The European Securities and Markets Authority (ESMA) has published its initial consultation package in a bid to frame the regulatory landscape for crypto firms across the European Union. The effort, backed by the European Union’s Markets in Crypto Assets (MiCA) law, sets the stage for a more regulated and transparent crypto space within the bloc.
Building the regulatory framework
The MiCA law, which will be effective from 2024, grants crypto service providers, including wallet providers and exchanges, the freedom to operate across the EU with a single license. ESMA’s proposed guidelines, released as part of a detailed 160-page consultation, suggest a protocol for managing user complaints and conflict of interests for these crypto entities. The overarching goal is to cultivate improved governance and security within the crypto sector.
Following the release of these proposals, ESMA Chair, Verena Ross, stated, “This first consultation package is an important milestone for ESMA in the implementation of the MiCA framework. It translates our ambition to set high regulatory standards in the EU for crypto-asset-related activities into concrete requirements.”
The EU securities agency’s guidelines are aimed at preventing misappropriation of funds and potential hacks. The recent bankruptcy filing of the FTX exchange, and its subsequent impact on the crypto world, has been a significant influencer in drafting these recommendations. The agency seeks to mitigate future collapses in the crypto sector through these guidelines.
Compliance and information confidentiality
Part of ESMA’s effort to tighten regulations revolves around the requirement for companies to provide confidential information regarding their expected revenue, number of white papers, and the use of on- and off-chain trading. This fact-finding exercise aims to provide the agency with a deeper understanding of the EU crypto-asset markets and their potential development.
Companies will need to demonstrate that their client’s funds and crypto-assets are segregated and not used for their own benefit. They are also expected to detail the security of their ICT system and underlying distributed ledger technology. Furthermore, crypto firms will have to identify and manage potential conflicts of interest that could arise among clients, especially in situations involving trading platforms or access to confidential information.
This consultation phase will last until September 20, and a second phase, focusing on sustainability and record-keeping, will follow in October. The final consultation, expected to take place in early 2024, will explore the criteria that classify crypto as a security and the conditions under which foreign companies can serve EU clients.
