ESMA warns national authorities over authorization of non-EU digital asset firms

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The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, released an ‘Opinion’ concerning the authorization of global digital asset firms under the Markets in Crypto Assets (MiCA) regulation, the first part of which came into force at the end of June.

The Opinion addressed the potential risks associated with digital asset firms seeking EU authorization for activities such as brokerage while keeping significant parts of their operations outside the EU’s new regulatory framework.

“ESMA recognises risks associated with global crypto firms’ complex structures where execution venues fall outside of the scope of MiCA,” said the regulator. “Such structures may include the involvement of an EU-authorised broker effectively routing orders to an intra-group execution venue based outside the EU.”

In this context, an “intra-group execution venue” is a place where trades are made between different parts of the same company or group of companies.

ESMA is concerned that EU-authorized brokers routing orders to such a venue based outside of the EU could undermine consumer protection and lead to an unlevel playing field with EU-authorized execution venues.

For this reason, the bloc’s top financial watchdog recommended that National Competent Authorities (NCAs), the relevant regulators across each EU nation, be vigilant during the authorization process and “assess business structures of global firms to ensure that they do not bypass obligations established in MiCA, to protect consumers and ensure transparent and orderly functioning of crypto markets.”

The Opinion called for a “case-by-case assessment,” outlining the specific requirements that should be met around best execution; conflicts of interest; the obligation to act honestly, fairly and professionally in the best interests of clients; and the obligation relating to the custody and administration of digital assets on behalf of clients.

“Crypto-asset execution venues play an important role in the functioning of the crypto-asset ecosystem and MiCA sets out comprehensive rules regarding the functioning of trading platforms for crypto-assets,” said ESMA. “This Opinion is part of broader efforts by ESMA and NCAs to ensure effective application of MiCA and convergent supervisory practices throughout the EU.”

MiCA‘s comprehensive regulatory framework for “crypto-asset trading platforms” includes implementing robust consumer protection measures, adhering to strict transparency and disclosure obligations, establishing procedures for handling complaints, managing conflicts of interest and safeguarding client assets. It also sets out market abuse rules to ensure market integrity and financial stability.

In other words, ESMA is asking NCAs to do their due diligence on digital asset firms that have parts of their operations outside the EU to ensure that they comply with these obligations as closely as possible, no matter what the obligations and regulations are in the jurisdiction in which their external operations lie.

The landmark MiCA regulation officially became law in June 2023, with the framework set to be implemented in stages. The first part of MiCA to kick in on June 30, 2024, was the framework’s stablecoin rules, while the provisions applicable to digital asset “service providers” will begin to apply as of December 30, 2024.

It’s this latter category and set of rules that “crypto-asset trading platforms” fall into and that ESMA, the regulator in charge of implementing MiCA, is concerned global digital asset firms operating in the EU adhere to, no matter where their operations may be based.

Watch Yves Mersch: Regulatory frameworks for digital currency in Europe