The European Securities and Markets Authority (ESMA) has released a series of detailed proposals on how crypto companies within the European Union should be authorized, the first use of the new powers granted under the union’s Crypto Asset Markets (MiCA) law. Here are the details…
Cryptocurrency rules published in the EU
In the latest development, the European Union’s banking watchdog has urged stablecoin issuers to voluntarily comply with consumer protection and risk management within a year. The European Banking Authority (EBA) released the first set of measures on Wednesday, July 12, outlining the MiCAR requirements that will come into effect one year from now. In April of this year, the EU approved MiCAR, which provides the first comprehensive set of rules for trading coins like Bitcoin and Ethereum. MiCAR requirements also mention issuing a stablecoin, a cryptocurrency backed by fixed-value assets such as fiat currencies.
The recommendations laid out in the EU securities agency’s 160-page consultation include how crypto firms should handle user complaints and manage conflicts of interest. Effective in 2024, MiCA gives wallet providers and exchanges, known as crypto-asset service providers or CASPs, the ability to operate on a 27-country block under a single license and sets reserve requirements for stablecoins tied to the value of other assets. While the law was largely passed by June 2022, ESMA has clearly been affected by poor governance and security claims in the BTC and altcoins sector, such as those following the FTX exchange that filed for bankruptcy in November.
“Some of the recent crashes in the crypto world have demonstrated misuse of clients’ funds and crypto assets,” the consultation also referred to “media reports of hacking attacks on CASPs, often resulting in the theft of substantial client crypto assets.” The agency is also seeking confidential information on the expected revenue of crypto companies, the number of whitepapers and the use of on-chain and off-chain trading in a consultation that will last until September 20.
Securities status of coins still unclear
ESMA said that another slice of consultation covering sustainability and record keeping is coming in October, with a final batch coming in early 2024 to discuss when to consider cryptocurrencies as a security and how foreign companies can serve EU customers. The document states that applicants must detail the security of ICT systems and underlying distributed ledger technology, as well as demonstrate that clients’ funds and cryptocurrency are separated and not used for the company’s own account.
Companies will also have to identify and manage potentially conflicting interests with or between clients if, for example, they are also fulfilling orders for clients while operating a trading platform, or if a staff member has access to confidential information about the issuer of a crypto asset they hold. According to the latest announcements, ESMA rules will come into effect as of January 2025. However, it will not include any compensation for customers who lose money by investing in unsupported crypto assets.
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