MiCA Prudential Capital: Class 1, 2, and 3 Explained for CASPs

How does MiCA classify CASPs into three tiers?

MiCA Annex IV divides crypto-asset services into ten activities and groups them by risk into Class 1, 2, or 3 — the firm’s class is set by the most prudentially demanding service it intends to offer.

Annex IV of MiCA divides crypto-asset services into ten activities and groups them into three risk classes. The classification drives the prudential capital requirement under Article 67. The class of a firm is determined by the most prudentially demanding service it intends to provide — not by the volume mix.

Class 1 — €50,000 floor

Class 1 covers the lowest-risk crypto-asset services, where the firm does not hold customer assets and does not take principal risk on transactions:

• Reception and transmission of orders — passing client orders to a third-party execution venue
• Advice on crypto-assets — providing investment recommendations to clients
• Placing of crypto-assets without a firm-commitment basis — best-efforts placement during issuance

A firm that is purely an advisor or order-router is a Class 1 firm. The economic model is similar to an investment adviser under MiFID II — fees for advice, no balance-sheet risk.

Class 2 — €125,000 floor

Class 2 adds services where the firm takes some operational risk but does not hold customer assets in custody:

• Exchange of crypto-assets for funds or other crypto-assets — operating an exchange function
• Execution of orders on behalf of clients — executing client orders against own book or third-party venues
• Placing of crypto-assets on a firm-commitment basis — underwriting placements
• Portfolio management — discretionary management of client crypto-assets

Most commercial CASPs end up at Class 2 because exchange or execution is part of their economic model.

Class 3 — €150,000 floor

Class 3 covers the highest-risk services, where customer assets sit on the firm’s balance sheet (custody) or where the firm operates an organised market:

• Custody and administration of crypto-assets on behalf of clients — holding customer crypto in firm-controlled wallets
• Operation of a trading platform for crypto-assets — running a multilateral matched-trading venue
• Transfer services for crypto-assets on behalf of clients — initiating on-chain transactions for clients

Class 3 is the most demanding tier. The €150,000 initial floor is only the start; the on-going overlay scales with assets under custody.

How does the own-funds overlay actually work?

Ongoing capital is the higher of the initial-capital floor or one-quarter of the previous year’s fixed overheads — so capital scales with the firm’s cost base, not just the licence class.

The headline initial-capital figures (€50K, €125K, €150K) are floors, not ceilings. The ongoing capital requirement under Article 67(2) is the higher of:

1. The initial-capital floor for the firm’s class — €50K, €125K, or €150K
2. One-quarter of the previous year’s fixed overheads — measured per the IFR Article 13 definition

For a small, operating Class 1 advisory firm with €100K annual fixed overheads, the ongoing capital requirement is the floor (€50K), because €100K / 4 = €25K, which is below the floor.

For a mid-sized Class 2 exchange with €1M annual fixed overheads, the ongoing capital requirement is €250K (€1M / 4), because that exceeds the €125K floor.

For a large Class 3 custodian with €4M annual fixed overheads, the ongoing capital requirement is €1M (€4M / 4), because that exceeds the €150K floor.

The fixed-overheads calculation is performed annually based on audited accounts. Firms with growing operating expenses see their capital requirement scale with their cost base.

What custody overlay applies to Class 3 firms?

Class 3 custody firms must hold either additional own funds equal to 0.025% of customer crypto-assets under custody or professional indemnity insurance — calculated daily for the own-funds option.

In addition to the fixed-overheads test, Class 3 firms providing custody must hold one of:

1. Additional own funds equal to 0.025% of customer crypto-assets under custody — calculated daily, applied as an additional capital buffer
2. Professional indemnity insurance — covering custody-related claims, with parameters set by the home regulator within ESMA’s RTS framework

For a custodian with €100M in customer crypto-assets, the additional-own-funds option requires €25,000 in extra capital. For €1B in custody, it requires €250,000. The PII alternative becomes economically attractive at higher custody volumes because PII premiums scale sub-linearly with assets covered.

What does the capital trajectory look like for a Class 2 exchange?

A Class 2 Lithuanian exchange starts at €125,000 at authorisation, rises to €150,000 in Year 1, €225,000 in Year 2, and €350,000 in Year 3 as fixed overheads scale.

To make the numbers concrete, consider a typical Class 2 exchange structure:

• Lithuanian CASP entity
• Provides exchange and execution services to retail and professional clients
• Estimated Year 1 fixed overheads: €600K (rent, fixed staff, IT licences, compliance)
• Year 2 projected fixed overheads: €900K
• Year 3 projected fixed overheads: €1.4M

Initial capital at authorisation: €125,000 (Class 2 floor)

Ongoing capital, Year 1: €150,000 (€600K / 4 = €150K, exceeds €125K floor)

Ongoing capital, Year 2: €225,000 (€900K / 4)

Ongoing capital, Year 3: €350,000 (€1.4M / 4)

The firm needs to plan a capital trajectory, not a one-off injection. Founders that capitalise to the initial-capital floor and assume that’s the steady state under-fund the firm.

What counts as eligible capital under MiCA?

Only Common Equity Tier 1 items count — paid-in share capital, share premium, audited retained earnings, and other reserves from retained earnings — held in fiat at an EEA-licensed credit institution.

Eligible capital under MiCA Article 67 follows the Common Equity Tier 1 (CET1) framework from the Capital Requirements Regulation, adapted for non-bank firms. Eligible items:

• Paid-in share capital (par value)
• Share premium (paid-in capital above par)
• Retained earnings (audited)
• Other reserves arising from retained earnings

Ineligible items:

• Shareholder loans (even if subordinated, even if interest-free)
• Convertible notes (until conversion to equity)
• Off-balance-sheet guarantees
• Crypto-asset holdings, including stablecoins
• Capital denominated in non-EEA fiat held at non-EEA banks

The capital must be held at an EEA-licensed credit institution or e-money institution. The institution provides a confirmation letter to the regulator at authorisation, and an annual confirmation thereafter.

Where do firms typically go wrong on prudential capital?

Three patterns account for most deficiencies — capital structures built on shareholder loans rather than equity, under-estimated fixed overheads, and forgetting the Class 3 custody overlay.

Three common patterns account for most prudential-capital-related deficiencies in CASP filings:

1. Capital structure built on loans rather than equity. Often a tax-driven structuring decision that creates a regulatory problem at authorisation.

2. Under-estimating fixed overheads. The IFR Article 13 definition is stricter than founders’ instinct — items they consider variable (some staff costs, some IT) are classified as fixed under the framework.

3. Forgetting the Class 3 custody overlay. Founders model the headline €150K floor and forget to model the 0.025%-of-custody overlay or the PII premium. At meaningful custody volumes, this is the bigger number.

How should you work with counsel on prudential capital?

Engage senior counsel early — the structuring decisions made at the start (equity vs loan, fiat vs crypto, EEA vs non-EEA bank) are difficult to reverse later and have material capital consequences.

Prudential capital is one of the few CASP-application sub-topics where founders consistently benefit from senior counsel time over junior associate time. The reason: the structuring decisions made at the start of the engagement (equity vs loan, fiat vs crypto, EEA vs non-EEA bank) are difficult to reverse later and have material capital consequences.

Counsel that has personally walked five or more CASP files through prudential review at the home regulator has internalised which classifications the regulator accepts and which trigger pushback. Generalist firms with a small crypto sidearm typically lack this calibration.