The Markets in Crypto-Assets Regulation (“MiCA”), published in the Official Journal on June 9 2023, creates a thorough regulatory framework that addresses openness, disclosure, and supervision for issuers and service providers of crypto-assets. The objectives of the regulation are to improve financial stability, market integrity, and investor protection.
The European Securities and Markets Authority (“ESMA”) issued an opinion (the “Opinion”) which highlights the crucial role of trading platforms, especially Multifunction Crypto-asset Intermediaries (“MCIs”). MCIs offer a wide range of services and may attempt regulatory arbitrage by structuring operations to avoid MiCA’s full impact. ESMA is advising Member States’ National Competent Authorities (“NCAs”) to scrutinise such business models, particularly intragroup arrangements, to ensure effective and harmonised enforcement of MiCA across the European Union (“EU”).
The Opinion draws attention to the similarities between authorising Crypto-Asset Service Providers (“CASPs”) under the MiCA regulation and the authorisation challenges faced after the UK’s Brexit. Just as UK firms sought to maintain EU market access by establishing entities within the EU, crypto firms might do the same under MiCA, raising risks of supervisory arbitrage. To mitigate this, ESMA advises applying the principles developed during Brexit, ensuring compliance with EU law, tightly regulating outsourcing to non-EU entities, and preventing the creation of “letter-box entities”, to the MiCA authorisation process to maintain consistent and effective supervision across the EU.
Third-country firms are generally prohiThe bited from providing crypto-asset services in the EU. However, a “reverse solicitation” exemption is being introduced, allowing third-country firms to offer services to EU clients if the client independently initiates the request. This exemption only applies if the third-country firm has not actively solicited or advertised its services within the EU. If any solicitation occurs, the service is considered provided within the Union, and the exemption no longer applies, requiring the firm to obtain authorisation under MiCA. This exemption is narrowly defined and should not be exploited to bypass MiCA’s requirements. NCAs must closely scrutinise applications from EU entities, particularly those within groups that include non-EU firms, to prevent misuse of this exemption. They should assess whether EU-authorised brokers are being used to route orders or solicit clients for non-EU entities, which could constitute unauthorised provision of services in the EU.
CASPs must manage and disclose conflicts of interest, especially within groups offering both brokerage and trading services. NCAs should scrutinise these providers, particularly when EU brokers execute orders on in-house platforms, especially if located in less-regulated third countries. The mere capability to execute on external platforms not doing so carries a heightened risk. Additionally, EU brokers must ensure “best execution”, regularly assessing and comparing execution venues to secure the best results for clients, especially if relying on a single venue may compromise execution quality.
CASPs must also always act in the best interests of their clients. When EU-authorised brokers execute orders on non-EU trading platforms, especially those that are unregulated, NCAs should evaluate the level of consumer protection provided. MiCA has established that if these platforms take custody of client assets, they must be authorised as crypto-asset service providers within the EU.
ESMA’s Opinion underscores the need for uniform and rigorous oversight of crypto-asset platforms, MCIs. It stresses preventing regulatory arbitrage, ensuring fair competition, and protecting investors by addressing complex business structures and reverse solicitation. By guiding NCAs on managing conflicts of interest and ensuring best execution practices, ESMA aims to support a consistent application of MiCA across the EU and uphold market integrity.
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