Insights from ESMA's first Markets in Crypto Assets Regulation consultation (1st package)

With the Consultation Paper on Technical Standards for the Markets in Crypto Assets Regulation (MiCA), the European Securities and Markets Authority (ESMA) aims to collect views, comments, and opinions from stakeholders and market participants on the appropriate implementation of the regulation.

The paper comprising the "1st package" covers a wide range of topics related to the implementation of the MiCA regulation. It addresses authorization and notification requirements for Crypto Assets Service Providers (CASPs), complaint-handling procedures, identification and management of conflicts of interest, and the assessment of intended acquisitions of qualifying holdings by CASPs.

The consultation holds significant importance as it provides stakeholders, including crypto-assets issuers, service providers, financial entities, and interested parties, with a valuable opportunity to shape the final technical standards of the MiCA regulation. By participating in the consultation, stakeholders can ensure that their views, concerns, and expertise are considered, ultimately leading to a more comprehensive and effective regulatory framework that safeguards investors and upholds the integrity of the financial system.

 Authorization and notification

ESMA proposes a framework for the provision of crypto-asset services by certain financial entities. This includes requirements for authorization and notification. The framework proposed aims to ensure that CASPs and other financial entities that provide crypto-asset services are subject to appropriate regulatory oversight and that they meet certain standards in order to protect investors and ensure the integrity of the financial system. The requirements for authorization and notification are an important part of this framework, as they help to ensure that only qualified and competent entities are allowed to provide crypto-asset services.

In particular, the paper proposes that CASPs must be authorized by the relevant national competent authority (NCA) in order to provide crypto-asset services. As expected, the authorization process will involve a number of requirements, including the submission of an application for authorization, the provision of information on the applicant's program of initial operations, the applicant's outsourcing policy, and the forecast accounting plan. The NCA will assess the application and determine whether the applicant meets the requirements for authorization.

The paper also proposes that certain financial entities must notify the relevant NCA of their intention to provide crypto-asset services. This includes entities that are not CASPs but that provide crypto-asset services as part of their business. Again, as expected, the notification process will involve a number of requirements, including the submission of information on the services to be provided, the identification of the relevant NCA, and the provision of information on the applicant's program of initial operations, the applicant's outsourcing policy, and the forecast accounting plan.

 Content, forms, and templates

The paper provides details on the content, forms, and templates for the application for authorization of CASPs. This includes requirements for the applicant's program of initial operations, the applicant's outsourcing policy, and the forecast accounting plan.

Regarding the program of initial operations, the applicant must provide a program of initial operations that outlines the proposed activities of the CASP, including the types of crypto-asset services to be provided, the target market, and the expected volume of business. The program of initial operations must also include information on the applicant's governance structure, risk management policies, and internal control mechanisms.

As to the outsourcing policy, the applicant would be expected to provide an outsourcing policy that outlines the CASP's approach to outsourcing of activities related to the provision of crypto-asset services. This includes information on the types of activities that may be outsourced, the criteria for selecting outsourcing providers, and the procedures for monitoring and managing outsourcing arrangements.

On the other hand, regarding the forecast accounting plan, the applicant would be expected to provide a forecast accounting plan that outlines the expected financial performance of the CASP over the next three years. This includes information on the expected revenue, expenses, and capital requirements of the CASP, as well as the expected profitability and solvency ratios.

It should also be noted that the paper also provides templates and forms that applicants can use to submit their application for authorization. It appears that these documents are designed to ensure that applicants provide all the necessary information in a clear and consistent manner, which will help to streamline the authorization process and ensure that all relevant information is considered by the relevant NCA.

Complaint-handling procedure for CASPs

Third, the paper outlines the requirements for a complaint-handling procedure for CASPs. This includes specific requirements for the appointment of a complaints officer, the handling of complaints, and the reporting of complaints.

Regarding the appointment of a complaints officer, ESMA proposes that CASPs appoint a complaints officer who is responsible for overseeing the complaints-handling procedure. The complaints officer must have the necessary skills and experience to carry out this role effectively.

As to the handling of complaints, ESMA proposes that CASPs establish and maintain effective and transparent procedures for the prompt, fair, and consistent handling of complaints received from clients. This includes requirements for the receipt, registration, and investigation of complaints, as well as the provision of responses to complainants.

With respect to reporting of complaints, ESMA proposes that CASPs must keep records of all complaints received and provide regular reports to the relevant national competent authority (NCA) on the number and nature of complaints received, as well as the outcomes of the complaints-handling procedure.

In addition, the paper proposes that the management body of the CASP reviews the complaints-handling procedures at least once per year to ensure that they are up-to-date and effective. The paper also proposes that CASP staff are trained in relation to the complaints-handling procedures and that the procedures must be provided to all relevant staff of the CASP through an adequate internal channel.

Identification, prevention, management, and disclosure of conflicts of interest by CASPs

The paper discusses the requirements for the identification, prevention, management, and disclosure of conflicts of interest by CASPs. This includes requirements for the definition of conflicts of interest, the identification of conflicts of interest, and the disclosure of conflicts of interest.

Regarding the definition of conflicts of interest, ESMA proposes that CASPs establish and maintain a conflict of interest policy that defines what constitutes a conflict of interest. In particular, the policy must cover all aspects of the CASP's business and must be commensurate with the scale, nature, and range of crypto-asset services that the CASP intends to provide.

With respect to the identification of conflicts of interest, ESMA proposes that CASPs establish and maintain effective procedures for the identification of conflicts of interest. This includes requirements for the ongoing monitoring of activities and relationships that may give rise to conflicts of interest, as well as the establishment of internal controls and procedures to prevent and manage conflicts of interest.

As to the prevention and management of conflicts of interest, ESMA proposes that CASPs establish and maintain effective procedures for the prevention and management of conflicts of interest. This includes requirements for the establishment of internal controls and procedures to prevent and manage conflicts of interest, as well as the establishment of a system for the disclosure of conflicts of interest.

Regarding the disclosure of conflicts of interest, ESMA proposes that CASPs establish and maintain effective procedures for the disclosure of conflicts of interest to clients. This includes requirements for the provision of accurate and timely disclosures that enable clients to make informed decisions about the crypto-asset services in the context of which the conflicts of interest arise. The disclosures must be made available in all languages used for marketing or communicating with clients and must be kept updated at all times.

Assessment of the intended acquisition of qualifying holdings by CASPs

The paper outlines the requirements for the assessment of the intended acquisition of qualifying holdings by CASPs. This includes requirements for the definition of qualifying holdings, the assessment process, and the notification requirements.

Regarding the definition of qualifying holdings, the paper proposes that a qualifying holding in a CASP is any direct or indirect holding of 10% or more of the capital or voting rights of the CASP.

As to the assessment process, the paper proposes that the assessment of the intended acquisition of a qualifying holding in a CASP must be carried out by the relevant national competent authority (NCA). ESMA proposes that the assessment process is based on a number of criteria, including the reputation and experience of the intended acquirer, the financial soundness of the intended acquirer, and the potential impact of the acquisition on the sound and prudent management of the CASP.

Regarding the notification requirements, the paper proposes that the intended acquirer notifies the relevant NCA of the intended acquisition of a qualifying holding in a CASP. ESMA proposes that the notification includes information on the intended acquirer, the CASP, and the proposed acquisition, as well as any other information that the relevant NCA may require. The paper sets out that the notification is made in advance of the intended acquisition and must be accompanied by a fee.

Responding to the consultation

The feedback received will be considered by ESMA in the development of the final technical standards for the regulation. The paper provides an opportunity for stakeholders and market participants to have a say in the development of the regulation and to ensure that their views and concerns are taken into account. Given the importance of the paper, all stakeholders, including crypto-assets issuers, crypto-asset service providers, financial entities dealing with crypto-assets, and other interested parties, are expected to respond to ESMA by 20 September 2023.