MiCA regulation for custodial wallet

Adopted by the European Union in 2023, the Markets in Crypto-Assets Regulation (MiCA) is a comprehensive approach to regulating the cryptocurrency sector. One of the key areas covered by MiCA is custodial wallet services, which play a central role in the digital asset ecosystem.

Custodial wallets are services provided by third parties to store, manage and protect users’ cryptoassets. Unlike non-custodial wallets, where users manage their private keys themselves, custodial wallets involve handing over control of keys and assets to a service provider. This makes them a convenient solution for users, but also creates significant risks, including cyberattacks, internal fraud and loss of access to assets.

MiCA imposes strict requirements on custodial wallet service providers to ensure user protection and market stability. These requirements include:

1. Licensing and registration. All companies providing custodial wallet services in the EU are required to obtain a licence under MiCA. To do so, they must fulfil a number of criteria, including having sufficient capital, a transparent governance structure and adequate risk control procedures.
2. Providers are required to provide users with complete and accurate information about their services, including terms of use, potential risks and asset protection measures.
3. Risk Management. MiCA requires providers to implement effective risk management systems to prevent the loss or theft of assets. This includes the use of advanced protection technologies, asset provisioning and regular audits.
4. Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT). Custodial wallet providers are required to follow strict KYC (know your customer) procedures, monitor transactions and report suspicious transactions to the relevant authorities in a timely manner.
5. Liability to users. MiCA introduces indemnity obligations in the event of loss of assets due to the provider’s fault, which reinforces user confidence in such services.

On the one hand, the introduction of MiCA creates additional administrative and financial burdens for custodial wallet service providers. They will have to adapt their business models, invest in security technologies and increase transparency. However, on the other hand, strict rules and a unified legal framework create a competitive advantage for companies that will be able to meet these standards. This will build trust among institutional and private investors, increase user protection and reduce the risk of fraud in the market.

The implementation of MiCA contributes to the development of a more sustainable and transparent cryptoasset ecosystem. For custodial wallet market players, it is an opportunity to strengthen their position in the European market, gain competitive advantages and create a long-term basis for growth and innovation. At the same time, users of such services can expect increased security, transparency and trust in their relationships with providers.

In the long term, strict regulation of custodial wallets will be a key factor in professionalising the cryptocurrency sector and attracting a wider range of participants, including major financial institutions. Thus, MiCA sets a new standard for the digital asset industry and stimulates its transition to a more mature and sustainable development model.

What is custodial wallet?

A custodial wallet is a service provided by a third party to store, manage and protect users’ digital assets. This solution is an important part of the cryptocurrency market infrastructure and provides users with convenience and security when interacting with their assets. Unlike non-custodial wallets, where users manage their private keys themselves and are fully responsible for the safety of their assets, custodial wallets involve handing over control of keys and assets to specialised providers.

The primary purpose of a custodial wallet is to provide secure storage for digital assets. Providers of such services use advanced technologies including encryption, multi-level authentication and data backup to minimise the risks of asset loss or theft. With these measures, users can focus on managing their investments without worrying about the technical aspects of security.

Custodial wallets are popular among institutional and private investors who value convenience and ease of use. The key advantages are:

1. Professional asset protection. Custodial service providers implement state-of-the-art security technologies to prevent cyberattacks and fraud.
2. Ease of management. Users do not need to memorise mnemonic phrases or store private keys. All operations are performed through the provider’s interface.
3. Legal protection. Providers are required to comply with the laws and regulations in the jurisdictions in which they operate, which provides users with additional certainty.
4. Integration with other services. Many custodial wallets provide access to trading platforms, staking and other financial instruments.

However, custodial wallet services also carry certain risks. Users transfer control of their assets to a third party, making them dependent on the reliability and integrity of the provider. Cyberattacks, internal fraudulent activities and operational failures can result in the loss of assets. In addition, users may face legal challenges if the provider fails to comply with regulatory requirements.

The MiCA (Markets in Crypto-Assets Regulation) adopted by the European Union sets strict requirements for custodial wallet providers. They are required to be licensed, comply with transparency standards, manage risks and implement anti-money laundering (AML) and countering the financing of terrorism (CFT) procedures. These measures are aimed at increasing user trust and creating a more secure and sustainable cryptoasset ecosystem.

Custodial wallets play an important role in the development of the cryptocurrency market, providing users with convenient and secure solutions for managing their digital assets. Thanks to strict regulation and the implementation of modern security technologies, they continue to attract the attention of both private and institutional investors, contributing to the professionalisation and sustainable development of the industry.

Liability of issuers and providers under MiCA regulation

With MiCA Regulation (Markets in Crypto-Assets Regulation) coming into force, token issuers and cryptoasset service providers (CASPs) in the European Union face new liability standards. This is due to the need for transparency, user protection and strict risk management rules. Failure to comply with these requirements can lead to serious legal and financial consequences.

The main types of liability for non-compliance with MiCA:

1. Liability for breach of transparency requirements. Issuers are required to disclose full information about their tokens, including their functionality, potential risks and investor protection mechanisms. Failure to provide correct information may lead to allegations of misinformation and harm to users.
2. Responsibility for protecting user assets. Custodial service providers have a responsibility to ensure the security of client assets. Violation of security standards may result in claims for loss of funds as well as sanctions from regulatory authorities.
3. Responsibility for breach of risk management rules. Issuers and providers are required to develop and implement operational, financial and legal risk management mechanisms. Failure to do so may result in allegations of unfair business practices.

What are the penalties for non-compliance with MiCA?

MiCA sets out strict sanctions for non-compliance. These measures may include:

• Financial penalties. Depending on the severity of the offence, the amount of the fine can reach a significant proportion of the company’s annual turnover. For example, for token issuers, fines can be up to €15 million or 10 per cent of the company’s total annual turnover.
• Restrictions on activities. Regulators can suspend or completely ban a company that breaches MiCA rules, including revoking its licence.
• Lawsuits by users. Infringement of consumer rights can lead to class action lawsuits, which increases reputational and financial risks.

Recommendations for risk mitigation:

1. Conducting legal audits. Regular analyses of MiCA compliance can identify and address potential breaches at an early stage.
2. Develop a robust risk management strategy. Companies should implement procedures to prevent operational and financial risks, including the protection of user data.
3. Preparing for interaction with regulators. It is important to communicate effectively with national regulators, providing correct and complete information when requested.
4. Investing in security. For custodial service providers, protecting customer funds is a key aspect. This includes the implementation of modern encryption and multi-level authentication technologies.
5. Employee training. Regular staff development helps to minimise human error that can lead to non-compliance with MiCA.

Regulated United Europe (RUE) offers its clients a full range of MiCA customisation services. We conduct due diligence, develop compliance strategies and provide support at all stages of regulatory engagement. Our experts also help to minimise risks and ensure reliable compliance with MiCA standards, which creates a solid foundation for successful business development in the cryptoasset market.

How can Regulated United Europe help with MiCA regulation for custodial wallet?

The adoption of MiCA Regulation (Markets in Crypto-Assets Regulation) marks a new stage in the regulation of the crypto industry in the European Union. Particular attention is paid to key infrastructure elements such as Custodial Wallets. Companies providing custodial wallet services are required to meet strict standards for security, risk management and customer protection. However, the process of adapting to MiCA requirements can be complex due to differences in national legislation and regulators’ approaches across the EU. Regulated United Europe (RUE) provides professional support to enable companies to effectively adapt their processes and minimise regulatory risks.

MiCA establishes common rules for custodial service providers, but implementation remains at the level of EU member states. This creates variability in the timing of adaptation and details of requirements. For example, Germany and France already have a developed legal framework for cryptocurrency assets, which may speed up the licensing process. In contrast, in countries with less established regulatory practices, such as Bulgaria or Greece, MiCA implementation may take longer. RUE analyses the local peculiarities of each jurisdiction to choose the best country to launch your project.

As part of your project preparation for MiCA requirements, RUE offers comprehensive support, from auditing your current operations to obtaining the necessary licences. We assess your company’s readiness for MiCA compliance, develop an adaptation strategy and assist in the implementation of key milestones. This includes:

• Develop internal documentation. Companies are required to implement clear policies and procedures to protect user funds and comply with transparency requirements. We prepare a full package of documents, including internal regulations, reports and instructions for employees.
• Providing custodial wallet services under MiCA requires a licence from the national regulator. We assist in gathering the necessary documents, submitting applications and liaising with regulators.
• Risk Management. MiCA has strict requirements for risk management, including prevention of cyber threats and protection of user data. RUE analyses your company’s current risks and helps you implement effective mechanisms to minimise them.

Particular attention is paid to compliance with security standards. MiCA requires custodial wallets to ensure maximum protection of user assets, including the use of advanced encryption and multi-factor authentication technologies. RUE advises on the implementation of technical solutions that comply with the requirements of the regulation and provides training for employees to improve their security competence.

One of the key challenges is choosing the right jurisdiction for licensing. For example, Estonia and the Czech Republic offer a relatively simple licensing process and support innovative crypto startups. At the same time, countries such as the Netherlands or Luxembourg may be favoured by large players seeking a high level of trust from customers and investors.

Regulated United Europe also provides long-term support to Custodial Wallets companies. We keep abreast of changes in legislation, help you adapt to new requirements and protect the interests of our clients when dealing with regulators. Our aim is to ensure your projects are sustainable and fully compliant with MiCA standards.

By partnering with Regulated United Europe, you get access to expert knowledge and customised solutions to help your business successfully adapt to the new regulatory environment of the European Union and secure a competitive advantage in the cryptoasset market.