EU watchdog warns of offshore crypto risks under MiCA regulation

The European Securities and Markets Authority (ESMA), the regulatory body responsible for overseeing the EU's financial markets, has issued a new Opinion highlighting the considerable risks posed by global crypto firms that seek partial authorization under the Markets in Crypto Assets (MiCA) regulation while conducting significant operations offshore.

On July 31, the ESMA released its MiCA-related opinion statement, which it has done on other occasions in the past following the implementation of new industry-wide regulations (i.e. in the aftermath of Brexit).

ESMA's latest warning focuses on the intricate organizational structures of many global crypto firms, which are known to use EU-authorized brokers to route orders to execution venues based outside the EU, commonly in offshore jurisdictions.

The EU markets watchdog said this is a practice that can undermine consumer protection and create an uneven playing field, disadvantageous to EU-based execution venues.

Complex structures and consumer risks

To address these concerns, ESMA has called on National Competent Authorities (NCAs) within individual EU member states to rigorously scrutinize the business models of these global firms during the authorization process in its Opinion. 

ESMA said the execution venues for crypto-assets play a crucial role in the overall function of the crypto-asset ecosystem. According to the Opinion, this could look like the following:

“​​While most crypto-asset conglomerates are expected to operate a multilateral trading platform outside the EU, there could also be cases where the non-EU entity is rather internalizing the order flow, executing orders coming from EU clients on their own account.”

Therefore, its goal is to ensure that these firms comply fully with MiCA’s regulations to safeguard consumers and maintain the integrity of the crypto industry.

It also stresses the importance of a meticulous, case-by-case assessment for firms seeking MiCA authorization. ESMA has outlined specific requirements that these firms must meet, including ensuring best execution practices, means of effectively managing conflicts of interest and upholding their duty to act in the best interests of clients. 

Additionally, firms must adhere to stringent guidelines regarding the custody and administration of crypto-assets on behalf of their clients.

MiCA in action

Alongside its Opinion, ESMA published a Final Report under the MiCA framework on July 3, presenting eight draft technical standards aimed at enhancing transparency and clarity for both retail investors and crypto-asset service providers (CASPs). 

These standards cover a range of areas, including sustainability indicators, business continuity plans for CASPs, trade transparency, order book formats, record-keeping protocols, and the readability of white papers.

Since the MiCA regulation took effect in June 2023, EU regulators have been steadfast in enforcing the key provisions of the legislation, while also working to clarify any compliance challenges businesses might encounter.

On July 19, EU regulators introduced a tool to help standardize crypto-asset classification under MiCA via a new test and guidelines in an effort to ensure uniformity across the market.

Key market players have also been reacting:  The central bank of Italy announced that it will be sharing how it envisions the country’s application of MiCA, while crypto exchanges like OKX are selecting EU-locations to become MiCA hubs through which to maneuver regulatory infrastructure for expanded EU crypto services.