Crypto Regulations | August 14, 2023

ESMA Releases First Crypto Consultation on MiCA

by Mariam Giorgadze

Crystal Regulatory & Compliance Team

ESMA calls for feedback on MiCA  

 In July 2023, the European Securities and Markets Authority (ESMA) published the first consultation package on the technical standards on Markets in Crypto-Assets regulation (MiCA). 

The consultation paper outlines the necessary obligations for Crypto-Asset Service Providers (CASPs) and financial institutions aiming to provide crypto services in the European Union (EU). 

ESMA invites crypto-assets issuers, crypto-asset service providers and financial entities dealing with crypto-assets as well as all stakeholders that have an interest in crypto assets to submit their feedback to ESMA. ESMA is seeking input from those who can provide valuable perspectives on the proposed rules for CASPs, their authorization, conflict of interest management, addressing complaints, and other related matters. All comments must be submitted by 20 September 2023. 

ESMA will consider the feedback received from this consultation and expects to publish a final report and submit the draft technical standards to the European Commission for endorsement by 30 June 2024 at the latest.  

Here we have summarized the draft’s main points and their impact on the crypto industry. We encourage compliance teams to stay up to date with these developments, as they are central to the evolution of EU crypto regulations. 

A) Notification Process Requirements

Financial entities already licensed to provide financial services do not need full authorization. However, they must notify their home Member State’s National Competent Authority (NCA) with specific details related to their crypto-asset services. Notification must include: 

  • Types of crypto services offered; 
  • Anti-money laundering measures; 
  • Client asset segregation;  
  • Custody and administration policies; 

Information and Communications Technology (ICT) systems and security; 

B) MiCA requirements for crypto businesses outside the EU

MiCA mandates non-regulated entities intending to provide crypto-asset services in the EU to obtain authorization. Here is a breakdown of the stipulations to consider for the authorization application: 

MiCA authorization application requirements for CASPs: 

  • Applicant’s address and unique identifier;. 
  • Articles of association (if relevant);. 
  • Business model description;. 
  • Legal opinion on token classification;. 
  • Governance structure 
  • Anti-money laundering controls 
  • Shareholder reputation check 
  • Crypto-asset white paper 
  • Business continuity strategy 
  • Data protection, and complaint handling mechanisms 

C) Complaints-handling requirements

CASPs must implement and maintain clear and transparent procedures to handle client complaints promptly, fairly, and consistently.  

Additionally, they must publish descriptions of these complaints-handling procedures. The draft RTS provides more detailed specifications, including requirements, templates, and procedures for effectively managing complaints.  

Here is an overview of the complaints-handling requirements for CASPs: 

  • Procedures Establishment: CASPs must have transparent complaints-handling procedures 
  • Accessibility: Procedures and templates should be publicly available on CASPs’ websites in multiple languages 
  • Annual Review: CASPs’ management should review procedures yearly 
  • Resource Allocation: Adequate resources should be dedicated to handling complaints 
  • The expertise of Personnel: Staff handling complaints must be skilled and knowledgeable 
  • Prompt Acknowledgement: Immediate acknowledgment of complaints received 
  • Timeliness: Decisions on complaints must be communicated promptly 

D) Identification, prevention, and disclosure of conflicts of interest

CASPs must establish effective policies and procedures to identify, prevent, manage, and disclose conflicts of interest. MiCA identifies conflicts of interest in the crypto asset service industry in three main categories: 

Direct Conflicts: 

  • Between CASPs and their clients. 
  • Between the service provider and its shareholders, members, management, employees, or affiliated entities. 

Client-to-Client Conflicts: 

  • Between individual clients or groups whose interests conflict. 

Internal Conflicts: 

  • Conflicts that could compromise the objectivity and independence of affiliated entities or employees. 

CASPs must disclose conflict of interest information on their website, including the mitigating measures and controls.  

ESMA proposes specific requirements for managing conflicts: 

  • CASPs need to manage conflicts actively, not just disclose them. 
  • All CASPs, regardless of size, must robustly address conflicts. 
  • Regular reviews of policies are crucial, and transparency in CASP roles is essential. 
  • Specific requirements address conflicts related to placement services. 

It emphasizes the importance of disclosing conflicts in multiple languages and keeping them up to date. Additionally, CASPs must report to their management body on conflict-of-interest policies and procedures. 

ESMA consultation package enhances market integrity under MiCA 

ESMA is taking the lead in shaping how the industry is regulated. ESMA aims to ensure the crypto market stays strong and reliable overall by inviting feedback from crypto assets issuers, CASPs and financial entities dealing with crypto assets as well as all stakeholders that have an interest in crypto assets on the MiCA regulation through its consultation paper.  

For all stakeholders involved – individuals, organizations, and experts – it is important to understand the aim of this consultation. The outcome of it will affect how the regulations are interpreted and implemented, and where the crypto industry is heading. 

Increasing the crypto asset market’s integrity is central to ESMA’s strategy.  

With a focus on CASPs and related financial institutions, the goal is to encourage clear and transparent disclosure of information. This approach is expected to address the consumer and investor protection. 

Furthermore, ESMA’s exhaustive criteria, which cover everything from how organizations operate to robust anti-money laundering strategies, will ensure that CASPs align with MiCA’s requirements.  

As NCAs examine these criteria, ESMA’s overarching goals are clear: to make sure investors are safe, and to bring stability to the crypto world. 

This is not merely a regulatory exercise; it is a learning curve. The mistakes of the past, like the failure of some crypto services, serve as compelling reminders of why we need clear, well-thought-out regulations.  

To learn how we can help your business achieve compliance with crypto regulations, please contact our advisors here. 

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