How New Amendments to the Law on the Prevention of Money Laundering and Terrorist Financing Will Affect Crypto Service Providers
It‘s almost 3 months left until the 1st of August, 2024. Which measures should be taken to ensure the indicators of capital sufficiency in the activities of crypto service providers?
The requirements are strict, the consequences are threatening, whereas the timeframe to comply is short. Not surprising that market participants quickly initiated discussions as to what measures could be taken to comply with the new requirement set forth in the AML/CFT Law.
- Is it necessary to always maintain at least EUR 125,000 of cash in a bank account?
- Can such funds be used for operational activities?
- Would increase of share capital be the only mean to satisfy the requirement?
- Or are there alternative methods?
The Parliament of the Republic of Lithuania accepted amendments to the Law on the Prevention of Money Laundering and Terrorist Financing of the Republic of Lithuania (the “AML/CFT Law“).
Which, among other changes, oblige virtual currency exchange operators and depositary virtual currency wallet operators to constantly ensure an adequacy of equity capital of at least EUR 125 000. Crypto service providers that fail to comply with a newly set requirement as of 1st of August, 2024 and/or fail to provide relevant information to the FIU by the 31 of August, 2024 – will lose the right to carry out the activities of virtual currency exchange and/or depository virtual currency wallet operator in Lithuania as of the 1st of September, 2024.
Important to note, that equity capital is not the same as initial capital of the company and is not directly linked to cash held in bank accounts. And so insufficiency of the equity capital occurs due to loss-making activities. The Law on Companies defines that equity capital consists of the following indicators: the amount of the paid-up share capital, share premium, reserves, retained earnings (losses). In practice, insufficiency of the equity capital occurs due to loss-making activities. For example, businesses at the beginning of their activities often incur more expenses than they earn revenue. This results in losses, which reduces the equity ratio.
Common practice is that companies assess their performance and equity ratio once a year when preparing annual financial statements. However, new requirements introduced in the AML/CTF Law obliges crypto market participants to monitor equity sufficiency on daily basis and to ensure that equity capital is at least EUR 125 000.
What measures would enable effective monitoring of adequacy of equity capital on daily basis?
A. Common measure is a creation of a safety buffer. By applying such a method, it is possible to estimate the losses that business may incur over a given period in advance and to react respectively (i.e., by making equity capital injection in corresponding amount).
For example, if a company is expected to make a loss of EUR 75 000 in its first year of operations, equity capital of EUR 200 000 may be formed. This would ensure that the safety buffer will be sufficient to cover losses in the following year and will secure that the equity ratio does not fall below the statutory requirement of EUR 125 000 for the entire year.
B. Usually firms ensure compliance with equity capital adequacy requirement by increasing a share capital. However, from practical perspective this method may appear considerably inconvenient for crypto service providers, because of a new obligation set forth in the AML/CTF Law which obliges Virtual Asset Service Providers (VASPs) to increase share capital only through the bank account opened within credit institution (i.e. traditional bank).
Current market situation shows that only one out of ten crypto service providers, at best, have bank accounts opened with credit institutions, which, upon receipt of bank account opening requests, are usually in no hurry to get account opened for crypto market participants. This could lead to VASPs being unable to maintain adequate equity capital due to the impossibility of opening bank accounts with traditional banks.
If your business is in a similar situation…
And you feel that performance indicators may not be in line with the newly established capital adequacy requirements due to difficulties in opening bank account with a credit institution or due to other commercial circumstances, we invite you to refer to us and to work together in finding solutions. Experienced experts from NOEWE’s legal, tax, financial accounting and business advisory teams will help your business to choose the most suitable approach that will enable you to effectively prepare for the implementation of the new operational requirements and to ensure a smooth and uninterrupted operation of your business.
Please contact us and we will find solutions together!
- Ieva Bakutienė
Associate Partner | Licensing Services
ieva.bakutiene@noewe.eu - Rita Tamulytė
Associate Partner | Compliance Services
rita.tamulyte@noewe.eu
