Non-EU Crypto Firms Under Scrutiny For MiCA Compliance, ESMA Warns

The European Securities and Markets Authority (ESMA) has raised concerns about non-EU firms providing crypto-asset services within the European Union (EU) without fully complying with the Markets in Crypto-Assets (MiCA) regulation.

These firms, often operating through complex and opaque group structures, pose significant risks, including potential conflicts of interest and inadequate investor protection, professional services firm Deloitte said in a recent blog post .

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MCIs Are Particularly Concerning

Deloitte said FTX serves as a prime example of a Multifunction Crypto-asset Intermediary (MCI), which refers to a firm or a group of affiliated entities offering a wide range of crypto-asset services, typically centered around a trading platform.

These MCIs are particularly concerning because they remove intermediaries, providing a direct route for crypto services. However, some of these firms may attempt to access EU clients without physically relocating their operations to the Union, all while maintaining their disintermediated business models.

In response to these concerns, ESMA has issued an Opinion urging national competent authorities (NCAs) within the EU to exercise heightened caution when evaluating applications from non-EU firms under MiCA.

We are entering a critical phase of MiCA adoption from the end of this year 2024 into 2025.
ESMA has issued a letter to the Economic and Financial Affairs Council (ECOFIN) and a statement to crypto-asset service providers and national competent authorities to encourage… pic.twitter.com/k0ziyGmgG1

— Mr. Man (@MrManXRP) April 1, 2024

Although ESMA’s Opinion is not legally binding, it emphasizes the need for NCAs to ensure that these firms are not merely seeking a “legal cover” to solicit EU clients. This involves an EU-authorized broker, typically part of the same group as the non-EU firm, while the actual services continue to be provided from outside the Union.

ESMA has revealed several practices that may indicate unlawful solicitation of EU clients by non-EU trading platforms. These include situations where an EU-authorized broker systematically routes orders to the group’s execution venue outside the Union, fails to consider other suitable unaffiliated execution venues, or relies on the non-EU exchange’s reputation to attract EU clients.

Additionally, if the EU-authorized broker generates little to no revenue from its brokerage activities within the EU, it may be a sign of regulatory circumvention.

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Issue of Conflicts of Interest Also Remains

The issue of conflicts of interest within MCIs is also a significant concern for ESMA. NCAs are advised to closely scrutinize whether a group’s interests improperly influence how and where EU client orders are executed.

For instance, if orders are consistently executed on a group’s platform located in a third country, this could be a strong indication that the conflict of interest has not been adequately managed. Another red flag is when an EU firm has the technical capacity to execute orders on other trading platforms but never does so in practice.

ESMA further emphasizes the importance of the “best execution” requirement, which mandates that EU brokers implement procedures ensuring the best possible outcome for their clients.

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Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.