The European Securities and Markets Authority (ESMA), the key regulator for the EU’s financial markets, has recently issued a detailed Opinion to highlight the risks associated with global crypto firms operating partially under the Markets in Crypto Assets (MiCA) regulation while maintaining significant activities offshore.
This advisory, released on July 31, echoes previous statements issued in the wake of major regulatory changes, such as those following Brexit. ESMA’s focus remains on ensuring the integrity of the financial markets within the EU, particularly in the evolving landscape of cryptocurrency.
Intricacies in Global Crypto Operations
The crux of ESMA’s concern lies in the complex structures utilized by many international crypto firms. These entities often employ EU-authorized brokers to channel orders to execution venues located in offshore jurisdictions. This practice, according to ESMA, could potentially weaken consumer protection mechanisms and disadvantage EU-based execution venues by creating an uneven competitive landscape.
Addressing Complex Structures and Consumer Risks
To mitigate these risks, ESMA has called upon National Competent Authorities (NCAs) in EU member states to conduct thorough reviews of the business models employed by these firms during the authorization process. The regulatory body emphasizes the critical role of execution venues in the crypto-asset ecosystem, pointing out scenarios where:
- Non-EU entities might internalize order flow, executing orders from EU clients independently rather than through multilateral platforms.
The primary aim here is to ensure full compliance with MiCA regulations to protect consumers and uphold the integrity of the broader crypto industry.
Detailed Assessment and Compliance Requirements
ESMA stresses the need for a meticulous, case-by-case assessment of firms seeking MiCA authorization. It outlines specific requirements these firms must fulfill, including:
- Upholding best execution practices.
- Effectively managing conflicts of interest.
- Acting in the best interests of their clients.
- Adhering to strict guidelines for the custody and administration of crypto-assets.
Enhanced Transparency and Clarity
Accompanying its Opinion, ESMA released a Final Report under the MiCA framework on July 3, detailing eight draft technical standards. These standards are designed to improve transparency and offer clarity for both retail investors and crypto-asset service providers (CASPs). Key areas covered include:
- Sustainability indicators.
- Business continuity plans for CASPs.
- Trade transparency.
- Order book formats.
- Record-keeping protocols.
- Readability of white papers.
Since MiCA took effect in June 2023, EU regulators have diligently enforced its provisions while also addressing compliance challenges that businesses may face. On July 19, a new tool was introduced to standardize crypto-asset classification under MiCA, featuring a test and guidelines aimed at ensuring market uniformity.
Significant market players are adjusting to the regulatory landscape. For instance, the central bank of Italy has shared insights on how it plans to implement MiCA regulations nationally. Crypto exchanges like OKX are strategically selecting EU locations to establish regulatory hubs for expanding their services within the EU.
