foundation could be worthwhile in certain cases, as Liechtenstein offers attractive options with a comparatively low foundation entry tax – especially for Austrian residents. The Liechtenstein foundation can also be redomiciled to an offshore destination if necessary – although this usually only makes sense if you are going to emigrate to that country.

In the medium term, you will not be able to get rid of these hurdles if you wish to continue trading cryptocurrencies as before. Simply having a residency outside the EU (preferably combined with citizenship of a free country) could be enough to maintain your current freedoms in the crypto sector. Feel free to consult us to find out your best options (Germans are allowed to acquire a second citizenship without restrictions since June 26, 2024 ). In addition, some of the most interesting countries (with costs between USD 100,000 and 200,000) also accept payment entirely in cryptocurrencies, such as Vanuatu. In our eyes, this is one of the best citizenships by investment, one of the least complicated and one of the fairest; and that is why we frequently endorse and recommend it.

The crypto market is not going to die or disappear, but the evolution of the market as a result of these severe regulations acts as a double-edged sword: cryptocurrencies that focus on system compliance and adjust to the new regulations could expect institutional capital growth, while anonymous coin owners will suffer the most, as they will not even be able to exchange their cryptocurrencies for fiat currencies through official channels if they do not have the proper residency.

Luckily, there is a whole world beyond the EU: yes, interfaces with the fiat world can be comprehensively regulated (as they are doing with MiCA and DCA8) but they will not be able to ban or restrict cryptocurrencies completely. regulation of decentralized networks barely contemplates it for lack of real means to do so, so there is always the option of paying via other countries more favourable to cryptocurrencies; countries that will always exist, because crypto has long been a multi-billion dollar market from which countries with the right conditions benefit enormously, such as El Salvador —although other countries will soon follow. You would do well to consider the possibility of establishing a new (tax) residence in one of these countries.

The situation is not going to improve. The EU asset register will soon make all your cryptoassets publicly available, which may pose a threat to your personal security. Once registered in the asset register, the passing of taxes and wealth levies is only a matter of time… not to mention the removal of tax exemptions on cryptocurrency transactions —such as Germany’s tax-free holding period. The German Anti-Money Laundering Act could then take your cryptoassets away from you, because you’re not going to be able to explain their clean origin. The new regulation opens the door wide to the seizure of centralized exchanges. The only thing that will be able to protect you will be a fictitious residence -—or, better yet, a real residence outside the EU. The best option would be the citizenship of a free country, especially if we are talking about a small sovereign nation like El Salvador or Vanuatu. We at Denationalize.me will be happy to help you get it.

When “fighting crime” generates unconditional submission

It is honourable, just, and dignified to want to fight “crime”. Naturally, ideally, all transactions should be legitimate, secure, and valid. No one should be a victim of theft, fraud, assault, coercion, etc. Yes, there are malicious people in this world, but no amount of regulation, no matter how sweeping, can prevent that. However, surveillance, persecution and bureaucracy do hurt honest people who have nothing criminal about them, and it gives regulators absolute and frankly terrifying power.

Remember:

• Money laundering is a government term for money that the government does not like, would like to appropriate because it thinks it has a right to, and is trying to tax. Often, a large amount of money is automatically labelled as “black money” just because it is very large.
• An act is only considered a “crime” if the Constitution and the law define it as such, which is ultimately the opinion of a certain group of people who are or were in power.

However, using the argument that the population is being protected from crime as an excuse to commit real crimes in order to subdue the population does not seem to us to be an honourable, just, or dignified act. Is the crypto world really so evil that we need governments to “protect” us from it with their claws?

Fiat money remains the vehicle of choice for criminal activity, especially money laundering and terrorist financing. Government cash is particularly attractive to criminals because of its anonymity and widespread acceptance. A Europol study shows that cash transactions and cross-border money transfers remain common methods of financing terrorism and money laundering in Europe.

Cryptocurrencies offer criminals new opportunities to defraud or defraud, true, but on a much smaller scale than fiat money.

Here is an interesting statistic made by Chainanalysis, which serves us for comparative purposes: illegal activity also decreased to 0.34% compared to 0.42% in 2022:

Unfortunately, scams will still happen, but the key here is that no one is forcing you to adopt any cryptocurrency… and with the right information and education, anything is possible. That said, how do you protect yourself from the biggest fiat scam backed by law?

The increase in the money supply and the resulting inflation causes citizens to lose purchasing power. This form of debasement of wealth through an inflationary monetary policy is clearly a fraud: that is right, it is a government fraud, because citizens are ultimately robbed of the value of their savings and income without them even realizing it or having any direct control over it, nor any measure with which to defend themselves. The continuous devaluation of money resembles a systematic and legally legitimized form of theft in which citizens are the victims and governments are the perpetrators… and we have not yet talked about the most classic fraud and theft in the arsenal of every State: indeed, taxes! Can you think of a bigger swindle than that?

What regulations protect us from governments and prevent them from stealing from us?