EU Securities Agency Issues First Batch of Detailed Crypto Rules Under MiCA Law

The European Securities and Markets Authority (ESMA) issued a set of detailed proposals on how crypto companies within the European Union should be authorized, the first use of new powers given under the bloc’s Markets in Crypto Assets (MiCA) law.

The proposals set out in the EU securities agency's 160-page consultation include how crypto firms should handle user complaints and manage conflicts of interest.

MiCA, which takes effect in 2024, gives wallet providers and exchanges, known as crypto asset service providers or CASPs, the ability to operate across the 27-nation bloc with one license and sets reserve requirements for stablecoins tied to the value of other assets. Though the law was largely agreed by June 2022, ESMA has clearly been influenced by subsequent allegations of poor governance and security in the crypto sector, such as those that followed the FTX exchange filing for bankruptcy in November.

“Some of the recent collapses in the crypto world have shown a misuse of clients’ funds and crypto-assets,” said the consultation, which also cites “media reports about hack attacks at CASPs, which have often resulted in the theft of significant amounts of client crypto-assets.”

The agency is also seeking confidential information about crypto companies’ expected revenue, number of white papers and the use of on- and off-chain trading in a consultation that lasts until Sept. 20.

ESMA said a further tranche of consultations will follow in October, covering sustainability and record-keeping, with a final batch due early 2024 that will consider when crypto counts as a security and how foreign companies will be able to serve EU clients.

Applicants must show that clients’ funds and crypto are segregated and not used for the company’s own account, as well as detailing the security of their ICT system and underlying distributed ledger technology, the document said.

Companies will also have to identify and manage potentially conflicting interests with or among clients if, say, they execute orders for clients while also operating a trading platform, or if a staffer has access to confidential information about the issuer of a crypto asset they hold.

The consultation comes on the same day that the EBA, ESMA's counterpart for banks, urged stablecoin issuers to anticipate MiCA rules to avoid a cliff-edge in June 2024, when new rules targeting cryptocurrencies tied to fiat take effect.

UPDATE (July 12, 10:09 UTC): Adds rule detail in second paragraph, quote in fourth, further details in last two paragraphs.

UPDATE (July 12, 10:51 UTC): Adds reference to EBA statement in last paragraph.