MiCA and Solicitation of EU Clients
The long-awaited EU legislation on cryptoassets took a major step on October 10, 2022, as a committee of the European Parliament approved the text of the Markets in Crypto-Assets regulation (MiCA), with a final vote by the full Parliament expected soon. The MiCa legislation will create a framework for regulation of cryptoassets and cryptoasset service providers (CASPs), including the creation of new rules requiring that CASPs obtain a specific authorization from their regulator to provide services and specifying operating conditions such as prudential safeguards, safekeeping of client assets, complaint handling, and other requirements commonly applied to providers of financial services.
To be authorized to provide cryptoasset services, MiCA requires a CASP to have a registered office in the EU from which it carries out at least part of their cryptoasset services. Its place of effective management must be in the EU and at least one of the directors must be a resident in the EU. Authorisation is granted by the competent authorities of a member state where a CASP has its registered office.
TradFi Notification Requirement
In addition to the native crypto firms that may obtain authorisation, MiCA anticipates that traditional financial institutions (TradFi), such as credit institutions, central securities depositories, investment firms, market operators, e-money institutions, and investment funds, may also provide cryptoasset services to EU residents. These institutions may do so only after notifying their regulators.
Provision of Cryptoasset Services to EU Clients
Once a CASP or TradFi firm has obtained authorization from and/or provided notification to its regulator, they may market their services to EU clients, subject to other applicable rules and regulations. Any form of active marketing of cryptoasset services to EU citizens requires either crypto authorisation (in the case of CASPs) or relevant notification (in the case of TradFi entities).
But what if clients do not wish to use an EU CASP or TradFi firm? What if a client seeks to receive services from a firm in a non-EU country that either is not EU-authorized or explicitly does not offer any services in the EU?
Client’s Exclusive Initiative Exemption
MiCA allows the provision of cryptoasset services by non-EU authorized firms at the exclusive initiative of the client. This concept is not new. Article 42 of MIFID II, the second installment of the EU’s flagship directive relating to investment firms, anticipates that if the EU client initiates the provision of an investment service or activity by a third‐country firm, the MIFID authorisation requirement will not apply. This approach is sound and understandable, as EU citizens have the right to choose whatever services they wish and are not limited to EU entities only.
Soliciting Clients or Potential Clients in the EU
Similarly to MIFID II, MiCA explicitly contemplates that soliciting clients or potential clients in the EU, regardless of the means of communication used for such solicitation, promotion or advertising in the EU, is not considered to be at the client’s exclusive initiative. This includes a third-country firm acting through other entities on behalf of such firm or having close links with such firm, as well as through any other person acting on behalf of such entity. This rule applies regardless of any contractual clause or disclaimer purporting to state otherwise.
Marketing Following the Initiative of the Client
The exemption for client-initiated services relates to a particular cryptoasset service only. In practice this means that third country firms may only market the particular service the client requested. MiCA explicitly contemplates that initiative by a client does not entitle the third-country firm to market new categories of cryptoassets or cryptoasset services to that client. These other assets or services would still require the CASP authorization in accordance with MiCA.
What About Shilling?
There is a thin line between the exclusive initiative of a client and active marketing. What about YouTube videos describing some new, amazing crypto project, say, in German? What about a U.S. firm explicitly allowing the onboarding of new EU clients following its marketing campaign not directed to any particular target group, but coincidently launched at a crypto event in Warsaw? Such dilemmas will surely start popping up once MiCA comes into force. Perhaps in anticipation of this conundrum, MiCA contemplates the adoption of guidelines specifying when a third country firm is deemed to solicit clients established or situated in the EU to be adopted by the European Securities Markets Authority (ESMA) within 18 months of the entry into force of MiCA. Additionally, in order to promote the consistent supervision amongst competent authorities in the EU in relation to client’s exclusive initiative exemption, ESMA will issue guidelines on supervision practices for regulators to detect and prevent any attempted circumvention of the exemption.
This article was originally published in Decentralized Law newsletter in November 2022
RedHatRoss is an EU-based attorney-at-law/compliance officer/MLRO with 10+ years background in the financial supervision and payment services industry. BanklessDAO Legal Guild and LeXpunK_Army contributor.
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