EU Regulators Caution Crypto Firms Against “Letterbox” Entities To Skirt New Rules

• EU regulators warn cryptocurrency companies about exploiting member state differences under new bloc-wide rules.
• Markets in Crypto-Assets (MiCA) regulation to be effective from 2024, requiring EU-wide licenses.
• Companies can operate under national licenses until mid-2026, raising concerns about opaque offshore entities.

European Union (EU) financial regulators warned cryptocurrency companies Tuesday about potentially exploiting differences among member states once new bloc-wide rules take effect.

The European Securities and Markets Authority (ESMA) advised major crypto companies to begin preparations now for the incoming Markets in Crypto-Assets (MiCA) regulation. Starting in 2024, MiCA will require firms to obtain licenses to operate across the EU.

However, companies can continue functioning under existing national licenses until mid-2026. ESMA fears this interim period could allow opaque offshore entities to access the EU market through shell companies.

ESMA cautioned against letterbox entities

In a statement, ESMA cautioned against “letterbox” entities that maintain minimal EU staff or operations. The regulator stated that some firms “may lack a strong compliance culture” and could leverage regulatory discrepancies across jurisdictions.

ESMA urged national regulators to scrutinize license applicants and prevent abusive regulatory arbitrage. Though MiCA harmonizes rules across the bloc, differences in transitional policies and decentralized network exemptions could motivate questionable jurisdiction shopping.

Crypto firms were advised to engage proactively with regulators about licensing plans, despite procedures still being finalized. National authorities were likewise told to establish frameworks immediately to vet prospective applicants.

The warnings come after collapsed exchange FTX obtained EU access last year through regulator approval in Cyprus. ESMA head Verena Ross has already pledged to avoid such “forum shopping” for the most favorable oversight.

While offering a single market, the EU must remain vigilant about crypto firms exploiting fragmentation during MiCA’s phased implementation. Regulators hope consistent scrutiny and licensing will provide needed consumer protections.