The European Securities and Markets Authority (ESMA), the regulatory body overseeing the EU’s financial markets, has warned crypto firms seeking partial authorization under the Markets in Crypto Assets (MiCA) regulation while maintaining substantial operations offshore.
In an “Opinion” released on July 31, ESMA highlighted the complications and consumer risks of such practices. It noted that many global crypto firms use EU-authorized brokers to route orders to execution venues outside the EU, often in offshore jurisdictions.
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ESMA warned that this approach could undermine consumer protection and create an uneven playing field that disadvantages EU-based execution venues.
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ESMA Calls on NCAs to Address Offshore Risks
In the Opinion, ESMA called on National Competent Authorities (NCAs) within individual EU member states to scrutinize the business models of these global firms during the authorization process.
The regulatory body stressed the importance of execution venues for crypto-assets in maintaining the integrity of the crypto-asset ecosystem.
“While most crypto-asset conglomerates are expected to operate a multilateral trading platform outside the EU, there could also be cases where the non-EU entity is rather internalizing the order flow, executing orders coming from EU clients on their own account.”
ESMA said this practice raises significant concerns about compliance with MiCA’s regulations, which aim to safeguard consumers and uphold the integrity of the crypto industry.
ESMA’s Opinion highlights the need for a thorough, case-by-case assessment of firms seeking MiCA authorization. The agency has outlined specific requirements for these firms, including adherence to best execution practices, effective management of conflicts of interest, and a commitment to act in the best interests of clients.
Additionally, firms must follow stringent guidelines regarding the custody and administration of crypto-assets on behalf of their clients.
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ESMA Publishes Final Report Under MiCA
Last month, ESMA also published a Final Report under the MiCA framework, presenting eight draft technical standards designed to enhance transparency and clarity for both retail investors and crypto-asset service providers (CASPs).
These standards cover various areas, including sustainability indicators, business continuity plans for CASPs, trade transparency, order book formats, record-keeping protocols, and the readability of white papers.
Since MiCA’s enactment in June 2023, EU regulators have diligently enforced its key provisions while addressing compliance challenges businesses might encounter.
On July 19, EU regulators introduced a tool to standardize crypto-asset classification under MiCA through new tests and guidelines, ensuring uniformity across the market.
Key market players have begun to respond to these regulatory developments. The central bank of Italy announced plans to share its vision for the country’s application of MiCA, while crypto exchanges like OKX are selecting EU locations to become MiCA hubs, navigating the regulatory infrastructure for expanded EU crypto services.
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Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.
