The European Securities and Markets Authority (ESMA) has recently released guidance on the provision of crypto-asset services by EU-based crypto firms to non-EU customers. The guidance clarifies that such services are limited under the Markets in Crypto Assets Regulation (MiCA) to cases where the client is the exclusive initiator of the service. However, it is important to note that this allowance, known as the reverse solicitation exemption, is narrowly framed and strictly an exemption. Companies cannot use this exemption to bypass MiCA rules, which came into force in June 2023 and introduced new regulations for the cryptocurrency industry in the EU. ESMA has also published a consultation paper on this exemption, which aims to gather feedback on specific applications and supervision practices to prevent violations. Additionally, ESMA has released a second consultation paper on guidelines that define the classification of crypto-assets as financial instruments, bridging the gap between MiCA and the earlier Markets in Financial Instruments Directive II (MiFID II).
The reverse solicitation exemption allows EU-based crypto firms to serve non-EU customers, but only if the client initiates the service. This means that the firm cannot actively seek out non-EU customers or promote its services to them. The purpose of this exemption is to ensure that the EU’s regulatory framework for crypto-assets is only applicable to clients who have willingly sought out the services of EU-based firms. By requiring the client to be the exclusive initiator, ESMA aims to prevent companies from circumventing MiCA rules through indirect solicitation.
ESMA emphasizes that the reverse solicitation exemption is narrowly framed and should not be used as a loophole to bypass MiCA regulations. Companies must ensure that they comply with all the requirements set out by MiCA when serving non-EU customers. The exemption does not exempt firms from their obligations under MiCA; it simply provides an exception for cases where the client is the exclusive initiator. Therefore, EU-based crypto firms must carefully evaluate their activities to determine whether they fall within the scope of the exemption or if they need to fully comply with MiCA rules.
ESMA has published a consultation paper on the reverse solicitation exemption to gather feedback from industry participants and other stakeholders. The paper seeks input on specific applications of the exemption and supervision practices that authorities can employ to prevent violations. The feedback received will help shape the final guidance on the reverse solicitation exemption and ensure that it is effectively implemented. Interested parties are encouraged to submit their comments and suggestions to contribute to the development of a robust regulatory framework for crypto-asset services.
ESMA’s second consultation paper focuses on defining the classification of crypto-assets as financial instruments, aligning MiCA with MiFID II. While MiCA specifically regulates the cryptocurrency industry, MiFID II provides a framework for regulating traditional financial instruments, including securities. The aim is to establish consistency and coherence in the regulatory approach towards both crypto-assets and traditional financial instruments. ESMA aims to strike a balance between comprehensive regulation and fostering innovation in the digital asset space. The agency’s approach suggests a potential for a lighter touch in regulating crypto-assets compared to traditional financial instruments, based on previous statements.
ESMA’s guidance on the reverse solicitation exemption provides clarity on the provision of crypto-asset services by EU-based firms to non-EU customers. The exemption is narrowly framed and strictly an exemption, meaning it cannot be used as a loophole to bypass MiCA rules. Compliance with MiCA remains mandatory for EU-based crypto firms, and the reverse solicitation exemption only applies when the client is the exclusive initiator. The consultation papers issued by ESMA aim to gather feedback and ensure effective implementation of the exemption and coherent regulation of crypto-assets. By bridging MiCA with MiFID II, ESMA seeks to establish consistency in the approach towards regulating both crypto-assets and traditional financial instruments, striking a balance between comprehensive oversight and fostering innovation in the cryptocurrency industry.