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Payment Clearing Services

From the moment a payment is promised to the moment money actually moves, and how crypto-assets fit into that picture under MiCA.

What clearing means in banking and finance

In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment (for example, in the form of a cheque or electronic payment invoice) into the actual movement of money from one account to another. Clearing houses were formed to facilitate such transactions among banks.

In trading, clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction. It involves the management of post-trading, pre-settlement credit exposures to ensure that trades are settled in accordance with market rules, even if a buyer or seller should become insolvent prior to settlement. Processes included in clearing are reporting and monitoring, risk margining, netting of trades to single positions, tax handling, and failure handling.

PAYMENT CLEARING Payer bank payment promise Clearing house reporting · netting risk margining · tax handling failure handling Payee bank settlement commitment cleared position Money moves only after clearing, when the promise becomes an actual transfer.
A clearing house stands between the two banks: it takes the commitment, checks and nets it, then passes it on for settlement.

Systemically important payment systems

Systemically important payment systems (SIPS) are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy. In general, these are the major payment clearing or real-time gross settlement systems of individual countries, but in the case of Europe, there are certain pan-European payment systems. TARGET2 is a pan-European SIPS dealing with major inter-bank (exchange services) payments. STEP2, operated by the Euro Banking Association, is a major pan-European clearing system for retail payments which has the potential to become a SIPS. In the United States, the Federal Reserve System is a SIPS.

Crypto-assets under MiCA

On October 10, 2022, the European Parliament Committee on Economic and Monetary Affairs (ECON) endorsed the approved text for the Markets in Crypto-assets regulation (MiCA). While the bill’s main provisions were agreed upon in June, the approved text sets out a harmonized crypto regulatory framework that supports innovation and fair competition while ensuring market integrity and a high level of protection for retail holders.

While MiCA broadly applies to crypto-asset service providers (CASPs) providing crypto services to EU residents, some areas fall outside of MiCA’s scope. These include crypto-assets that:

  • Are unique and not fungible with other crypto-assets, such as digital art and collectibles
  • Qualify as financial instruments as defined under Directive 2014/65/EU, such as security tokens
  • Represent services or physical assets that are unique and not fungible, including real estate or product guarantees
  • Are offered for free, or are automatically created

Classification of crypto-assets

The MiCA bill introduces three sub-categories of crypto-assets based on whether an asset seeks to stabilize its value in relation to other assets.

A

Asset-reference tokens

Assets that maintain a stable value by referencing several currencies, one or several crypto-assets, one or more commodities, or a combination of such assets.

B

E-money tokens

Assets that aim to stabilize their value by referencing only one official currency, such as stablecoins.

C

Other crypto-assets

All other crypto-assets that do not fall into either of the aforementioned groups make up MiCA’s third sub-category.

CASP requirements

Under MiCA, potential retail holders of crypto-assets must be informed about the characteristics, functions, and risks of the crypto-assets they intend to purchase. Therefore, CASPs will be required to compile a whitepaper containing general information on the:

  • Issuer and offerer
  • Rights and obligations attached to the crypto-assets
  • Underlying technology used for such assets
  • Related risks

Prior approval for marketing communications will also be required for asset-reference and e-money tokens. All advertising messages and marketing materials should be fair, clear, not misleading, and aligned with the information provided in the crypto-asset whitepaper.

Further requirements for asset-reference tokens and e-money tokens include regulatory approval before launching new services and vetting key management personnel. Regarding management, the bill notes that issuers of asset-referenced tokens should have robust governance arrangements, including a clear organizational structure and effective processes to identify, manage, monitor, and report the risks to which they are or might be exposed.

Climate impact

The climate impact per crypto transaction is rising. Study results show that the climate impact of bitcoin in 2020 is estimated at 402 kg of CO₂ per transaction. This equates to two thirds of the monthly emissions of an average UK household (611 kg of CO₂ per month). This represents an increase of 32% compared to 2019. The increase in the environmental cost per transaction can be attributed to a sharp increase in the overall energy consumption of the crypto network. Total carbon emissions increased by 25%, from 36 to 45 megatonnes in 2020, while the number of transactions fell by 6%, from 119 million to 112 million. Since the energy mix between renewables and fossil fuels remained fairly constant over this period, the increase in carbon emissions can be attributed almost entirely to the growth of computational power required by the bitcoin network. Further growth in energy consumption is highly dependent on the price of cryptos. As the value of crypto assets such as bitcoin increases, it attracts more miners, who then consume more electricity to mine cryptos.

CO₂ EMISSIONS, 2020 402 kg per bitcoin transaction (+32% vs 2019) 611 kg monthly emissions of an average UK household: one transaction is two thirds of it
Figures as quoted in the study above.

More sustainable alternatives are available

Not all cryptos are based on an energy-intensive algorithm. The algorithm of bitcoin and ethereum, among others, has the highest energy consumption per transaction compared to other technologies with similar functionality that are currently available. This is one of the reasons why, for example, the Swedish financial supervisory authority has recently called for an EU-wide ban on cryptos that use this energy-intensive mining method. It is as yet difficult to compare the total climate impact of cryptos with conventional means of payment.

Our commitment. Crypto Clearing is responsible for dedicating our work not only to the customer’s satisfaction but also to reducing the impact of carbon emissions made up by the wallets and assets that are not cleared accordingly yet. If the digital asset has stuck on the wallet, it does not mean it produces 0 emissions. Every time a new transaction is made on the blockchain, all unfinished, failed and pending transactions are still considered to be a part of the block. Such transactions are responsible for 43.9% of CO₂ emissions caused by cryptocurrency networks in 2021. Our mission is to reduce the amount of stuck and unsettled transactions by providing technological tools and a user-friendly experience to the clearing process on your behalf.

All information is owned by SDD CLEARING LTD. Reports may not be shared with any outside party without our express written permission.

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