In order to manage the emerging risks before the entry into application of the European Markets in Crypto Assets Regulation (MiCA), Lithuania intends to reinforce its national cryptocurrency regulation. We discussed the key points and consequences with legal experts from Gofaizen & Sherle, specializing in fintech law and crypto license in Lithuania and the EU, Vladimiras Kokorevas and Mihhail Sherle.
Rules of MiCA allows Member States of the EU to decide on the application of a transitional period (i.e., from 30 December 2024 until 1 July 2026 or a shorter period) in relation to entities already providing crypto asset services within their jurisdiction during which such entities can continue their business activities without the MiCA license. Lithuania is already recognized as the most attractive jurisdiction for crypto in the fintech community and its Ministry of Finance proposed to be proactive and not utilize MiCA’s transitional period for crypto-asset service providers. This proposal in the form of draft legislative acts is currently under discussion with other institutions and stakeholders.
This post slightly steps back from the discusion of MiCA and explores how the proposed changes as an “intermediate” risk management measure before the application of the MiCA in Lithuania will impact crypto businesses in the country and outlines steps to prepare for them. Let’s first delve into the anticipated changes in 2024.
On November 29, 2023, the Government of the Republic of Lithuania approved the draft Law on the Prevention of Money Laundering and Terrorist Financing (AML Law draft) along with eight other related draft laws. Among other things, these measures aim to strengthen supervision and regulation regarding the prevention of money laundering and terrorist financing.
Key proposed amendments in the AML Law draft affecting the crypto sector include:
- Depositing Authorized Capital: From May 1, 2024, the funds forming a company’s authorized capital (minimum EUR 125,000) must be deposited into an account with a Lithuanian credit institution or EU credit institution having a branch in Lithuania.
- Equity Capital Obligation: Crypto businesses must constantly maintain a minimum equity capital of EUR 125,000 starting from May 1, 2024. Existing businesses must report compliance with this requirement to the Financial Crimes Investigation Service by May 31, 2024, or risk losing the right to operate in Lithuania.
- Sanctions and Prohibitions: From January 1, 2024, the Financial Crimes Investigation Service gains authority to impose new sanctions on crypto entities – temporary or permanent prohibitions of crypto activity for certain infringements.
- Delegation of Functions: New requirements for delegating identification activities to other entities will be effective from May 1, 2024.
The AML Law draft and related laws have been submitted to Parliament. On December 14, 2023, Parliament decided to initiate the consideration procedure, appoint relevant lead committees for examination and schedule the consideration at the Parliament’s sitting.
Parliament plans to consider all draft laws during the Spring session, which typically runs from March 10 to June 30. Due to the session’s duration and the need to prepare for the changes, entry into force dates may change, and certain provisions could be subject to alteration based on committee and Parliament considerations.
These proposed changes aim to strengthen the regulation and current supervision of the crypto sector in Lithuania. Over the next six months, crypto asset providers in Lithuania should closely monitor the process and outcome of the adoption of the amendments to AML Law and formulate an action plan to address approved changes, including focusing on employee adaptation. This implies increased hiring and educational costs in 2024, potentially leading to a community of highly qualified professionals in the crypto industry.
Establishing an AML department to handle compliance matters throughout the operating process is vital. Success in the crypto business relies on robust operating procedures and staff with adequate expertise, skills and knowledge. In 2024, as in previous years, AML officers will be in high demand. Implementing sanctions prevention and personal data policies is also essential in everyday business life.
Because the majority of Lithuanian credit institutions do not currently offer financial services to crypto businesses due to their risk appetite and tolerance levels, it may be challenging to implement the proposed rules regarding the formation of authorized capital, if they are approved. It should be noted that the current regulation allows the formation of the capital with the electronic money institutions, including the EU credit institutions not having the branches in Lithuania. Moreover, the current regulation also allows capital formation from various assets (e.g., intellectual property, crypto assets).
Business is an ever-changing field, especially in the crypto market. Crypto businesses in Lithuania should be ready to embrace the changes which shall be introduced by the AML law amendments and later on by MiCA implementation in order to strengthen their position and contribute to the new financial industry for the EU.
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