The European Union will start sorting out securities regulated by MiFID from crypto assets

The European Securities and Markets Authority (ESMA) issued two consultation papers on January 29 regarding its obligation to create standards and guidelines on the conduct of markets in crypto-assets (MiCA). The papers considered inverse demand and crypto assets qualified as financial instruments.

Reverse solicitation is the name given by European regulators where a potential client is approached by a firm for crypto asset services. An exemption from the MiCA framework allows third-country crypto asset firms to serve EU clients only through this mechanism.

“Third-country firms are not allowed to offer CASP, so they cannot solicit clients in the Union. [presumably, crypto-asset service provider] Services in the Union,” the report explains, “if the customer does not contact the organization on his own initiative and does not request the service, a third country organization may provide it. ESMA only sees the reciprocity request as a narrow exemption for third-country firms:

“ESMA, and national competent authorities […] It will take all necessary measures to protect European Union (EU)-based investors and MICA-compliant crypto-asset service providers from improper raids by entities outside the EU and MiCA.

ESMA has issued guidelines to national regulators based on the Financial Instruments Directive 2014 (MiFID II), which contains similar provisions. Online banner ads, sponsorship deals, and influencer and celebrity endorsements are among the direct solicitation methods the guidelines consider. Monitoring services of third country CASPs are also subject to the guidelines. The deadline for comments is April 24, 2024.

Related: Belgian regulator reviews pending classification of crypto assets

ESMA is also asking for comments on the “Rules and Criteria for the Qualification of Crypto-assets as Financial Instruments”. A financial instrument is a money contract. A crypto asset that qualifies as a financial instrument will be subject to MiFID II regulation instead of MiCA. By the end of the year, ESMA wants MiCA to differentiate financial documentation requirements between MiCA and MiFID to create a nationally consistent approach.

#ESMA has published 2⃣ Consultation Papers on the Directives under Markets in Crypto-Assets Regulation #MiCA.

Submit your comments by April 29, 2024 pic.twitter.com/v31nWMUEcu

— ESMA – European Union Securities Markets Regulator (@ESMAComms) January 29, 2024

There was no comprehensive disclosure of financial instruments issued in MiFID II. It provides examples of financial documents in the appendix for guidance, and this has led to disagreements at the national level. “This lack of a common definition and common standards that apply to all financial documents makes it more difficult to adopt a comprehensive approach in these draft guidelines,” the report said.

“The assessment of whether a crypto-asset should be treated as a financial instrument should remain a case-by-case exercise and the guidelines are only intended to promote consolidated practices in this context.”

To be considered a financial instrument, a crypto asset must be defined as a transferable security, money market instrument, unit of mutual investment, foreign contract or emission allowance. Comments are due by April 19, 2024.

The European Parliament overwhelmingly passed the MCA in October 2022.

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