ESMA warns of risks with partial authorisation of crypto companies

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator, has released a new advisory highlighting the significant risks posed by global crypto companies seeking partial authorization under the Markets in Crypto Assets (MiCA) Regulation while conducting significant operations offshore.

MiCa related opinion shared

ESMA published its MiCA-related opinion on 31, criticizing the complex organizational structures of many global crypto firms. These firms are known to use EU-authorized brokers to route orders to execution locations outside the EU, often in offshore jurisdictions.

The EU market watchdog warns that this practice could undermine consumer protection and create an uneven playing field, to the detriment of execution locations within the EU. ESMA therefore calls on national competent authorities (NCAs) within individual EU member states to scrutinise the business models of these global firms during the authorisation process.

ESMA emphasises that crypto-asset execution venues play a crucial role in the overall crypto ecosystem. The advice states that some crypto-asset conglomerates may operate a multilateral trading platform outside the EU, while others may internalise order flow and execute EU clients’ orders on their own account.

Objective: to ensure that companies fully comply with MiCA regulations

ESMA’s goal is to ensure that these firms fully comply with MiCA regulations in order to protect consumers and maintain the integrity of the crypto industry. ESMA underlines the importance of a careful case-by-case assessment for firms seeking MiCA authorization. Specific requirements include ensuring best execution practices, effectively managing conflicts of interest, and acting in the best interests of clients. Firms must also adhere to strict guidelines for the custody and administration of crypto assets on behalf of their clients.

In addition to this advice, ESMA published a final report under the MiCA framework on 3 July, containing eight draft technical standards aimed at improving transparency and clarity for both retail investors and crypto asset service providers (CASPs). These standards cover, among other things, sustainability indicators, business continuity plans for CASPs, trading transparency, order book formats, record keeping protocols and whitepaper readability.

Comments on MiCA

Since the MiCA regulation came into effect, EU regulators have been steadfast in enforcing key provisions of the legislation, while also working to clarify compliance challenges for firms. On July 19, EU regulators introduced a tool to standardize the classification of crypto assets under MiCA, with new tests and guidelines to ensure uniformity in the market.

Major market players have also responded. For example, Italy’s central bank has announced how it sees the application of MiCA in the country, while crypto exchanges like OKX are selecting EU locations to become MiCA hubs, allowing them to maneuver the regulatory infrastructure for expanded EU crypto services.