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ESMA Proposes Crypto Regulations Under MiCA Laws

Updated: Jul 20, 2023

ESMA, under the newly established MiCA law, has released a comprehensive set of proposals detailing the authorization and conflict-of-interest rules for crypto companies operating within the European Union.

EU Parliament in Brussels
Source: iStock

BRUSSELS, BE – The European Securities and Markets Authority (ESMA) has taken significant steps to regulate the crypto industry by issuing a set of detailed proposals on the authorization and conflict-of-interest rules for crypto companies within the European Union. These proposals mark the first utilization of ESMA's expanded powers under the Markets in Crypto Assets (MiCA) law.


ESMA Proposes Crypto Regulations


ESMA's 160-page consultation document highlights recent collapses and security breaches in the crypto world, underscoring the need for improved governance and protection of clients' funds and assets. Instances of misusing clients' funds and media reports about hack attacks resulting in significant loss of crypto assets have prompted ESMA to strengthen its regulatory oversight. As ESMA proposes crypto regulations, many company executives and investors are watching to see how the MiCA law gets applied in the real world.


Key Features of the MiCA Law and Implications


Streamlined Licensing for Crypto Asset Service Providers (CASPs)


MiCA, scheduled to take effect in 2024, introduces a unified licensing framework for wallet providers and exchanges, known as crypto asset service providers (CASPs), across all 27 EU member states. This framework allows CASPs to operate within the bloc under a single license, streamlining their operations and fostering cross-border activities.


Reserve Requirements for Stablecoins


MiCA also establishes reserve requirements for stablecoins, ensuring their stability and tying their value to other assets. This measure aims to enhance market confidence in stablecoins and mitigate potential risks associated with their widespread usage.


ESMA's Consultation and Future Regulatory Milestones


Comprehensive Consultation Process


ESMA's consultation, open until September 20, invites confidential information from crypto companies regarding their expected revenue, the number of white papers, and the utilization of on- and off-chain trading. The agency seeks to gather valuable insights to refine the regulatory framework and address specific industry challenges.


Additional Consultations on Sustainability and Record-Keeping


ESMA plans to conduct further consultations in October, focusing on sustainability aspects and record-keeping requirements for crypto companies. These consultations aim to ensure the long-term viability and stability of the crypto sector while promoting transparency and accountability.


Finalizing Regulations in Early 2024


ESMA's final set of consultations, anticipated in early 2024, will explore the classification of crypto as securities and outline guidelines for foreign companies serving EU clients. This last batch of regulatory milestones will provide clarity on the legal and operational requirements for crypto companies operating within the European Union.


Demonstrating Compliance and Managing Conflicts of Interest


Segregation of Clients' Funds and Crypto-Assets


To obtain authorization, crypto companies must demonstrate the segregation of clients' funds and crypto assets, ensuring that they are not commingled with the company's own assets. This measure aims to safeguard clients' interests and protect them from potential misuse or mismanagement.


Robust Security Measures


Applicants are required to detail the security of their information and communication technology (ICT) systems and the underlying distributed ledger technology (DLT). This requirement ensures that crypto companies have robust security measures in place to protect users' data and assets from unauthorized access and cyber threats.


Managing Conflicts of Interest


Crypto companies must identify and effectively manage any potential conflicts of interest that may arise. For instance, if a company executes orders for clients while operating a trading platform, it must have appropriate mechanisms to ensure fair and unbiased treatment of its users. Additionally, access to confidential information about the issuer of a crypto asset must be handled diligently to prevent conflicts of interest.


Enhanced Cybersecurity in the Crypto Sector


ESMA's proposals for crypto company authorization and conflict-of-interest rules under the MiCA law represent a significant milestone in regulating the crypto industry within the European Union. By addressing concerns related to poor governance and security, these regulations aim to enhance user protection and foster trust in the crypto sector.


Crypto companies operating within the EU should actively participate in ESMA's consultations to contribute to the shaping of these regulations and ensure compliance with the forthcoming regulatory framework.

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