EU begins sorting MiFID-regulated securities out of crypto assets


The European Securities and Markets Authority (ESMA) released two consultation papers on Jan. 29 pertaining to its mandate to create standards and guidelines for the implementation of the Regulation on Markets in Crypto-Assets (MiCA). The papers considered reverse solicitation and crypto assets qualifying as financial instruments.

Reverse solicitation is the name given by European regulators to the practice of a potential customer approaching a firm for crypto asset services. An exemption to the MiCA framework allows third-country crypto asset firms to service a European Union client through this mechanism alone.

“Third-country firms may not solicit clients in the Union as they are not authorised to provide CASP [presumably, crypto-asset service provider] services in the Union,” the report explained, unless “the client at its own, exclusive initiative contacted the firm and requested the service, the third-country firm may provide it.” ESMA sees reverse solicitation as only a narrow exemption for third-country firms:

“ESMA, and national competent authorities […] will take all necessary measures to actively protect European Union (EU)-based investors and MiCA-compliant crypto-asset service providers from undue incursions by non-EU and non-MiCA compliant entities.”

ESMA proposed the guidelines for national regulators based on the Markets in Financial Instruments Directive 2014 (MiFID II), which contains similar provisions. Online banner advertisements, sponsorship deals and influencer and celebrity endorsements are among the direct solicitation methods the guidelines address. Follow-up services by third-country CASPs are also subject to the guidelines. The deadline for comments is April 24, 2024.

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ESMA is also soliciting comments on “the conditions and criteria for the qualification of crypto-assets as financial instruments.” A financial instrument is a monetary contract. A crypto asset that qualifies as a financial instrument will be subject to MiFID II regulation rather than MiCA. MiCA requires ESMA to delineate between MiCA and MiFID requirements for financial instruments to create a consist approach at the national level by the end of the year.

There was no general definition of financial instrument given in MiFID II. It provides examples of financial instruments in an annex for guidance, and that has resulted in a lack of harmonization at the national level. “This absence of a common definition and shared criteria applicable to all financial instruments makes it more difficult to adopt a holistic approach in these draft guidelines,” the report noted, adding:

“The assessment as to whether a crypto-asset should be considered a financial instrument should however remain a case-by-case exercise and the guidelines are only meant to promote convergent practices in this context.”

To be considered a financial instrument, a crypto asset would have to be defined as a transferable security, money-market instrument, a unit of collective investment undertaking, a derivative contract or an emission allowance. Comments are due by April 19, 2024.

The European Parliament passed MiCA overwhelmingly in October 2022.

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