The European Security and Markets Authority (ESMA) has fired a warning shot to international crypto businesses planning broker applications under the Markets in Crypto-Assets Regulation (MiCAR).
ESMA’s opinion recognises that trading platforms hold an important role in the functioning of the crypto-asset ecosystem. In particular, so-called Multifunction Crypto-asset Intermediaries (MCIs)/Global Crypto Firms, i.e. those offering a large variety of services, products and functions, at the level of an individual entity or group of affiliated entities, typically centered around the operation of a trading platform, are an essential point of attention considering the impact they have on the functioning of crypto-asset markets.
MiCAR in fact imposes a number of obligations on such trading platforms such as having detailed operating rules, ensuring resilient systems and procedures, adhering to pre-trade and post-trade transparency requirements, maintaining a transparent fee structure, setting rules, procedures and criteria promoting fair and open access to the trading platform for clients willing to trade and ensuring fair and orderly trading and efficient execution of orders. These obligations are intended to ensure that the principles of investor protection, market integrity and financial stability are always in place and enforced.
Entities offering the likes of crypto derivatives (including perpetual futures) to EU clients through a broker operating model systematically routing client orders to their offshore trading platform (i.e. global exchange) should reconsider their business model as ESMA’s opinion specifically calls out this model and warns national competent authorities (NCAs) to be vigilant in assessing broker licence applications under MiCAR by international groups.
ESMA is concerned that by using this model, international crypto businesses can seek to limit their EU regulatory obligations by applying for authorisation as a broker rather than as a trading platform under MiCAR. It notes that the brokerage model may be adopted by such MCIs to achieve regulatory arbitrage and lead to an unlevel playing field between trading platforms located in a third-country but trying to gain access to EU clients and MiCA-regulated EU trading platforms.
This echoes similar statements in the UK government’s response to its own consultation on the future regulatory regime for crypto-assets, published in October last year.
The obvious corollary to this regulatory stance is a limiting of direct access for customers to global liquidity pools, which would necessarily be regionally fragmented if all jurisdictions were to demand that international crypto businesses establish trading venues in their jurisdictions (without some nuanced and globally coordinated operational and regulatory structuring), as also recognised in the UK government’s consultation response.
This stance also ties in with the narrow interpretation that is being adopted for reverse solicitation under MiCAR. Third-country firms offering their services in the EU are exempt from licensing under MiCAR where a client established or situated in the Union initiates at its own exclusive initiative the provision of a crypto-asset service or activity by a third‐country firm.
The rationale for this exemption is that persons established in the EU should have the liberty to request and receive crypto-asset services by a third-country firm on their own exclusive initiative. The reverse solicitation exemption applies only where the third-country firm has not solicited, promoted or advertised crypto-asset services or activities to clients or prospective clients in the EU. ESMA has however reiterated that this exemption should not be assumed, nor exploited to circumvent MiCAR and should be regarded as an exception to the rule.
International crypto businesses should thus take note when considering how to structure their global operations. The European market bears a strong weight and thus these players must inevitably assess the implications that MiCAR has on their operations and servicing plans.
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