Types of Licenses for Your Fintech Business: EMI, PSP, and Crypto Licenses

Understanding when a fintech business needs a license is just the first step. Knowing which specific license can set your business on the right path is equally essential, especially as regulatory requirements evolve. In our previous blog post, “When Does Your Fintech Business Need Licensing? Key Cases to Consider”, we covered the basics regarding fintech licenses and when they are required. Now that you know the key definitions and what fintech operations are regulated, it’s time to dive deeper into the main types of licenses. 

This article focuses on European licenses and the overall fintech business licensing process. This choice is justified because the European market has been growing exponentially for the past decade. According to the European Central Bank, the industry has grown more than twice since 2016, with as many new businesses launched since then as in the previous 15 years. Forecasts predict that the European fintech market will be worth USD 188 billion by 2029. This boom is, in part, explained by the existence of innovation hubs in many European countries. These are business-friendly schemes through which companies can interact with competent authorities and seek assistance with licensing, among other things. 

If you are considering entering this competitive but extremely promising market, this article can help you learn more about the types of licenses available. You’ll learn about EMI license requirements, PSP license, and various crypto licenses. If you are planning to expand to the Canadian market, you can also benefit from our quick overview of an MBS license. 

The Logic of Dividing Licenses: A Strategic Checklist

Before deciding on the type of license to obtain for your fintech business, you need to answer several important questions about your company’s overall direction and long-term plans. 

• Business model: What currencies are you planning to use? Will your business operate with fiat currency, cryptocurrencies, or both? 
• Funds management: Will your company directly store customer funds, or do you plan to engage a third-party partner responsible for this purpose?
• Service scope: What specific services will your business offer? This aspect should be planned in detail so that you clearly understand what types of activities need licensing (e-money insurance, payment processing, crypto exchanges).
• Jurisdiction: Where are your users located? Do you plan to expand or advertise your services in other jurisdictions? 

You might also want to decide on the available funds, as the cost of licenses and the initial capital requirements can vary. Responding to these questions might take time as a more detailed picture of your business emerges. However, at this point, it is important not to rush things because your decisions will determine what type of license for financial services you will need. Moreover, if you plan to obtain crypto license consulting, having a clear picture in mind will help you obtain more targeted, hands-on professional assistance. 

EMI License in the European Union: Enabling Fiat Transactions

Obtaining an Electronic Money Institution’s (EMI) license is a key step for any EU-operating company seeking regulatory compliance in fintech. This license type allows fintech businesses to issue e-money and process transactions. EMI license also allows making payments, creating electronic wallets, and providing individual IBANs. 

However, unlike a traditional bank, a company with an EMI license has no right to issue loans or hold deposits. The process of safeguarding money is also different from classic banks. An Electronic Money Institution must segregate the money into a separate safeguarding account different from the businesses’ own money. Alternatively, the assets can be invested in secure, liquid, low-risk assets approved by the Financial Supervisory Authority. These limitations are justified because EMIs enjoy lower capital requirements and lighter regulations compared to traditional banks.

Having an electronic money license sends a powerful message to potential customers that your company has all the necessary security systems in place to protect clients’ assets. As such, it can contribute greatly to the company’s competitiveness and image.. European fintech license has the advantage of opening up opportunities to operate across a large European market. 

So, if you want your users to exchange cash for electronic money, use financial storage services, or pay for services or goods with electronic currency, EMI is the right type of license for you. It gives you the legal right to offer services such as e-wallets and prepaid cards throughout the whole EU. 

It is important to note that fintech licensing requirements regarding EMI in Europe are demanding and not easy to meet. Your company needs to follow some very specific rules regarding the following:

• Sufficiency of capital 
• Operational sustainability
• Security system
• Customer data protection
• Policies regarding anti-money laundering and counter-terrorism

Meeting these expectations requires multidisciplinary expertise and careful planning. Therefore, we recommend starting with a consultation on getting a financial services license. 

By the way, the process of obtaining EMI in the UK has changed since Brexit, as this licensing is now regulated by the Financial Conduct Authority (FCA). The application process is rather straightforward due to the presence of clear instructions. For example, a business must have an initial capital of €250,000 to be eligible for EMI. It must also possess an ongoing capital of 2% of the issued outstanding e-money. Obtaining EMI in the UK will allow your company to issue e-money and provide merchant services that accept e-money for payment. 

PSP License in Europe: Facilitating Payment Services

Another type of license available to fintech companies seeking to operate in the EU is the Payment Service Provider (PSP) license. Although it may look like an e-money institution license at first glance, it does not allow the issuing of IBANs for clients and storing clients’ funds. In addition, PSP-licensed companies focus on processing transactions rather than issuing e-money. When it comes to capital requirements, your company needs a relatively lower initial capital investment to get a license like this. 

A PSP license typically does not allow to hold client funds directly, as PSPs act as intermediaries that facilitate transactions rather than managing or holding customer assets themselves. However, PSPs are still required to comply with strict regulations regarding customer data security. 

The steps for obtaining EMI and PSP are essentially the same. If you seek to obtain a license in Europe, you will need to: 

• Establish a company in the jurisdiction of choice.
• Obtain an official registration address.
• Set up a management board and determine shareholders. 
• Seek legal assistance with the preparation of application documents. 
• Complete an application form and collect all necessary documents and policies
• Apply to the relevant authority and wait for approval.

Skipping the legal advice step is unwise because European electronic money regulations and cryptocurrency regulations constantly change. Besides, distinguishing when you might need an EMI or a PSP license can be tricky because these types of licenses have many similarities. Making the wrong choice can delay the launch of your business and cost you a hefty sum. 

VASP License: Crypto Compliance Across Jurisdictions 

Moving on to crypto regulation in Europe, Virtual Asset Service Provider (VASP) is another license option you may need to consider. This crypto license is a relatively new regulatory requirement designed as a response to the increasing use of virtual assets. Its goal is to ensure that the business operates in compliance with anti-money laundering and counter-terrorism financing measures. VASP license also guarantees that the company demonstrates financial stability and integrity.

Your company might need this fintech license if you work with cryptocurrencies. For example, this is your go-to license if you want to launch a crypto bank. Any services related to crypto, such as crypto exchange or crypto custody, need to comply with European regulations. So, VASP can be your crypto exchange license or virtual currency license that permits you to engage in specific crypto activities. 

To get a VASP crypto license, you need to ensure that your company meets requirements in the following areas:

• Ethical business practices
• Internal governance
• Capital adequacy
• Risk management policies
• Asset segregation 
• Cybersecurity 

In order to ensure that the company is not involved in any illegal money laundering activities, compliance with the Know Your Customer (KYC) strategy is also paramount. Cryptocurrencies tend to provide a greater degree of anonymity than traditional money. So, you need to have a system to track transactions and detect suspicious activities. Obtaining a VASP license means that you will need to constantly upgrade your security system by investing in IT and staff training. 

A VASP crypto license is particularly popular in jurisdictions such as Lithuania. We mention this country for a reason. Statistics show that Lithuania is one of the most popular countries for fintech and crypto startups. Fintechs licensed in this European country cumulatively serve more than 27 million customers across the EU. Another benefit of being licensed in Lithuania is that there is a well-developed market for crypto license consulting. So, learning how to obtain a crypto license would not be a problem. Other countries where VASP licensing is easier and cheaper include Estonia, Poland, Slovakia, and the Czech Republic.

With the advent of the Markets in Crypto-Assets (MiCA) regulation, all payment service providers in Europe offering crypto-related services will need to obtain a license in compliance with MiCA standards. This regulation requires that businesses operating a cryptocurrency exchange license or crypto trading license align with new consumer protection and financial stability rules across the EU. As a result, any company involved in crypto services must secure a MiCA-compliant license to operate legally within the region.

MSB License in Canada: A Hybrid Approach

A Money Service Business (MBS) license is a hybrid choice that helps fintech companies to work with both fiat and cryptocurrencies. Unlike Europe’s EMI, Canada MBS license does not permit keeping customers’ assets and issuing IBANs. Rather, it is more equivalent to the PSP license in Europe. 

The benefits of getting an MBS license are obvious, as it allows:

• Working with virtual currencies, such as Bitcoin and Ethereum, to sell goods and services. 
• Transforming traditional money into digital currencies or vice versa.
• Providing virtual currency transfer services. 

Your company needs this financial service license if it meets two criteria: (1) operates in Canada and (2) offers at least one money services business (MSB) service. The Government of Canada specifies that the latter may include many traditional services, as well as dealing with virtual currencies. If you plan to exchange or transfer virtual currencies while operating in Canada, having an MSB is obligatory. For example, MSB is needed for trading fiat money for cryptocurrencies. 

Getting an MSB does not mean that you are done complying with regulations once and for all. It is an ongoing process, and if your company does not invest in security measures and compliance policies, it risks facing harsh penalties or even license revocation. 

Conclusion

This article presented an overview of the main fintech licenses by outlining their roles and regulatory requirements. However, this information is not enough to make the final choice. The decision will ultimately depend on your unique business model, jurisdiction, and target market. To avoid confusion and costly mistakes, we recommend reaching out to us and we will help you connect with legal consultants specializing in fintech licensing. 

In addition to offering specialized services, such as consultations on how to build an investment platform, the 4IRE team connects clients with experienced partners. They can consult you and assist you with licensing applications and compliance every step of the way.