The European Securities and Markets Authority, the EU’s financial markets regulator, issued an opinion on 31 July 2024 addressing concerns about global crypto firms seeking authorisation under the markets in crypto assets (Mica) regulation while conducting substantial activities outside the EU’s regulatory framework. Esma highlighted the risks associated with these firms’ complex structures, especially when intra-group execution venues fall outside Mica’s jurisdiction, and advised national competent authorities to exercise heightened vigilance. The agency also confirmed that additional guidelines would be released by the end of the year.

Regulatory concerns

Esma’s underscored significant risks tied to the operational models of global crypto firms. These firms might involve an EU-authorised broker routing orders to an intra-group execution venue located outside the EU. Such arrangements could compromise consumer protection and create an uneven playing field between EU-authorised and non-EU execution venues, cautioned Esma.

The Mica regulation aims to establish a comprehensive framework for regulating crypto-asset issuance and services in the EU. It set out obligations related to transparency, disclosure, authorisation and supervision of transactions, aiming to bolster investor protection, market integrity and financial stability. For Mica to meet its goals, effective and consistent implementation across the EU was necessary, emphasised Esma.

Exemptions and implementation

Esma highlighted that the article 59 of Mica prohibits third-country firms from providing crypto-asset services within the EU. However, article 61 introduces a “reverse solicitation” exemption, permitting EU clients to request services from third-country firms on their own initiative. This exemption is not applicable if the third-country firm solicits or advertises its services within the EU.

Esma stressed that national competent authorities in the member states must ensure ongoing compliance with articles 59 and 61 of Mica both during the authorisation process and continually thereafter. NCAs should scrutinise applications to prevent third-country firms from using EU-authorised entities to solicit EU clients while operating from outside the EU. They must assess whether an EU-authorised broker is effectively soliciting clients for non-EU entities within the same group.

Potential non-compliance

NCAs should be alert to indicators of potential non-compliance with Mica, commented Esma. These include cases where an EU-authorised broker consistently routes orders to a non-EU execution venue without evaluating unaffiliated alternatives, relies on the reputation of a non-EU exchange to attract clients or reports abnormally low revenue from brokerage activities compared to what would be expected for an independent broker and execution venue interaction.

Future guidance

Esma plans to issue further guidance on the reverse solicitation exemption through its guidelines on reverse solicitation under Mica, anticipated for publication in the second half of 2024. This guidance will aim to clarify the application of the reverse solicitation exemption and address ongoing regulatory concerns, said Esma.

In its opinion, Esma emphasised the need for rigorous oversight of global crypto firms and their cross-border operations and reiterated the importance of effectively implementing the Mica regulation to uphold investor protection and market integrity within the EU.