European Union regulators are reporting a common blind spot among crypto firms applying under the Markets in Crypto-Assets (MiCA) framework: the 'substance' requirement. Under MiCA, substance is not a box to tick on a form. It's an empirical test of whether a business genuinely operates from within the EU. And most applicants, according to feedback from the application process, underestimate what that test demands.
What 'Substance' Really Means
The regulation defines substance through concrete evidence of local operations. A company must show it has a physical office, employs staff who make key decisions in the EU, and carries out core business activities from within the bloc. A registered address and a part-time director won't cut it. Regulators are looking for real, day-to-day management and control on the ground.
That's a shift from earlier approaches where companies could simply register in a member state and claim compliance. MiCA's substance test is designed to prevent so-called 'letterbox' firms that exist only on paper. The empirical nature means each application is judged on its specific facts, not on promises or plans.
Why Most Applicants Get It Wrong
The biggest mistake, sources involved in the process say, is assuming that a small EU office with a handful of staff meets the bar. Many applicants try to keep their core teams outside the EU—in London, Singapore, or the US—while maintaining a minimal presence in a member state. That doesn't pass the empirical test. Regulators can and do check where decisions are actually made, where servers are located, and where the bulk of the workforce sits.
Another recurring error is underestimating the documentation required. Applicants are asked to provide detailed org charts, meeting minutes, and records of who approved key policies. Firms that can't show a clear chain of decision-making within the EU are sent back to the drawing board.
Impact on Crypto Businesses
For companies that fail the substance test, the consequences are immediate. Their MiCA application is rejected or put on hold, meaning they can't legally offer services in the EU market. Some firms have had to restructure their entire European operations, relocating senior staff or setting up new subsidiaries. The process is costly and time-consuming.
The regulation also requires ongoing compliance. Once approved, a firm must maintain its substance. Any significant shift—like moving a key executive outside the EU—triggers a reassessment. That means companies can't treat substance as a one-time hurdle.
As MiCA enforcement ramps up, businesses that haven't yet passed the substance test will need to reassess their EU footprint. Regulators expect to see more applications either withdrawn or restructured in the coming months. The question is how many firms are willing to make the long-term investment that genuine EU substance requires.
