The European Securities and Markets Authority (ESMA) is seeking to impose tight limits on cryptocurrency firms outside the EU bloc trying to operate in member states of the international organization. The regulator seeks public opinion on the crypto assets-financial instrument classification issue.
The ESMA made these revelations in two separate consultation papers released on January 29, 2024, named ‘Consultation paper on the draft guidelines on reverse solicitations under the markets in Markets in Crypto Assets Regulation (MiCA)’ and ‘Consultation paper on the draft guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments.’
While the former addresses the limits on foreign crypto firms operating in EU member states using the MiCA regulatory framework, the latter seeks input from the public on the classification situation of cryptocurrencies as financial instruments. The general public can respond to both consultation papers until April 29, 2024, after which the regulator will expectedly respond.
ESMA Seeks to Ban Client Solicitation in the EU
In the detailed 21-page consultation paper on the draft guidelines on reverse solicitations, the European regulator seeks to restrict the activities of non-EU crypto firms within the European Union by preventing them from soliciting users, except for cases of reverse solicitation. Reverse solicitation, as understood from the ESMA document, is when a client, at their discretion, contacts the crypto asset service provider and expressly requests its service.
“The rationale for this exemption is that clients shall not be excluded from using third-country firms if they choose to do so without having been solicited by such firms,” the consultation paper explains further.
The proposal further explained scenarios when a crypto asset service provider from a third-country firm (is deemed) to have solicited EU clients. Crypto companies using banner ads or paying “so-called influencers” to target users in the European Union (are deemed) to have solicited users. The proposal also forbids a firm from continuously offering services to an EU customer, even if the customer reverse-solicited the firm.
Concluding the consultation paper, the ESMA asked the public to respond to the consultation paper with what they think of the approach and how effective they believe the supervision practices to be.
The ESMA Seeks Public Opinion on Crypto Classification
In another consultation paper released (on) the same day, the European regulator sought public opinion on the conditions and criteria to qualify crypto assets as financial instruments to provide regulatory clarity for all market participants. Among other salient questions, the document requests public opinion on the settlement process of stablecoin or cryptocurrency-based derivatives. Responses to this consultation paper also end on April 29, 2024.
CASPs and Financial Entities Should Provide Opinions
As expected, the EU’s foremost financial regulator raised several questions in its consultation papers, requesting the public to weigh in with expert opinions. ESMA will consider all the responses by April 29, 2024, exactly three months after publishing the papers. For its paper on crypto classification as financial properties, ESMA called on crypto asset issuers, service providers, financial entities dealing with cryptocurrencies, and other stakeholders to read and respond to the consultation paper.
While the paper on third-country crypto firms soliciting EU customers targets the same demographic, the ESMA specifically called on the affected group, CASPs outside the European Union region, to comment on the consultation. With the ESMA promising to consider all comments by April, it may be realistic to expect a response to either or both consultation papers before the year runs out.
What to Expect
The consultation papers don’t contain fleshed-out regulation plans by the European Securities and Markets Authority (ESMA). They are regulatory proposals subject to assessment by stakeholders and members of the public to identify loopholes and voice their concerns before the eventual release of the final versions.
However, most observers believe the proposals in the ESMA consultation papers would look similar to final decisions on the topics in review, since most of them have the charters of the MiCA regulatory framework as a basis. We can only wait to see what objections stakeholders raise about the proposals and how ESMA responds.