EU Regulator Seeks Public Opinion on Crypto Rules

The European Securities and Markets Authority (ESMA), the top regulator of the European Union’s financial markets, has opened a feedback window on two guidelines under the Markets in Crypto Assets Regulation (MiCA). The regulation, which is due to take effect this year, is the EU’s comprehensive crypto law that promises legal certainty, compliance challenges and global implications for the crypto industry.

Reverse Solicitation Exemption

One of the guidelines that ESMA is seeking input on is the reverse solicitation exemption, which is a provision that limits the provision of crypto-asset services by a third-country firm to cases where the client is the exclusive initiator of the service. This means that a firm outside the EU cannot solicit clients established or situated in the EU without obtaining a MiCA authorisation.

ESMA is looking for more guidance on the conditions of application of this exemption and the supervision practices that national competent authorities may take to prevent its circumvention. The regulator wants to ensure that the exemption is understood as very narrowly framed and must be regarded as the exception, not the rule. ESMA is concerned that some third-country firms may exploit potential loopholes to bypass MiCA authorisation requirements.

Classification of Crypto-Assets as Financial Instruments

The other guideline that ESMA is seeking input on is the classification of crypto-assets as financial instruments. This is aimed at bridging the MiCA regulation and the Markets in Financial Instruments Directive II (MiFID II) and ensuring consistency across the EU. The guideline aims to provide clear conditions and criteria for determining whether a crypto-asset can be classified as a financial instrument, such as a security, a derivative or a money market instrument.

ESMA is proposing a structured but flexible approach that balances between providing guidance and avoiding a one-size-fits-all solution. The regulator believes that this will reduce misunderstandings and misinterpretations of policy intent and support a harmonised approach throughout the Union. ESMA hopes that this guideline will provide much-needed clarity and contribute to the global standards in crypto-asset regulation.

How to Respond to the Consultation

ESMA has published two consultation papers on its website, one for each guideline. The consultation closes on 29 April 2024. All interested stakeholders are invited to respond to the consultation papers, especially crypto-asset service providers and financial entities dealing with crypto-assets. ESMA will consider the feedback it receives in the second quarter of 2024 and expects to publish a final report in the fourth quarter of 2024.

The consultation papers reflect ESMA’s broader work in establishing regulatory clarity around cryptocurrencies in line with the MiCA regulations. The regulator has previously published another consultation package on the technical standards under MiCA in May 2023. MiCA is part of the EU’s Digital Finance Strategy, which aims to foster innovation and competition in the digital finance sector while ensuring consumer protection and financial stability.