Background

Under the Regulation on markets in crypto-assets (“MiCA”), which was published in the Official Journal of the EU on 9 June 2023, ESMA has been empowered to develop technical standards and guidelines relating to certain provisions under MiCA. The guidelines, which ESMA has been mandated to publish by 30 December 2024, are intended to provide additional clarity to National Competent Authorities (“NCAs”) and market participants on how to enforce and  comply with the rules under MiCA.

The consultation papers published by ESMA on 29 January 2024 set out ESMA’s proposals in relation to the guidelines on (i) reverse solicitation and (ii) the qualification of crypto-assets as financial instruments as defined in the Markets in Financial Instruments Directive (“MiFID II”), two significant areas which will be critical to clarifying the scope of the regulatory framework as set out under MiCA.

Reverse solicitation - a very narrow exemption

The “reverse solicitation exemption” refers to the carve out to the obligation to obtain an authorisation under MiCA where EU customers request the services of a third-country crypto-asset service provider on their own initiative, as set out in Article 61 and Recital 75 of MiCA. Article 61(3) of MiCA mandates ESMA to issue guidelines on:

• The situations in which a third-country firm is deemed to “solicit” clients in the EU; and
• Supervision practices to detect and prevent circumvention of the reverse solicitation exemption.

Importantly, ESMA emphasises that the exemption should be understood as applying in only very limited and narrow circumstances. In other words, the reverse solicitation “exemption” is better understood as a “prohibition”—third-country firms are prohibited from soliciting clients within the EU, unless the crypto-asset service was requested at the own exclusive initiative of the client.

Accordingly, the consultation paper clarifies that the term “solicitation” should be construed broadly and in a technology neutral way. It would include promotions and offers by any means, including the use of social media platforms, trade fairs, use of influencers and other celebrities, etc. A website in an official language of an EU jurisdiction would be a strong indicator that such firm is soliciting clients in the EU.

On the flip side, the draft guidelines state that the circumstances in which a client is considered to be requesting crypto-asset services by their “own exclusive initiative” should be construed narrowly, and the assessment would be based on the underlying facts. ESMA further emphasises the time-limited nature of the exemption—for example, if an EU client requests the purchase of a crypto-asset, the firm may at this point in time market to the clients crypto-assets of the same “type” as permitted under Article 61(2), but such firm will not be entitled to do so a month later.

It is worth noting that, for the purposes of Article 61(2), the draft guidelines also set out a non-exhaustive list of types of crypto-assets which should not be considered as belonging to the same “type”, for example: (i) e-money tokens not referencing the same currency, (ii) crypto-assets not based on the same technology, and (iii) utility tokens, asset-referenced tokens and e-money tokens.

With regards to supervisory  practices, the draft guidelines urge NCAs to focus on monitoring online activities of third-country firms, given that that crypto-asset services are almost exclusively offered online. For example, NCAs may search for third-country firms with a “virtual” presence in the EU by having a website with a URL ending with “lu”, “de”, “fr” etc. The draft guidelines also encourage NCAs to collaborate with other local and international authorities, as well as to follow up on information from whistleblowers.

Classification of crypto-assets as financial instruments

Article 2(5) of MiCA mandates ESMA to issue guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments as defined in MiFID II—this is critical as MiCA applies only to crypto-assets that are not already covered under existing EU legislation.

As a summary, some key takeaways in the proposed guidelines include the following:

• Technology neutral approach: Financial instruments that have been “tokenised” should continue to be recognised as financial instruments;
• Transferrable securities: Crypto-assets may be classified as transferable securities if they grant rights similar to shares, bonds or other securities, the key criteria under MiFID II being that the crypto-asset (i) should be part of a “class of securities”, (ii) must be negotiable on the capital market and (iii) should not be a payment instrument. The guidelines address each of these criterion in further detail;
• Money market instruments: To be classified as a money-market instrument (e.g. treasury bills, certificates of deposit), crypto-assets should have features akin to instruments typically traded within the money market characterised by their short term nature—in particular, the crypto-asset should exhibit a predefined maturity or redemption date maturity;
• Units in a collective investment undertaking: For a crypto-asset to be qualified as a unit in a collective investment undertaking, the project attached to the crypto-asset should, broadly speaking, involve the pooling of capital (regardless of whether this is in the form of fiat currency or crypto-assets) from a number of investors, for the purpose of investing this capital in accordance with a defined investment policy and with a view to generating a pooled return for the benefit of those investors. Although ‘collective investment undertakings’ is not defined under MiFID II, NCAs and market participants should consider the ESMA Guidelines on key concept of the AIFMD (ESMA/2013/611);
• Derivative contracts: The assessment for a crypto-asset to be qualified as a derivative contract should take into account whether (i) the rights of the crypto-asset holders are contingent upon a contract based on a future commitment, and (ii) the crypto-asset's value is derived from that of an underlying asset. Care should be taken to distinguish between securitised derivatives (that should be covered by the definition of transferable securities) and derivative contracts;
• Emission allowances: For a crypto-asset to be classified as an emission allowance, it should represent a right to emit a certain quantity of greenhouse gases and be recognised for compliance with the EU Emissions Trading Scheme. However, ESMA highlights that such emission allowances differ from most crypto-assets currently on the market, which often represent a store of value, a stake in a project, or access to a service;
• NFTs: The consultation paper also provides further guidance on whether a crypto-asset amounts to a non-fungible token (“NFT”) which falls outside the scope of MiCA. The draft guidelines set out an “interdependent value test” which considers (i) if the value of the crypto-asset stems from the individual asset, (ii) the extent the crypto-asset has a value that is not correlated with other crypto-assets, and (iii) unique characteristics which distinguish these crypto-assets from others;
• Hybrid tokens: In the case of “hybrid” crypto-assets which are structured to combine several characteristics and purposes (e.g. means of payment, utility-type, investment-type) and may perform different functions after issuance, NCAs and market participants should adopt a hierarchical approach—if the token displays features of a financial instrument, this should take precedence over alternative classifications (for example, as a utility token).

Next Steps

ESMA is inviting comments to the proposals outlined above until 29 April 2024, and expects to publish a final report based on the feedback received in Q4 2024.

As a reminder, MiCA is expected to apply fully by 30 December 2024, although member states may have the option of granting entities already providing crypto-asset services in their jurisdictions up to an additional 18-month “transitional period” during which they may continue to operate without a MiCA license—further details on ESMA’s statement regarding the implementation timeline for MiCA can be found in our previous Engage Article.

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Authored by Eimear O'Brien, Christina, Wu, and Melanie Johnson.