The EU financial market regulator discourages crypto firms to use a borderless modus operandi and announces a stringent enforcement of the breaches of the reverse solicitation clause.
Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets (MiCA) was published in the Official Journal of European Union on 9 June 2023. The intense negotiations of the legislative text lasted for 2.5 years, only to conclude that another stage of fulfilling more than 50 mandates for developing level 2 and level 3 measures is ready to begin (see here multiple public consultations currently running).
Level 2 and level 3 measures will cover a very broad scope of topics, including the authorisation of crypto-asset services providers (CASPs), the governance of these CASPs, their conduct of business, their operational resilience, disclosure requirements and ultimately the supervision of future authorised entities.
As Verena Ross, the ESMA Chair underlined on 16 November 2023 (ESMA75-840896669-368), the key objective of MiCA is to provide the crypto market with regulatory certainty that will enable sound innovative technologies, such as distributed ledgers, to develop in the EU. MiCA technical standards will ensure that issuers of crypto-assets provide the information required in MiCA in a common format. In particular, issuers “will no longer be able to hide potential risks behind catchy slogans” or prevent investors from comparing various options to make well-informed investment decisions.
A prominent feature of new rules highlighted by the EU regulator will be standardised white-papers - they will be required for all crypto-assets offered in the EU, whether they are issued inside or outside of the EU. Machine readability enhancement will be mandatory in this regard.
In return, passporting rights gained the MiCA a positive reception from many in the crypto industry.
However, an important reservation is involved with this freedom - as the ESMA underlined, passporting rights are based on a simple premise: to do business in the EU, you have to properly comply with EU rules. This entails an expectation that EU-based crypto-asset service providers would not rely extensively on non-EU entities for the performance of services for clients based in the EU.
The key message from the EU financial market regulator is in this regard as follows: the idea that the crypto market is “borderless” may be true in a technological sense, but not from a legal perspective.
Verena Ross ascertained some large crypto firms had made this ‘borderless’ philosophy part of their modus operandi, providing their services globally without a formal operational presence in any single jurisdiction. However, the regulators’ view is such a setup should be discouraged.
It became clear then that the EU supervisors favour a firm presence and commitment to the EU regulatory framework.
The above ESMA’s message of 16 November 2023 represents, moreover, a harbinger of stringent enforcement by ESMA and the competent authorities of the breaches of the reverse solicitation clause. With this comes a broad interpretation of what constitutes solicitation of EU clients from third-country firms, through which the EU supervisors want to limit the scope of the ‘reverse solicitation’ clause to genuinely exceptional cases. This is both to protect MiCA-compliant firms from unfair competition and to shield EU investors from unknowingly using unregulated crypto-asset services.
The above developments may be seen as a follow up to the MiFID II regulatory approach, as expressed in the ESMA Letter to EU Commission of 17 December 2021 (Request for support in relation to the report on reverse solicitation, ESMA34-45-1485). In this document the ESMA observed:
“With respect to the impact of reverse solicitation on the passporting regime, several NCAs believe that reverse solicitation is used in practice to circumvent the rules of the third-country and EU passport regimes, which raises some concerns in terms of investor protection but may also create an unlevel playing field between EU asset managers and non-EU asset managers operating in the Union via reverse solicitation”.
It is hardly surprising that as a result of such an effort to develop a regulatory framework for CASPs, the regulator seeks to provide them with an equal or even more favorable position in relation to their non-EU counterparts.