Global crypto firms: no way to avoid MiCA’s impact

A closer look

On 31 July 2024, ESMA published its Opinion to support the convergent application of the Markets in Crypto-Assets Regulation (MiCA).

ESMA is concerned about non-EU firms providing crypto-asset services in the Union without fully abiding by MiCA’s requirements, especially when these firms use group structures that tend to be complex and opaque. As these structures come with an increased risk of conflicts of interest and diminished investor protection, Europe could face a similar scenario to the notorious FTX collapse.

FTX is what is considered a Multifunction Crypto-asset Intermediary (MCI)—in other words, an individual firm or a group of affiliated firms that combine a broad range of crypto-asset services, products and functions typically centered around a trading platform.

One of MCIs’ key selling points is that they offer this broad range of crypto services by removing intermediaries. These firms may try to gain access to EU clients without moving their activities to the Union, while simultaneously retaining their disintermediated business model.

Therefore, while not legally binding, ESMA’s Opinion urges national competent authorities (NCAs) to be especially prudent when assessing non-EU firms’ applications under MiCA.

Notably, NCAs should ensure that firms are not just applying to obtain a “legal cover” in the EU—in other words, seeking to solicit EU clients through an EU-authorized broker, typically belonging to the same group, while still providing services from outside the Union.

ESMA provides the following examples of unlawful solicitations of EU clients by a non-EU trading platform:

• The EU-authorized broker systematically routes orders to the group’s execution venue located outside of the Union;
• The EU-authorized broker has not analyzed the availability of other suitable unaffiliated execution venues;
• When promoting or advertising its services, the EU-authorized broker relies on the non-EU exchange’s reputation and brand to attract business from EU clients; and
• The EU-authorized broker has no (or very limited) sources of revenue for its brokerage activities with EU clients.

ESMA has also highlighted conflicts of interest concerns with MCIs. For example, if MCIs conduct brokerage activities in the EU, NCAs should check that the group’s interests do not influence how and where orders from EU clients are executed. The decision at a structural level to execute orders on the group’s platform located in a third country should be considered a very strong indication that this structural conflict of interest has not been properly managed.

Similar “red flag” would be a situation where EU firm only has the technical capability to execute orders on other trading platforms but never proceeded to such execution in practice.

Furthermore, EU brokers are required to implement procedures and operational accesses that allow them to execute transactions with the best possible result for their clients (“best execution” requirement). NCAs should particularly focus on this provision’s application for brokers that are part of a group that includes execution venues.

Execution venues may (temporarily) take custody of client assets. In this case, they must be licensed under MiCA to provide custody services, regardless of how temporary the custody service may be. Therefore, EU-authorized brokers cannot route or execute orders on non-EU execution venues if such venues are not authorized under MiCA.

Similar to Brexit, where UK firms sought to maintain EU market access by creating EU entities or relocating activities to the EU, crypto-service providers will seek to do the same. ESMA’s Opinion underscores that this path for global firms to access the EU market will not be easy.

In anticipation of these developments, ESMA encourages NCAs to carefully analyze authorization requirements under MiCA, ensuring that a substantial degree of activities or critical functions remain in the EU and, as such, under the supervision of EU regulators.

How Deloitte can help

Deloitte’s specialists and dedicated services can help you tackle not only the compliance challenges but also the opportunities arising from ambitious new laws.

Deloitte can support you in critical areas, such as:

• Review your corporate or product strategy regarding crypto-asset services;
• Design your operating model and control framework;
• Perform regulatory and operational gap analysis;
• Select crypto-asset service or technology providers;
• Support with preparing and filing the license application; and
• Certify services regarding stablecoins.

Deloitte’s Regulatory Watch team closely follows crypto-related legislative developments and can help you stay ahead of the regulatory curve.