Lithuania is the latest impatient European Union member to rush ahead with creating its own crypto licensing system because EU laws may come too late to protect the sector's reputation, local ministers told CoinDesk.
With the landmark Brussels law - the Markets in Crypto Assets (MiCA) regulation - potentially not coming into force until 2025, the Baltic country wants to do its "homework" in advance, the country's deputy finance minister told CoinDesk. But plans for the law to be debated in the country's parliament have some Lithuanian-based companies fearing for their future.
The EU is in the final stages of MiCA negotiations. The single licensing regime for the 27-country bloc has been years in the making and could transform the sector by allowing companies to tap into a market of hundreds of millions. But some countries can't wait to grab their share of the emerging sector.
The European Commission, the EU's governing body, first asked for advice on how to apply existing regulations to cryptocurrencies in March 2018. Since then, the proliferation of cryptocurrencies has skyrocketed, and entire initiatives like Facebook-backed Libra, later renamed Diem, have been born and died.
Even if lawmakers iron out their final tweaks in the law, such as the treatment of Libra-like stablecoins, non-fungible tokens and decentralized funding, there will be a transition period of up to two years before MiCA takes effect.
"MiCA is like the biggest thing coming up, it's a good decision, we support it," Mindaugas Liutvinskas, vice minister at Lithuania's Ministry of Finance, said in an interview with CoinDesk. "But before we get there, it's, what? 2025, the end of 2024; we still have quite a bit of time.
"What we've decided to do is take practical steps, do all our homework to strengthen our regulatory framework," he said, calling his proposed law a "quick fix" that can then "take MiCA to the next level."
Image problem
Liutvinskas is concerned that if he doesn't act quickly, less upstanding companies could damage the sector's image.
"For both the government and market participants, the worst-case scenario would be a bad situation, some kind of scandal related to money laundering or evading sanctions," he said. "Reputation is an important resource in this industry."
Like regulators in Estonia, Liutvinskas welcomes solid companies, but not empty shells that are merely registered in the country but operate from another location.
The main provisions of the proposed law have already been published in draft form and are expected to be submitted to parliament in early summer. They include a MiCA-like requirement to hold 125,000 euros ($133,000) in capital and have anti-money laundering staff in the country. Meanwhile, the industry hopes the measures will be introduced in a slower timeframe.
Capital
Liutvinskas has already agreed not to introduce the anti-money laundering identity checks immediately, not least because it is not clear what the EU will expect. Negotiations have been thrown up in the air by what he calls "unconventional thinking" by the European Parliament, which wants stricter controls on transactions involving crypto wallets that are not hosted by a regulated exchange.
And it is in this area that his proposals seem to have drawn the ire of the crypto industry, which complains that Lithuania is going it alone in a global market, since in practice many countries around the world have not yet implemented the standards set by the Financial Action Task Force, a global anti-money laundering regulator.
Requiring virtual asset service providers (VASPs) to identify their customers for even the smallest transactions "doesn't make sense" because the administrative burden is disproportionate to the risk, said Agnė Smagurauskaitė, legal counsel at CoinGate, a Lithuania-based payments and trading company.
"VASPs in other jurisdictions do not have the same obligation to share data, which makes it almost impossible to trade with them," she said in an email to CoinDesk. And the lack of an equivalent to the SWIFT messaging service in the banking sector means information may not be secure, she said.
She said she supports measures that make markets more transparent and trustworthy, but not those that stifle innovation or the ability to compete.
The draft law "contains some points that completely destroy the Lithuanian VASP market," she said.
Adjustments
There may be further amendments to the law, which Liutvinskas acknowledges is not yet "completely set in stone. However, other industry officials believe the new legislation, which could take effect later this year, will not harm the country's status as a crypto hub.
Companies "usually don't like it" when stricter rules are introduced, Kęstutis Kvainauskas, a lawyer at consulting firm Ecovis ProventusLaw, told CoinDesk, but "Lithuanian requirements are actually still considered quite liberal."
Kvainauskas believes the move toward MiCA-like rules is inevitable, and that smaller countries may just be trying to get ahead of the game.
"At the moment, I don't see other countries being able to offer something similar to Lithuania," with licensing providing broad access to markets across Europe, he said.
British expatriates
The country could even prove an attractive home for firms fleeing countries such as Estonia or the United Kingdom, where the Financial Conduct Authority, the U.K.'s financial regulator, appears unwilling to extend its current temporary registration regime, Kvainauskas notes.
Liutvinskas might take issue with the idea that companies are merely seeking the jurisdiction with the loosest rules, because the practice known as regulatory arbitrage "is something we don't want to have."
But, Liutvinskas added, Lithuania is "an innovation-friendly fintech-friendly jurisdiction.... We welcome all innovative companies that have solid business models."