The Role of LEIs in MiCA

Understanding Crypto Regulation & Organisation Identity

In the evolving world of cryptocurrency, the regulatory landscape is becoming increasingly complex. One of the latest regulatory frameworks to be introduced into the crypto community is the Markets in Crypto-Assets Regulation (MiCA), introduced by the European Union. Among the various tools and identifiers proposed to streamline compliance and enhance transparency, the Legal Entity Identifier (LEI) stands out as significant. But why the LEI, and why are they so crucial in the context of MiCA?

What is an LEI?

A Legal Entity Identifier (LEI) is a 20-character alphanumeric code that uniquely identifies legal entities participating in financial transactions. This system, overseen by the Global Legal Entity Identifier Foundation (GLEIF), was established to improve the management of financial data and reduce risk in the global financial system. Think of the LEI as a universal passport for companies, providing a standardised way to identify and verify legal entities on a global scale.

LEIs are issued by accredited LEI Issuers like Ubisecure RapidLEI and Bloomberg. We handle the registration, issuance, and maintenance of Legal Entity Identifiers (LEIs) by processing applications, validating legal entity data, and ensuring its accuracy and compliance with GLEIF standards. LEI Issuers are responsible for updating and renewing LEIs annually, providing customer support, and educating entities about LEI importance and compliance. We work closely with the GLEIF to contribute validated data to the central LEI database, adhere to quality standards, and report on their activities to maintain transparency and reliability in the global financial system.

Once issued, LEIs are publicly verifiable in the Global LEI System (GLESI) database. Any stakeholder can check who is who, and who owns whom to aid with KYC/KYB, client onboarding and better business decisions within a global supply chain.

The basics of MiCA

The Markets in Crypto-Assets Regulation (MiCA) is a regulatory framework aimed at ensuring consumer protection, market integrity, and financial stability within the crypto-asset market in the European Union. MiCA covers a broad range of crypto assets, including utility tokens, asset-referenced tokens, and e-money tokens, while also setting forth rules for Crypto-Asset Service Providers (CASPs) / Virtual Asset Service Provider (VASPs) .

Why LEI is used in MiCA

1. Enhancing Transparency and Trust

One of the primary goals of MiCA is to foster transparency in the crypto market. By requiring legal entities to obtain an LEI, MiCA ensures that all market participants can be uniquely identified. This transparency helps build trust among investors, regulators, and other stakeholders, as they can easily verify the legitimacy of entities involved in crypto transactions. For instance, when a company issues a new token, having an LEI makes it straightforward for investors to verify the issuer’s credentials, reducing the risk of fraud.

As stated by Stephan Wolf, CEO of GLEIF, “The LEI is a key component in achieving greater transparency in the financial system. It provides an essential tool for identifying entities, thereby reducing complexity and risk.”

2. Improving Regulatory Oversight

Regulatory bodies need a clear and consistent way to monitor the activities of various entities within the crypto market. LEIs provide a standardised method for identifying these entities, making it easier for regulators to track their activities, assess risks, and enforce compliance. With the global nature of crypto markets, having a universally recognised identifier like the LEI facilitates cross-border regulatory cooperation and information sharing, enhancing the overall effectiveness of regulation under MiCA.

3. Streamlining Compliance Processes

For companies operating within the EU’s crypto market, compliance with MiCA’s requirements can be complex and time-consuming. The LEI simplifies this process by providing a single, standardised identifier that can be used across different regulatory reporting frameworks. This reduces the administrative burden on companies, as they no longer need to manage multiple identifiers for different regulatory purposes. Instead, they can use their LEI for all compliance-related activities, from transaction reporting to fulfilling disclosure requirements.

“By providing a single identifier that is recognised globally, the LEI system reduces the burden on companies and improves the efficiency of regulatory reporting,” notes the GLEIF.

4. Facilitating Market Integrity

Market integrity is crucial for the healthy functioning of any financial market. By mandating the use of LEIs, MiCA helps prevent market manipulation and other illicit activities. The ability to uniquely identify and verify all entities involved in the crypto market means that suspicious activities can be more easily detected and investigated. This not only protects investors but also helps maintain a level playing field, ensuring that legitimate entities can compete fairly.

5. Supporting Innovation and Growth

While regulation might seem like a barrier to innovation, in reality, clear and consistent regulatory frameworks can foster innovation by providing legal certainty. Companies are more likely to invest in new technologies and business models when they understand the regulatory environment they are operating in. The use of LEIs within MiCA helps create such an environment by providing a transparent and predictable framework for market participation. This, in turn, can attract more institutional investors and encourage the growth of the crypto market within the EU.

Mandatory LEI usage for MiCA compliance

MiCA mandates the use of LEIs for legal entities, especially for Crypto-Asset Service Providers (CASPs) / Virtual Asset Service Provider (VASPs). The LEI is required in:

• Article 18: Application for Authorisation
• Article 62: Application for authorisation as a crypto-asset service provider
• Article 109: Register of crypto-asset white papers, of issuers of asset-referenced tokens and e-money tokens, and of crypto-asset service providers

These requirements to provide transparent identification information aligns with the Financial Action Task Force (FATF) guidelines, which call for standardised identification measures to combat money laundering and terrorist financing. The FATF Travel Rule specifically mandates that VASPs must share information about the originators and beneficiaries of crypto transactions, ensuring traceability and accountability.

The GLEIF highlights the importance of LEIs in this context: “The LEI is essential for VASPs to comply with the FATF Travel Rule, ensuring that entities are accurately identified and that transaction data is transparent and traceable.”

Ubisecure RapidLEI is pushing ahead with support for this growing industry. We onboarded the first Travel Rule solution provider as a Validation Agent (VA) in 2023. VerifyVASP can now seamlessly obtain LEIs for their Virtual Asset Service Provider (VASP) clients, using RapidLEI’s automated issuance technology through our LEI Everywhere program.

Shihyun Chia, CEO of VerifyVASP, said: “Travel Rule is effectively a messaging protocol that would require data standards, taxonomies and industry best practices for effective frictionless compliance. The adoption of LEI as prescribed by regulations such as the TFR would be a cornerstone in achieving this. Additionally, LEI would also facilitate the identification and verification of counterparties in establishing counterparty or correspondent relationships between VASPs/CASPs.”

Next steps for the the crypto-asset industry

In the volatile world of cryptocurrency, regulation is a necessary tool to protect investors, maintain market integrity, and support sustainable growth. The Markets in Crypto-Assets Regulation (MiCA) is a significant step forward in this regard, and the inclusion of the Legal Entity Identifier (LEI) plays a crucial role in achieving its objectives. By enhancing transparency, improving regulatory oversight, streamlining compliance, facilitating market integrity, and supporting innovation, LEIs help create a safer and more reliable crypto market. For anyone involved in the crypto space, understanding and embracing LEIs and their associated organisation identity data within the framework of MiCA is essential for navigating the regulatory landscape and making the most of the opportunities it presents.

Learn more: LEI Everywhere for CASPs and VASPs

Next steps: Register LEI | Renew LEI