On 31 July 2024, the European Securities and Markets Authority (ESMA) issued an opinion addressing the risks presented by global crypto firms seeking authorization under the EU Markets in Crypto-Assets Regulation (MiCA) while keeping a substantial part of their group activities outside the EU regulatory scope. The Opinion urges national competent authorities (NCAs) to ensure that MiCA applications do not provide 'legal cover' for third-country firms (i.e., firms established outside the EU) which seek to solicit clients or prospective clients in the EU through a MiCA-authorized entity belonging to the same group, whilst still providing services from outside the EU.
ESMA’s Opinion highlights in particular the risk associated with global crypto firms only seeking MiCA authorization for brokerage services (e.g., reception and transmission of orders, execution of orders for crypto-assets on behalf of clients and/or exchange of crypto-assets for funds or for other crypto-assets) while leaving a large part of the group activities (in particular the operation of a trading platform for crypto-assets) outside the EU and thus outside MiCA's scope. However, the Opinion notes that the risks are not exclusive to broker/trading platform models and can apply to other types of business setups. The Opinion argues that such structures unlawfully circumvent MiCA and do not fall within the scope of the reverse solicitation exemption under Article 61 MiCA, therefore being in violation of EU law.
The ESMA Opinion draws parallels to the applications received by NCAs in the context of the United Kingdom's decision to withdraw from the EU, i.e., 'Brexit'. In that context, ESMA published an opinion laying out general principles NCAs should take into account when assessing authorization applications from companies that are part of groups with UK-based entities. The latest ESMA Opinion states that NCAs should take into account the general principles of the Brexit Opinion when assessing MiCA authorization applications.
Although NCAs are encouraged to evaluate MiCA applicants on a case-by-case basis, the ESMA Opinion lists the following facts and circumstances that NCAs should regard as very likely indications of unlawful solicitation of EU clients and consequent provision of services in the EU by a non-EU trading platform:
The ESMA Opinion explicitly states that EU firms may enter into agreements with non-EU entities to manage their liquidity and hedge their risk. However, the Opinion recommends that NCAs pay close attention to situations where an established hedging scheme has the main purpose or effect to channel EU order flows systematically and automatically to a unique non-EU execution venue, particularly when this execution venue is part of the same group. In such cases, NCAs are encouraged to carefully scrutinize situations where the EU-authorized broker does not engage in risk-facing transactions but systematically conducts, when executing EU client orders, riskless back-to-back transactions with/on the group's execution venues as this may constitute a relevant indication of a strategy to structurally circumvent the MiCA regime.
In addition, the ESMA Opinion notes that NCAs should carefully consider the situation where the EU-authorized broker is streaming quotes to its clients from a non-EU liquidity provider.
The ESMA Opinion sets a precedent for a more stringent regulatory approach towards global crypto firms. The Opinion significantly increases the compliance burden on global crypto firms with established operations outside the EU. These firms will likely have to adapt their business models and operational structures to give their EU-authorized entities the ability to operate independently of their non-EU group counterparts. Firms will need to clearly define the roles and responsibilities in connection with the performance of intra-group activities through the conclusion of outsourcing agreements, which will likely face close scrutiny from regulators.
