EU seeks to clarify boundaries of cryptoasset regulation

The EU’s Markets in Crypto-Assets Regulation starts to apply this year. Given that MiCA can impact firms based outside the EU and covers a broad range of cryptoassets, including e-money tokens and asset-referenced tokens, the precise scope will be of interest to a wide variety of businesses. ESMA is consulting on new guidelines which aim to shed light on key questions relating to MiCA’s scope and has also published guidance regarding transitional measures. 

ESMA consultations

As part of the ongoing development of the MiCA regulatory framework, the European Securities and Markets Authority has opened consultations on:

  1. Draft guidelines on reverse solicitation under MiCA
  2. Draft guidelines on conditions and criteria for the classification of crypto-assets as financial instruments

Both consultations are open for feedback until 29 April 2024.

Reverse solicitation under MiCA

MiCA requires cryptoasset service providers serving EU clients to be based and licensed in the EU. An exemption is available for non-EU firms where the services are provided at the exclusive initiative of the client. This “reverse solicitation” exemption is a concept recognised in other areas of EU financial regulation.

ESMA has previously underscored that the reverse solicitation exemption is very narrow and not exploited to circumvent MiCA. Its draft guidelines now give more detail about how it should be used under MiCA. For example:

  • Means of solicitation: According to ESMA, “solicitation” should be understood in a broad and technology-neutral way to cover the various ways in which cryptoasset services can be marketed to EU clients, including via the internet and social media advertising. For example, ESMA clarifies that a website in an official language of the EU would be a strong indication of solicitation to EU-based clients. On the other hand, stopping EU clients from accessing a website (e.g. geo-blocking) would be an indication to the contrary.
  • Exclusive initiative of the client: ESMA proposes that this should be construed narrowly and based on a factual assessment. For example, an act by a client to initiate services should be construed as applying to specific types of services in relation to specific types of cryptoassets at a specific point in time. Firms should be able to provide records tracking their relationship with the client.
  • Same type of cryptoassets: The draft guidelines provide a non-exhaustive list of examples of pairs of cryptoassets that are not of the same type. This includes e-money tokens which reference different currencies, cryptoassets considered liquid vs illiquid, cryptoassets where there is an identifiable offeror vs those for which there is none, and cryptoassets that are stored or transferred using different technologies.

ESMA points out that regulators need to pay special attention to the online presence of non-EU firms because cryptoasset-related services are primarily offered and marketed through the internet.

Classifying cryptoassets as financial instruments

MiCA introduces a comprehensive regulatory regime for a wide range of cryptoassets. However, it does not cover all types of cryptoasset. For example, MiCA does not apply to cryptoassets that qualify as “financial instruments”. These instruments are regulated separately under the Markets in Financial Instruments Directive (MiFID II).

In its draft guidelines, ESMA aims to set consistent standards for classifying cryptoassets as financial instruments across the EU. Its criteria relate to products that meet both the definition of a “crypto-asset” under MiCA and the definition of a “financial instrument” under MiFID II. For example:

  • Transferable securities: ESMA reiterates that national regulators and market participants should classify cryptoassets as transferable securities if they confer their holders similar or equivalent rights to those granted by shares, bonds, other forms of non-equity securities or other negotiable securities as defined by MiFID II. To qualify, cryptoassets need to fall within a class of securities that is negotiable on capital markets and not be payment instruments. The guidance elaborates on the meaning of these three components, each of which has raised considerable uncertainty in the market. 
  • Units in collective investment undertakings: For a cryptoasset to qualify as a unit in a collective investment undertaking, the project attached to the cryptoasset should involve the pooling of capital from a number of investors for the purpose of investing this capital in accordance with a defined investment policy and with a view to generating a pooled return for the benefit of those investors.
  • Derivative contracts: Cryptoassets could be recognised as eligible underlying instruments in derivatives. To categorise a cryptoasset as a derivative under MiFID II it should be the “digital representation” of a contract and have an underlying reference which determines its value. 

Predictably, the guidance seeks to cast a broad net while emphasising the need for a case-by-case assessment. Cryptoassets labelled as utility tokens (or anything else) will be treated as financial instruments if they meet the applicable criteria, even if they also exhibit features of instruments regulated under MiCA.

The guidance also touches briefly on the boundaries of the definition of a “crypto-asset” under MiCA. It reiterates, for example, that the representation of value or rights must be capable of being “transferred and stored” using DLT or similar technologies. It also confirms that digital assets that are non-transferable to other holders or genuinely unique and non-fungible do not fall within the scope of MiCA.

ESMA calls on national regulators to proceed on a case-by-case basis when evaluating whether cryptoassets qualify as financial instruments. They recommend taking a “substance over form” approach which is technology neutral.

Further guidance for CASPs

ESMA has started to build a bank of extra guidance on MiCA-related topics. On 2 February 2024 it released five Q&A on MiCA. For example:

  • No right to passport during transition: ESMA clarifies that entities that benefit from the transitional measures under MiCA to provide crypto services in one EU Member State are not automatically allowed to offer those services in other Member States. These entities can only do so if they comply with the relevant laws in both the home and host Member States.
  • Cut-off date for existing firms: ESMA confirms that entities that provide crypto services before 30 December 2024 can benefit from MiCA’s transitional regime (to the extent that Member States offer this). Firms starting to provide in-scope services after this date will need to seek authorisation under MiCA.
What happens next?

ESMA’s consultations run for three months, closing on 29 April 2024. ESMA expects to finalise its guidelines in Q4 2024.

Other aspects of the MiCA framework are also due to be finalised over the coming months, including so-called Level 2 measures which set additional technical standards for in-scope issuers and service providers.

MiCA starts to apply to issuers of e-money tokens and asset-referenced tokens from 30 June 2024. The remainder of MiCA applies from 30 December 2024, subject to transitional measures. ESMA is expected to release more Q&A both in the lead-up to these deadlines and beyond.