ESMA Initiates Separation of MiFID-Regulated Securities from Cryptocurrencies

The European Securities and Markets Authority (ESMA) has unveiled its latest initiative to bring more clarity to the world of crypto assets. ESMA published two consultation documents on January 29th, addressing its role in creating standards and guiding principles for regulating crypto assets under the Markets in Crypto Assets (MiCA) framework.

The consultation papers delve into the concept of "reverse solicitation" and the classification of crypto assets as financial instruments. Reverse solicitation is a term used by European regulators when a potential client approaches a firm for crypto asset services. Exemptions from the MiCA framework allow firms dealing with crypto assets in third countries to serve European Union (EU) clients solely through this mechanism.

ESMA views reverse solicitation as a narrow exception for third-country firms. ESMA and national competent authorities aim to protect EU investors and crypto asset service providers that comply with MiCA requirements from unauthorized incursions by non-EU entities.

ESMA has proposed guiding principles for national regulators based on the 2014 Markets in Financial Instruments Directive (MiFID II), which contains similar provisions. These principles cover online banner advertising, sponsorship deals, and support from influential individuals or celebrities as methods for direct customer acquisition. Subsequent services from third-country crypto asset service providers are also subject to these recommendations. The deadline for comments is April 24, 2024.

ESMA is also seeking comments on "qualification criteria for crypto assets as financial instruments." A financial instrument is a monetary contract. A crypto asset classified as a financial instrument falls under the regulation of MiFID II, not MiCA. MiCA requires ESMA to distinguish MiCA and MiFID requirements for financial instruments to establish a consistent approach at the national level.

MiFID II lacks a common definition of financial instruments. The application examples in the annex further complicate harmonization at the national level. The report acknowledges the absence of a shared definition and criteria for all financial instruments, posing challenges in taking a comprehensive approach to these guiding principles.

The report emphasizes that determining whether a crypto asset qualifies as a financial instrument should remain individualized, and the recommendations aim to promote convergent practices in this context.

To be considered a financial instrument, a crypto asset must be defined as a transferable security, a money market instrument, a unit in a collective investment undertaking, a derivative contract, or an emission allowance. Comments should be submitted by April 19, 2024.

The European Parliament adopted MiCA with an overwhelming majority in October 2022.