Introduction
Ireland offers a favourable environment for cryptoasset businesses attracted to the country’s developing regulatory and business environment, including competitive corporation tax requirements in addition to strategic access to the wider EU market. Cryptoasset regulation in Ireland is shaped by evolving European regulation and global standards, aiming to foster innovation while ensuring financial integrity in its sector. This article examines Ireland's regulatory landscape for cryptoassets with a specific focuson AML requirements, taxation policies, registration processes and forthcoming regulatory developments under Markets in Crypto Assets Regulation (MiCAR).
Ensuring Compliance with AML/CFT Principles: The Criminal Justice (Money Laundering and Terrorist Financing) Act 2021
The Anti-Money Laundering (AML) framework in Ireland, governed primarily by the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 and subsequent amendments in 2021 aligned with the EU's Fifth Anti-Money Laundering Directive (5AMLD), imposes robust obligations on Virtual Asset Service Providers (VASPs) operating within the country. For the purposes of the legislation, VASPs encompass a range of services within the digital assets sector, including:
- Facilitating the exchange between virtual assets and traditional fiat currencies.
- Enabling exchanges between different types of virtual assets.
- Managing the transfer of virtual assets on behalf of clients, moving them between different accounts or addresses.
- Providing custodial services, such as digital wallets, to securely store virtual assets.
- Offering financial services related to the issuance or sale of virtual assets.
Under regulatory definitions, virtual assets represent digital representations of value that can be digitally traded or transferred and are utilised for various financial transactions and investment purposes, excluding representations of fiat currencies, securities, or other tangible financial assets.
To comply with AML/CFT legislation, VASPs must fulfill several conditions:
- Appointment of Key Personnel: VASPs are required to appoint senior officials and dedicated AML/CFT compliance officers tasked with implementing and overseeing effective AML measures within their organisations.
- Risk Assessment: A critical component of the AML framework mandates that VASPs conduct comprehensive risk assessments tailored to their specific operational risks. This includes identifying and mitigating potential risks associated with money laundering and terrorist financing activities.
- Customer Due Diligence (CDD): VASPs must adhere to stringent procedures for customer due diligence, ensuring the thorough verification and ongoing monitoring of client identities and transactions. This helps in detecting and preventing illicit activities such as money laundering and terrorist financing.
- Internal Policies and Controls: To strengthen their AML defenses, VASPs are required to establish and enforce robust internal policies, procedures, and controls. These measures are specifically designed to mitigate the risks associated with financial crimes, ensuring compliance with regulatory requirements.
- Reporting Obligations: VASPs have a legal obligation to promptly report any suspicious transactions to Ireland's Financial Intelligence Unit (FIU) and the Revenue Commissioner. This proactive reporting mechanism plays a crucial role in safeguarding the financial system from illicit activities.
The Central Bank of Ireland exercises rigorous supervisory oversight over VASPs operating in Ireland. This includes conducting inspections, seminars, risk assessment questionnaires, and on-site reviews to ensure compliance with AML regulations and guidelines.
This comprehensive framework underscores Ireland's proactive approach to combating financial crime in the digital asset sector. By adhering to stringent AML requirements, Ireland aims to foster a secure and transparent financial environment that supports innovation and sustainable growth in the digital economy.
Registration Process (in brief)
All VASPs operating in Ireland must undergo registration with the Central Bank specifically for AML/CFT compliance.
For entities not based in Ireland or not previously operating as a VASP before the 2021 Act's implementation, registration with the Central Bank is mandatory prior to initiating any virtual asset-related services from Ireland.
Financial firms authorised by the Central Bank for prudential or conduct of business services must also register as VASPs if they intend to offer virtual asset services.
To obtain AML/CFT registration approval from the Central Bank, VASPs must demonstrate effective AML/CFT policies that mitigate risks associated with money laundering and terrorist financing. Additionally, the fitness and propriety of the firm's management and beneficial owners must meet the Central Bank's standards.
For further information on the registration process, please refer to the Central Bank's Registration Page.
Money Transmission Laws
In Ireland, the regulation of money transmission services primarily falls under the European Communities (Payment Services) Regulations 2018 (Payment Services Regulations), which implement the Payment Services Directive (PSD2) into Irish law. These regulations focus on electronic forms of payment rather than traditional cash transactions or paper-based transfers. They are particularly relevant where a crypto-asset could potentially function as a payment instrument or if the issuer operates a payment account.
However, classic cryptocurrencies and related ancillary services typically fall outside the scope of the Payment Services Regulations. This is because they do not meet the criteria of "electronic cash" or involve the transfer of "funds" as defined under these regulations.
For cryptoassets other than classic cryptocurrencies, such as those involving the settlement of fiat currency payments between buyers and sellers on a cryptocurrency platform, the Payment Services Regulations may indeed apply. In such cases, the operator of the platform may be engaged in regulated payment services and subject to these regulations.
Furthermore, the European Communities (Electronic Money) Regulations 2011 (Irish E-Money Regulations), which implement the E-Money Directive, could also be relevant to certain types of crypto-assets. These regulations govern issuers of electronic money, defined as electronically stored monetary value redeemable against the issuer.
While classic cryptocurrencies do not typically fall under the definition of electronic money, the Markets in Crypto Assets Regulation (MiCAR) clarifies that certain crypto-assets, like stablecoins pegged to fiat currency, e.g. E-money tokens, qualify as electronic money under specific conditions. If deemed to meet this criteria, issuers of such E-money tokens (EMTs) would need to be authorized under the Irish E-Money Regulations, the MiCA Regulation as from 30 June 2024, comply with ongoing financial regulatory obligations, and adhere to anti-money laundering requirements.
In summary, while classic cryptocurrencies generally do not fall under the Payment Services Regulations or the Irish E-Money Regulations, other types of crypto-assets and ancillary services may indeed be subject to these regulatory frameworks depending on their specific characteristics and functionalities.
Promotion and Testing
In April 2018, the Central Bank started its Innovation Hub to better connect with the fintech industry. This Hub has three main goals. First, it helps the Central Bank understand new and upcoming technology trends by engaging with fintech innovators. Second, it makes it easier for these innovators to discuss regulatory issues, which can often be complex and intimidating. Third, it ensures that new financial firms are ready to meet regulatory standards, which is important for protecting consumers and maintaining financial stability.
Despite these efforts, Ireland still does not have a regulatory sandbox. A sandbox would allow companies to test new financial services with real consumers in a controlled setting. However, the DLT Pilot Regime does allow for the controlled trading of financial instruments using distributed ledger technology (DLT). This pilot program also provides exemptions from certain existing rules that don't fit well with DLT. This will help companies see how current regulations work in practice.
Taxation
In Ireland, tax matters are overseen by the Office of the Revenue Commissioners, and the tax year spans from the 6th of April to the 5th of April the following year. While specific taxes targeting VASPs (Virtual Asset Service Providers) have not been introduced, these entities are still obligated to comply with general taxation requirements.
Depending on the nature of their operations, VASPs in Ireland may be subject to various taxes. Here's an overview of applicable taxes:
- Corporation Tax: VASPs are liable for Corporation Tax at a rate of 12.5% on their profits derived from activities in Ireland.
- Capital Gains Tax: Profits arising from the disposal of assets by VASPs are subject to Capital Gains Tax at a rate of 33%.
- Dividend Withholding Tax: Dividends paid out by VASPs are subject to Dividend Withholding Tax at a rate of 25%.
- Social Security Contributions: Employers in Ireland, including VASPs, are required to make Social Security Contributions at a rate of 11.05% on employee earnings.
- Stamp Duty: Transfers of certain assets, such as shares and property, may be subject to Stamp Duty at a rate of 7.5%.
- VAT (Value Added Tax): VASPs may need to charge VAT at a standard rate of 23% on goods and services provided, depending on the nature of their transactions.
Ensuring compliance with these tax obligations is essential for VASPs operating in Ireland to avoid penalties and maintain regulatory adherence. For specific guidance tailored to individual circumstances, consulting with tax advisors or the Office of the Revenue Commissioners is recommended.
Next Steps: Alignment of Ireland’s Crypto Regulations with MiCA
The Central Bank of Ireland is actively preparing for the implementation of the Markets in Crypto-Assets Regulation (MiCAR) that has become applicable for issuers of Asset-Reference Tokens and issuers of E-Money Tokens on 30 June 2024 and will become applicable for Crypto-Asset Service Providers (CASPs) and issuers of utility tokens on 30 December 2024.
MiCAR allows for a transitional period of up to 18 months for CASPs that were operating under national laws before December 30, 2024. According to Article 143(3), Member States have the option to either not apply this discretion or shorten the duration if their national regulations are less stringent than MiCAR.
In response to its public consultation on Member State discretions within MiCAR, the Department of Finance stated in its feedback that Virtual Asset Service Providers (VASPs) operating in Ireland under existing laws before December 30, 2024, will have a transitional period capped at 12 months.
As the designated National Competent Authority (NCA) for authorizing and supervising entities under MiCAR, the Central Bank has formed a cross-sectoral team to integrate MiCAR into its supervisory and authorization processes.
Firms that intend to provide services or products under MiCAR are encouraged to engage with the Central Bank early on. The Central Bank will soon release further communications detailing the authorization and notification processes. Additionally, it will continue to monitor developments in the crypto-asset sector to ensure consumer protection and financial stability.
Firms should stay updated with the latest information and regulatory insights from the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and the European Commission. The Central Bank also advises firms to complete the ESMA questionnaire on crypto-asset services by July 26, 2024, to aid in the smooth transition to MiCAR compliance.
Conclusion
Ireland’s progressive approach to cryptocurrency regulation, positions the country as one of the desired destinations for digital assets investment. With an advancing legal framework and government support for fintech development, Ireland offers a compelling proposition for businesses seeking to capitalize on the opportunities presented by the digital economy.
If you would be interested in learning more about Malta, and how you can play a bigger role in defining the upcoming rules and regulations, we invite you to connect with us and schedule a complimentary consultation.
