ESMA proposes to prohibit third-country crypto-asset firms from servicing EU-based clients

Before the provisions of the EU’s Markets in Crypto-assets Regulation (MiCA) are applicable to crypto-asset service providers (CASPs) at the end of 2024, the European Supervisory Authorities are releasing consultations on MiCA’s secondary legislation, standards and guidelines that will set out requirements for CASPs seeking authorisation under MiCA.

On 29 January, the European Securities and Markets Authority (ESMA) issued a consultation paper on its draft guidelines on reverse solicitation. The guidelines cover cases when a client initiates services from a third-country firm not authorised under MiCA at their own exclusive initiative, and the requirement for authorisation shall not apply. They set out scenarios in which these third-country firms are able to service EU-based clients.

Since its existence, the principle of reverse solicitation has always been a blurry concept within the EU’s financial markets regulatory framework. These guidelines represent the first real attempt by ESMA to tackle this grey area. Until now, Member States had mostly been left to develop their own approaches.

EU CASPs are likely to support ESMA’s ambitious stance as it may level the playing field with non-EU firms that do not have to contend with the regulatory costs of MiCA. However, National Competent Authorities (NCAs) in each Member State may find it challenging to comply with these guidelines as they may not have the resources, the appetite or the power to act against non-compliance.

Solicitation by third-country firms is broadly construed

ESMA expects NCAs to interpret solicitation or the contacting of potential EU clients by third-country firms in “the widest possible way”. It clarifies that MiCA’s reverse solicitation provisions should be viewed as a prohibition for third-country firms rather than an exemption. This stance indicates NCAs will be expected to enforce these requirements with zeal.

In addition to press releases, advertising on the internet, brochures, phone calls, face-to-face meetings and other means of solicitation highlighted by ESMA for other types of financial institutions, these draft guidelines clarify that banner advertisements and other online methods are also covered.

This broadening of the definition of solicitation is a direct response to shilling and other types of online marketing methods typically used by crypto firms. As a result, online solicitation by third-country crypto-asset firms will likely be scrutinised more than it is for other financial institutions.

On the other hand, ESMA will view geo-blocking to prohibit EU-based clients from accessing a third-country firm’s website as a strong indicator that the firm is not soliciting clients in the EU.

ESMA will consider a website in an official language of the EU that is not “customary in the sphere of international finance” to be targeting EU-based clients. The specific languages that are customary in the sphere of international finance are not defined and might include English, Spanish, French and Portuguese.

Celebrities, influencers or what are referred to as “affiliates” will be deemed to be soliciting clients on behalf of a third-country firm by directing an online audience to a firm’s website, providing a means to access a firm’s services, offering promotional deals, or simply displaying the firm’s logo. Affiliates are loosely defined by ESMA and include those engaged in sponsorship deals, even if there is not an explicit contractual relationship.

To avoid falling foul of these guidelines, third-country firms will need to have significant marketing and client onboarding controls in place. They may need to undertake ongoing internal audits of not only their own marketing activities but also those of the people affiliated or connected with their brand.

Exemptions for reverse solicitation are very narrow

The draft guidelines confirm ESMA’s statement from October 2023 that the exceptional provision of crypto-asset services or activities by a third-country firm is strictly limited to cases where they are initiated at the exclusive initiative of a client. Contracts and disclaimers, like a client’s acknowledgement of receiving services sought at their own exclusive initiative, cannot supersede other facts and circumstances.

The guidelines also restrict the timeframe for a third-country firm to provide services to a client after their services are solicited. If as little as a couple of weeks have passed from the initial point of contact in relation to a particular transaction, the firm is no longer able to provide additional services to the client.

Third-country firms can only offer the same type of crypto-asset or service as was requested by the EU-based client. For example, ESMA indicates that utility tokens, fiat backed asset-referred tokens (ARTs), crypto-asset backed ARTs, and electronic money tokens (EMTs) are not the same type of crypto-asset. Crypto-assets of the same type must be stored or transferred using the same technology, EMTs must reference the same currency and the assets’ liquidity must roughly be the same. Crypto-assets with an identifiable offeror are not the same as those without.

Detection and enforcement by NCAs

ESMA’s proposed methods of detection of solicitation by third-country firms are arguably either highly resource-intensive or potentially ineffective. They include:

1. the use of market-monitoring tools (including social media monitoring tools),
2. detecting firms’ use of local country codes, mailing, email or website addresses and
3. reliance on consumer surveys, complaints and whistleblowing.

NCAs will need to dedicate resources and may require further training to effectively monitor and enforce against third-country firms to comply with these guidelines.

Enforcement tools are even more limited. Third-country firms that are outside of the jurisdictions of NCAs can be banned from further operations within the EU. NCAs may also apply pressure via diplomatic and regulatory cooperation with the firm’s home authorities. Otherwise, enforcement and prosecution are extremely costly and difficult. It will be even more difficult for NCAs to take action against affiliates of third-party firms that have solicited EU clients on their behalf, as the enforcement tools mentioned above are not applicable.

Although the content of these long-anticipated guidelines is largely as expected, whether NCAs can comply with these and at what cost remains to be seen.

To access an overview of the draft Standards and Guidelines that have been or will be published by the EBA and ESMA for consultation, visit XReg’s MiCA Standards and Guidelines Tracker.