MiCA and the Importance of Resolution Planning in Digital Asset Custody

In each jurisdiction we work in, we hold ourselves to the highest standards of regulatory compliance. This is why we don’t shy away from resolution planning: we have already put in place truly robust plans to ensure minimal disruption for our clients, no matter the circumstance.

As the EU’s Markets in Crypto-Asset (MiCA) regulation shines a new light on this overlooked topic, in this article we will delve into this rarely discussed aspect to reveal our comprehensive strategies for ensuring continuity and security.

A new level-playing field

MiCA is a transformative moment for the European digital asset market. It creates a level playing field for pan-EU digital asset activities, and paves a way for the institutional adoption of digital assets in the region.

Through MiCA, which was initially conceptualised from its older sibling Markets in Financial Instruments Directive (MiFID), we have a black-and-white picture of how providers should interact with EU clients, This includes everything from creating a clear definition of what constitutes a crypto asset, all the way through to providing clear legal differentiations between custodians and wallet providers.

MiCA also details the requirements each provider needs to meet, across the entire client lifecycle. Under the new regime, crypto-asset providers “must devise a plan for an orderly resolution of their activities.”

But what exactly is a resolution plan? Essentially, it is a process for ceasing regulated activities in the event of a firm undertaking a strategic exit, or if it were to become insolvent. It must take into account all aspects of the business — from governance and leadership to people, IT and operations. It also requires adequate capital, liquidity, knowledge and staff, as well as planning for various scenarios.

For many in the EU digital asset ecosystem, the need to focus on resolution planning will cause panic. The nature of digital assets adds more complexity to the equation and the introduction of MiCA means many providers are having to work backwards, with plans being scrambled into effect before the December 2024 deadline.

What may have seemed like “going over and beyond’ a few years ago has now positioned Zodia Custody as a leader in this space. Underpinned by our bank-backed heritage, and decades of experience in this area in the traditional finance sector, Zodia Custody has in fact implemented intricate resolution planning from its inception.

A necessary plan

Through our bank-owned heritage, we have tailored processes from traditional banking and adapted them to digital assets; from private key safety, reporting, reconciliations and all the way to data recovery. Our dedication to the highest regulatory standards means we have planned for even the most unlikely eventuality and regularly conduct robust testing of these plans, rather than leaving them to gain dust in a corner.

And here’s the example that no custodian ever likes to consider, but any custodian worth their salt should plan for: In the very unlikely scenario that Zodia Custody was to become insolvent a strategic exit is required — meaning a resolution of operations and returning all assets to the right owners.

This is where our intensive work comes into play. Through our resolution scenario planning, we will ensure that any client’s assets in that geography are protected and then returned as we exit.

How? Through our unique approach to custody, assets are always readily identifiable on an individual client basis and never commingled with that of the firm. This makes it easy for ourselves or independent administrators to return our client’s assets. Additionally, given the trust arrangements which underpin our service offering, our client’s assets are insolvency remote, protecting them from claims from our general creditors. This is further ensured through implementing a layered system that can cover multiple angles at all times — meaning neither day-to-day operations, private key security, or resolution planning will ever be reliant on any one person or system.

This is what truly robust resolution planning looks like: security, compliance and reassurance — guaranteed.

Tackling head on

Even with MiCA shining a new light on the subject, resolution planning is not the most comfortable subject to talk about as a custodian. But as December draws near, we need to tackle it head on, so you can be sure your assets are safe with us no matter what. This is exactly what we have done, through expert and robust planning.

Want to learn more about our approach to regulations and asset security? Reach out today by contacting us here.