ESMA consults on reverse solicitation under MiCAR

Executive Summary

The European Securities and Markets Authority (ESMA) has launched a consultation on the approach to be taken by supervisors to the "reverse solicitation" exemption under the Markets in Crypto-Assets Regulation (MiCAR). The three key take-aways from the consultation paper are:

• This exemption from authorisation requirements only applies when regulated crypto-asset services are provided by a non-EU service provider to an EU person at the "own exclusive initiative" of the latter.
• The "reverse solicitation" exemption will be narrowly construed, so marketing practices will need to be reviewed closely to preserve its availability.
• The supervisory authorities will be encouraged to police the regulatory perimeter to protect investors and the interests of authorised crypto-asset service providers (CASPs) in the EU. Greater scrutiny of cross-border practices is to be expected.

Background

The Markets in Crypto-Assets Regulation (MiCAR) requires certain services (eg, digital exchange and custody services) to be offered and undertaken only by firms authorised in accordance with its rules. While certain financial services firms – including credit institutions, central securities depositories, investment firms, and certain fund managers – can extend their existing authorisations^[1], other firms seeking to act as CASPs will need to meet certain conditions. One is that the putative CASP must have a registered office in a Member State where they are carrying out at least part of their crypto-asset services. Another is that the CASP's place of effective management must be in the EU, along with at least one director^[2]. Firms operating in the EU as CASPs under MiCAR will have the ability to operate cross-border within the EU, including by establishing branches and providing cross-border services on the basis of a regulatory "passport^[3]."

Firms that do not fit into these categories will be prohibited from providing crypto-asset services covered by MiCAR to EU clients^[4]. The sole exception to the rule is that a client established or situated in the EU may, at its "own exclusive initiative," request the provision of such a service by a non-EU firm without triggering the authorisation requirements of MiCAR^[5]. For firms seeking to operate globally, which have distributed their management and operations, this avenue might seem to provide a route for dealing with EU-based clients. In fact, as ESMA confirms in its consultation paper, it represents a barrier expressed as an exemption. The marketing of services into the EU from outside can defeat it. The sponsorship of sports teams in the EU can defeat it. The use of influencers or affiliates to promote the non-EU firm can defeat it. The clearest circumstance in which it will be permitted for a non-EU firm to provide services to an EU client is when the non-EU firm avoids marketing towards the EU and accepts engagements from EU clients passively.

Regulatory Concerns

The language of the "reverse solicitation" exemption has been adapted from the Markets in Financial Instruments Regulation (MiFIR). In January 2021, as firms were adapting to Brexit, ESMA issued a Public Statement to remind them that the communications to be considered ranged from press releases, internet advertising, brochures, phones calls and face-to-face meetings. It also warned against attempts to improperly manufacture evidence of the client's "own exclusive initiative" through Web site acknowledgements or contract terms.

In October 2023, ESMA took the step of issuing a statement aimed at promoting supervisory convergence and setting expectations in the period leading to the implementation of MiCAR. The key message is that the "reverse solicitation" exemption is "narrowly framed" and not to be used to avoid MiCAR. This came with an emphasis on the exercise of regulatory powers:

ESMA, and [national competent authorities] through their supervisory and enforcement powers, will take all necessary measures to actively protect EU-based investors and MiCA-compliant crypto-asset service providers from undue incursions by non-EU and nonMiCA compliant entities under the European MiCA framework.

These concerns are reflected in both the direction from the co-legislators for ESMA to produce guidance on "reverse solicitation" and in the consultation paper itself.

While this consultation is focussed on "reverse solicitation" under MiCAR, it may have read-across into traditional finance for investment firms regulated under MiFID II or banks under the Capital Requirements Directive (CRD). ESMA notes that the guidelines and concepts under MiCAR will be similar - but not exactly the same. The approach to "reverse solicitation" under MiCAR appears to be narrower than the corresponding provisions under MiFID II or the CRD. The proposed amendments to the banking package in CRD VI appear to offer more flexibility for non-EU firms to offer continuous services or similar (but not identical) services to the one originally solicited. What counts as "reverse solicitation" for one service or activity is not necessarily the same for all.

The Draft Guidelines

The guidelines drafted by ESMA broadly reflect and reinforce the text of MiCAR. ESMA points to its previous work under MiFIR for assistance, while noting that there will be differences due to the ways that crypto-asset services are promoted.

Although the "reverse solicitation" exemption is to be construed narrowly, the concept of solicitation is to be interpreted broadly when applied to the activities of non-EU firms. Promotional activity by a subsidiary clearly raises a problem for a non-EU firm attempting to rely upon the exemption, but ESMA encourages supervisors to take a wider view and disapply it even where there is no corporate or contractual relationship between the non-EU firm and a third party who is undertaking marketing or profile-building for its benefit. The use of an EU firm to drive traffic to a non-EU affiliate; brand-building through sponsorship deals; engagement of influencers on social media; banner advertising without geolocation controls – these are all examples of marketing that can defeat reliance on "reverse solicitation."

The extent to which the exemption can be relied on to offer or provide follow-on services is to be limited, as well. Although ESMA does not prescribe the precise point at which the exemption ceases to apply, having been properly relied upon previously, it does seek to confine it to "the context of the original transaction." The explanatory material suggests that "the lapse of a month or even a couple of weeks" could be excessive.

Another factor is whether a new type of crypto-asset service or activity would be allowed to be offered, even in "the context of the original transaction." ESMA's view is that this should be assessed on a case-by-case basis, taking account of both the type and the associated risks. Examples reflected in the guidelines of different types of crypto-assets include:

• Utility tokens, asset-referenced tokens or electronic money tokens.
• Crypto-assets not stored or transferred using the same technology.
• Electronic money tokens not referencing the same official currency.
• Liquid and illiquid crypto-assets.

In any event, ESMA expects records to be kept of the engagement with each EU client to evidence that all steps have been at their initiative.

Next Steps

The ESMA consultation is open through 29 April 2024. The final guidelines will be issued in time for the second phase of MiCAR implementation on 30 December 2024.

[1] Article 59(8).

[2] Article 59(2).

[3] Article 59(6).

[4] Article 59(1).

[5] Article 61(1).