European financial license application and acquisition

An application must be submitted to the regulatory authorities of EU member states (such as the Central Bank of Lithuania and the Estonian FSA), including a business plan, risk management framework, anti-money laundering (AML) policy, and IT system security certification. The review usually takes 6-12 months, capital must be in place in advance (minimum EUR 35), and the team must have payment industry experience.

It is necessary to submit financial statements, proof of client funds segregation, AML audit reports on a regular basis and ensure capital adequacy ratio (dynamic capital requirement is 6% of the average electronic currency liabilities in the past 2 months). If the business expands to non-EEA regions, additional local licenses must be applied for.

The minimum initial capital is 12.5 euros. If the assets under management exceed 2.5 million euros, additional "variable capital" (0.02% of the assets under management) must be added. In addition, professional liability insurance should be purchased to cover potential operational risks.

In addition to prohibiting trading platforms from offering security-type virtual currencies to retail investors for buying and selling. It indicates that since the value of stablecoin may be unstable, there is a high risk of large-scale redemption. Before stablecoins are regulated in Hong Kong, they should not be included in the platform for retail investors to buy and sell. The Hong Kong Monetary Authority issued regulatory proposals on stablecoins in January 2023.

It is expected that regulatory policy for stablecoins will be implemented in 2023/2024.

AIFs are usually limited to "professional investors" or "qualified high net worth individuals" (such as those with investable assets exceeding EUR 50). The manager needs to verify the qualifications of investors and provide regular reports (such as fund leverage level and liquidity risk).

Divided into two categories: "Investment Company" and "Exempt Company":

• investment company: Can execute client orders, proprietary trading, and asset management (requires higher capital, such as 73 euros).
• Exempted Company: Only provides investment advice or receives/transmits orders (lower capital requirement, e.g. 5 Euros).

All transactions must be reported to the regulatory authorities within 1 minute of completion, including transaction time, price, quantity, customer identity (institutional/retail) and product type. Over-the-counter (OTC) transactions also need to be disclosed through an approved Trade Repository.

Before a financial product is launched, a "target market assessment" (TMA) is required to identify the appropriate investor types and continuously monitor the sales process to see if it deviates from the target customer group. For example, high-risk contracts for difference (CFDs) must not be promoted to retail investors.

There are three levels based on annual transaction volume:

• Tier 1 (annual transactions ≤ EUR 500 million): capital requirement is 10% of annual operating expenses.
• Tier 2 (500-1000 million Euros): minimum 12.5 Euros.
• Tier 3 (≥ EUR 1000 million): minimum EUR 20.

According to EU ESMA regulations, the leverage limit for retail clients trading major currency pairs is 30:1, minor currency pairs is 20:1, and cryptocurrency contracts for difference (CFDs) is 2:1. Professional investors are not subject to this restriction but are required to sign a risk disclosure letter.

Client funds must be kept in an independent custody account at a top bank, strictly separated from the company's own funds. Balances need to be reconciled daily and monthly reports submitted to the regulatory authorities.

Issuers of “asset-referenced tokens” (such as stablecoins) must hold at least 6 months of operating reserves (cash or highly liquid assets) and publish reserve audit reports on a daily basis. If the size exceeds a certain threshold (such as 50 billion euros), additional approval from the European Central Bank will be required.

It is necessary to implement an ISO 27001 certified information security system, conduct regular penetration tests, and set up cold wallets to store most customer assets. Major safety incidents must be reported to regulatory authorities within 24 hours.

include:

• Capital requirements: Depends on the type of license (e.g. EMI requires 35 Euros, PI minimum 12.5 Euros).
• Legal and compliance advisory fees: Approximately 3 to 10 Euros (depending on the complexity of the business).
• Local entity operating costs: Office leasing, employee salaries, etc. (e.g. Cyprus requires at least 2 local compliance officers).
  Total costs usually range from 15 to 200 million Euros.

Common choices include:

• 立陶宛：Fast approval (6-8 months), low cost, suitable for start-ups.
• Maltese: Cryptocurrency-friendly, but compliance costs are high.
• Germany: High reputation, but strict capital requirements (e.g. EMI requires 500 million euros).

The license needs to be renewed every year, and a financial health certificate and compliance audit report must be submitted. Serious violations (such as misappropriation of client funds) can result in heavy fines (such as 4% of global revenue), suspension of business, or even criminal prosecution.

If you need further analysis of the application strategy or compliance details of a certain license, we can provide you with a specific business model so that you can get tailored advice!