EU Securities Agency Proposes Detailed Crypto Restrictions under MiCA Law

The European Securities and Markets Authority (ESMA) has taken a significant step towards regulating the fast-growing crypto industry with the issuance of a 160-page consultation document. The consultation, which addresses key aspects of the Markets in Crypto Assets (MiCA) law, aims to provide guidelines for the authorization of crypto asset service providers (CASPs) operating within the EU.

MiCA, set to take effect in 2024, will allow CASPs, including wallet providers and exchanges, to operate across all 27 EU member states under a single license. This groundbreaking legislation also establishes reserve criteria for stablecoins related to other assets, a move designed to bring greater stability to the crypto market.

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ESMA's consultation comes in the wake of recent high-profile incidents, such as the bankruptcy filing of the FTX exchange in November, which have raised concerns about governance and security within the crypto sector. Although the MiCA regulation was largely settled by June 2022, these incidents have prompted the securities agency to reinforce its commitment to safeguarding investors and promoting transparency in the industry.

Furthermore, the consultation document calls for crypto businesses to provide confidential data on various aspects, including projected revenue, the number of white papers, and details of on- and off-chain trades. The objective is to gain insight into the financial health and operational practices of CASPs, ensuring that they meet stringent standards before being granted authorization to operate within the EU.

One of the main focuses of the consultation is to address customer complaints and conflict-of-interest management among crypto companies. ESMA aims to ensure that CASPs have robust procedures in place to handle customer grievances promptly and fairly. Additionally, companies that operate trading platforms and execute orders for clients or whose staff members have access to sensitive information about a crypto asset's issuer,must identify and manage potential conflicts of interest diligently.

Security is a paramount concern for ESMA, and the consultation requires applicants to demonstrate the security of their ICT systems and distributed ledger technology. Moreover, CASPs must implement adequate measures to segregate clients' funds and crypto assets, protecting them from potential risks.

In the coming months, ESMA will continue its regulatory efforts. In October, consultations will focus on sustainability and record-keeping requirements, while early 2024 will see an assessment of how to classify crypto assets as securities and how foreign enterprises can cater to EU clients.

The European Banking Authority (EBA), the banking equivalent of ESMA, has also issued advice to stablecoin issuers, urging them to prepare for the implementation of MiCA laws to avoid potential issues in June 2024.

The ESMA's consultation period will end on September 20, giving stakeholders in the crypto industry the opportunity to engage with regulators and provide feedback on the proposed restrictions. The outcome of this process will play a crucial role in shaping the future of the crypto landscape in the EU, providing investors and users with greater confidence and protections in their interactions with crypto asset service providers.