Unlocking Insights into MiCA Implementation
COMMENTARY ON THE CONSULTATION PAPER ISSUED BY ESMA
In anticipation of the upcoming consultation package expected to be released by the European Securities and Markets Authority (ESMA) in October 2023, it is appropriate to briefly analyze the key themes of the first consultation package published on July 12, 2023. Given that there are numerous articles in the Crypto-asset Markets Regulation (MICA) that authorize ESMA to develop technical standards (RTS) and guidelines to specify certain provisions contained in the aforementioned European legislation, ESMA’s Consultation Document represents the first of three packages that the Authority intends to publish. These packages are required to be collectively submitted to the European Commission by June 30, 2024.
The objective of these documents is to gather opinions, comments, and viewpoints from stakeholders and market participants on the proper implementation of MiCA.
This legal analysis aims to highlight some of the relevant aspects of the first consultation document published by ESMA, including:
- RTS on the notification by certain financial entities of their intention to provide crypto-asset services (see paragraph 9.2.1. of the Consultation Document).
Under Article 60 of MiCA, a credit institution (paragraph 1), central securities depository (paragraph 2), investment firm (paragraph 3), electronic money institution (paragraph 4), UCITS management company or alternative investment fund manager (paragraph 5), or a market operator (paragraph 6), intending to provide crypto-asset services is obliged to notify the national competition authority of their home member state at least 40 working days before commencing such services for the first time.
MiCA also stipulates that entities already holding a license to provide financial services and having undergone the licensing process, intending to expand the scope of their services to include crypto-asset services, only have a notification requirement. An additional new license is not deemed necessary or appropriate, in other words, MiCA adheres to existing authorization but requests that it be supplemented with information specific to the provision of crypto-asset services to enable effective supervision.
In this regard, paragraph 7 of the same Article 60 of MiCA outlines the information that must be included in the notification. ESMA’s draft RTS incorporates the required content related to:
• Program of operations – Article 1;
• Detection and prevention of money laundering and terrorist financing – Article 2;
• Business continuity – Article 3;
• ICT systems and related security arrangements – Article 4;
• Segregation of clients’ crypto-assets and funds – Article 5;
• Custody and administration policy – Article 6;
• Operating rules of the trading platform and market abuse detection – Article 7;
• Exchange of crypto-assets for funds or other crypto-assets – Article 8;
• Execution policy – Article 9;
• Provision of advice or portfolio management on crypto-assets – Article 10;
• Transfer services – Article 11. - ITS on standard forms, templates, and procedures for the notification by certain financial entities of their intention to provide crypto-asset services (see paragraph 9.2.2. of the Consultation Document).
Specifically, the standard procedure outlined here requires the notifying entity to submit their request to the competent authority using the form attached to ITS Section 9.2.2 (Article 2). This will be followed by an acknowledgment of receipt from the competent authority within 5 working days (Article 3).
It’s noteworthy that the notifying entity has a duty to promptly communicate any changes in the information provided, using the same form (Article 4), including through the contact point designated by the competent authority, which is made public on its website (Article 1). - RTS on the authorization of crypto-asset service providers (see paragraph 9.2.3. of the Consultation Document).
Article 62 of MiCA stipulates in paragraph 1 that legal persons or other enterprises wishing to provide services for cryptocurrencies must submit an application for authorization as a CASP to the competent authority of their home member state. Paragraphs 2 and 3 specify the elements to be indicated.
Considering that significant risks associated with crypto-asset services can arise for unwitting investors, and potential customers usually lack the information needed to assess whether available CASPs have established adequate policies, agreements, and procedures to ensure the continued provision of services in the best interest of the customer, selecting market participants allows NCAs to provide a safer space for investors.
The goal of the proposed RTS appears to be to promote confidence in the crypto-asset market through a robust process of granting and denying authorization applications. In turn, this can enable CASPs to benefit more from the potential growth of the market. To this end, ESMA has further specified the requirements listed in Article 62 of MiCA regarding:
• General information – Article 1;
• Program of operations – Article 2;
• Prudential requirements – Article 3;
• Information about governance arrangements and internal control mechanisms – Article 4;
• Business continuity – Article 5;
• Detection and prevention of money laundering and terrorist financing – Article 6;
• Identity and proof of good repute, knowledge, skills, experience, and sufficient time commitment of the members of the management body – Article 7;
• Information relating to shareholders or members with qualifying holdings – Article 8;
• ICT systems and related security arrangements – Article 9;
• Segregation of clients’ crypto-assets and funds – Article 10;
• Complaints handling – Article 11;
• Operating rules of the trading platform and market abuse detection – Article 12;
• Custody and administration policy – Article 13;
• Exchange of crypto-assets for funds or other crypto-assets – Article 14;
• Execution policy – Article 15;
• Provision of advice or portfolio management on crypto-assets – Article 16;
• Transfer services – Article 17. - ITS on standard forms, templates, and procedures for the authorization of crypto-asset service providers (see paragraph 9.2.4. of the Consultation Document).
An applicant applying for authorization as a CASP under Article 62 of MiCA submits the application using the form attached to the same ITS Section 9.2.4 (Article 2). This will be followed by an acknowledgment of receipt from the competent authority containing contact point details (Article 3).
Again, there is a duty on the applicant to promptly notify any changes in the information provided, using the same form (Article 4). The decision to grant or deny authorization will be issued in paper form, electronic form, or both. - RTS on complaints handling by crypto-asset service providers (see paragraph 9.2.5. of the Consultation Document).
Article 71 of MiCA sets out the complaint handling requirements for CASPs. In a market still in the early stages of development, such as this one, it is essential to allow customers to express their problems and dissatisfaction with the services they receive uniformly throughout the Union. This promotes investor protection and a shared culture of complaint handling by CASPs.
ESMA has therefore chosen to be quite specific in the applicable requirements, partly in an attempt to compel CASPs to standardize their compliance standards in relation to complaint handling, ruling on:
• Complaints handling procedures – Article 1;
• Resources dedicated to complaints handling – Article 2;
• Submission means and language – Article 3;
• Acknowledgment of receipt and verification of admissibility – Article 4;
• Investigation of complaints – Article 5;
• Decisions – Article 6;
• Communication with clients – Article 7;
• Procedures to ensure consistent complaints handling – Article 8;
Section 9.2.5 includes the template for filing complaints. - RTS on identification, prevention, management, and disclosure of conflicts of interests (see paragraph 9.2.6. of the Consultation Document).
Article 72 of MiCA requires CASPs to implement and maintain effective policies and procedures to identify, prevent, manage, and disclose conflicts of interest. It is only with the draft RTS that we have definitions of “connected person,” “remuneration,” and “group” (Article 1).
This is followed by a description of conflicts potentially detrimental to clients (Article 2) and CASPs (Article 3); conflicts of interest policies and procedures (Article 4); remuneration procedures, policies, and arrangements (Article 5); and the scope of personal transactions (Articles 6 and 7).
ESMA’s proposal concludes with regulations concerning the disclosure of the general nature and source of conflicts of interest and the steps taken to mitigate them (Article 8), along with additional requirements related to placements (Article 9). - RTS on the proposed acquisition of a qualifying holding in a crypto-asset service provider (see paragraph 9.2.7. of the Consultation Document).
Article 83 of MiCA requires any person who intends to acquire or increase a qualifying interest in a CASP to notify the NCA and provide specific information. Paragraphs 3 to 9 of the same article establish a clear procedure for the authority’s evaluation of projects, including setting a maximum time period and specifying the criteria the authority must apply in the evaluation.
The requirement for harmonized information outlined in the draft RTS aims to support the assessment of direct or indirect proposed acquirers. In fact, it is in this regard that general information regarding the proposed acquirer is requested (Article 1), distinguishing between natural persons (Article 2) and legal persons (Article 3), defining information related to the proposed acquisition (Article 6) and its financing (Article 8), as well as additional information that differs depending on whether it concerns qualified holdings up to 20 percent (Article 9), between 20 percent and 50 percent (Article 10), and 50 percent or more (Article 11).
This document represents the first public consultation, which would allow ESMA to obtain an overview enabling it to better calibrate future legislation, considering both costs and risks.