Another first world regulatory endeavour in Europe has kicked off recently. We refer to the recent introduction of a regulatory infrastructure for the markets in so-called crypto assets. In one with the green transition, the European Union intends to prioritise the digital transition and ensure that financial services are fit for the digital age. At the same time, it wants to promote the use of transformative technologies in financial markets, including the DLTs.   

In a manner not entirely dissimilar from the regulatory push that sustained the introduction of SFDR over the recent past in Europe – somewhat rushed as it turned out – a new regulation has been introduced in 2023 to govern the offer of crypto assets and related services. And we also have an acronym for it – MICA. For the regulatory infrastructure applicable to the markets in financial services having already evolved in a rather sophisticated manner in Europe, markets in crypto assets will not need an entire set of new rules. MICA will mostly apply concepts and approaches already in existence and tested in the regulation of the more traditional markets in financial instruments. 

Markets in crypto assets are both global and cross-border in nature. The rules under MICA will have an extraterritorial effect same as their predecessor rules under AIFMD and MIFID. Success of the market in crypto assets globally and in Europe will be largely dictated also on the ability of investors to continue to access the services offered by third country firms. Whilst this is important, related regulation should be tight enough to curb occurrences of circumvention of the provisions under MICA that impose authorisation on crypto asset service providers active in Europe. We expect that reverse solicitation under MICA will become necessarily a hot topic. 

Is It too Early to Even Bother about MICA? 

Whilst adopted by the European Parliament in the first half of 2023, there is still some time to go before MICA regulation will be fully implemented and in force. As reminded by ESMA, the establishment, development and implementation of the first ever single rulebook for regulation and supervision of the issuance, trading and provision of services related to crypto assets is no small feat. The new and unprecedented risks posed by crypto assets will require a great deal of coordination by European and national supervisory authorities.  

The implementation phase of MICA covers the period from the entry into force until full application, which will take place sometime by the end of 2024. This phase is characterised by a great deal of activity by ESMA, in concert with the ESAs, to develop both technical standards and guidelines to specify some of the rules applicable to issuers, offerors and other service providers of crypto assets. European authorities will have to work very closely also with national competent authorities. Coordination will be paramount to ensure that MICA is implemented as early as possible in local rules across member states of the Union. Communication flows will have to be established amongst them both on new authorisations and occurrences of supervisory cases. The outcome of the implementation phase is a reality where expectations of supervisory authorities are aligned across the various member states in Europe for what concerns the provisions of crypto asset services and the carrying out of related activities. The same applies to the practices related to the authorisation regime for crypto asset service providers. The aim is that these are ultimately consistent across Europe and regulatory arbitrage is contained to the maximum extent possible.  

ESMA also reminds that even though MICA is set to become applicable at the end of 2024, there might not be full regulatory coverage by then for what concerns the activities of crypto issuers and service providers in Europe. Investors might be able to enjoy the protections afforded by MICA not earlier than the second half of 2026 in certain cases. This is due to a grandfathering clause contained under MICA. Member States retain the option to grant entities already active in the provision of crypto assets services an additional 18-month transitional period, during which they can continue to operate without a license under MICA. 

The European Passport under MICA 

Crypto assets and related markets are cross-border in nature. The introduction of a single book for crypto-assets and related service providers in Europe couldn’t be complete without a European passport attached to it. One will be indeed made available to all the crypto-assets service providers that undergo the authorisation process provided for by MICA. The passport will allow them to offer their services cross-border in Europe. Here we see a usual dynamic at play in the European regulation on financial services and markets, where concepts and mechanisms already deployed successfully in other ecosystems are then transposed to new regulatory environments.  

Authorised crypto asset service providers will be able to offer their services cross-border in Europe further to a straightforward passporting process. This will be a regulator vis-à-vis regulator process similar to the corresponding one already in existence under MiFID. As part of the passport application process, the crypto asset service provider will liaise with its home state authority and provide, amongst other things, a list of the member states in Europe where it intends to provide its services as well as an indication of the crypto asset services it indeed intends to offer. The application shall also contain an indication of the other activities carried out by that specific service provider that are not covered under MICA. The process is essentially a notification, which will allow the crypto asset service provider to carry out its services cross-border in Europe in a relatively short period of time.   

Glamour and Reverse Solicitation under MICA 

The marketing of crypto assets related opportunities and services takes place predominantly in a digital fashion. This is because crypto as a keyword resonates mostly with a target audience well versed with the digital environment. Same as the internet, crypto knows no borders. And the marketing of crypto related opportunities and services in the past has had a certain impact too. Celebrities lent their faces to multiple advertisements of various crypto exchanges.  

Against this backdrop of digital innovation and glamour, MICA introduces in Europe a regime for authorisation of crypto service providers and creates a situation already seen in the past. The rules under MICA are extraterritorial in nature, same as the ones under MiFID and AIFMD. They will capture crypto service providers from outside Europe – so called third country firms in European jargon – intending to offer their services to clients and investors domiciled in Europe. In this context, European authorities are not reinventing the wheel. They are taking advantage of the expertise matured over time – from the first introduction of AIFMD through Brexit – and adapting it to a new digital scenario. The discipline on reverse solicitation under MICA will be an adaptation of the current approaches already developed in the markets for more traditional financial services and products.  

Testament to that is the current formulation of article 61 MICA on the provision of crypto asset services at the exclusive initiative of the client. For the part that concerns laying out the paradigm of accepted reverse solicitation under MICA. Article 61 MICA specifies, amongst other things, that any clauses or disclaimers accepted by a client to the extent that a transaction shall be construed as reverse solicitation under MICA shall not be acceptable. Any related analysis carried out by supervisory authorities on occurrences of reverse solicitation under MICA shall be factual rather than contractual. This approach echoes warning statements made by ESMA on the broader topic of reverse solicitation in the provision of investment services under MiFID at the time of Brexit. More namely, with regards to practices adopted by UK firms around reverse solicitation, which seemed to suggest that by including general clauses in terms of business or online pop-up boxes, whereby clients could state that any transaction was executed at their own exclusive initiative, what was in practice an unauthorised offer of financial services could be purported to be a reverse solicitation instead. 

On the point of attempting to circumvent MICA regulation via reverse solicitation claims, it is noteworthy to mention some of the main takeaways from the consultation launched by ESMA on the guidelines on reverse solicitation under MICA. In concert with the other ESAs, ESMA is in charge of delivering most of the technical second level rules accompanying MICA. Here ESMA takes an unusual approach on the issue of reverse solicitation dealt under article 61 MICA. According to ESMA, the role of the provisions under article 61 MICA is to introduce a prohibition for third country firms to provide crypto asset service to clients and investors in the Union without an authorisation. Reverse solicitation as such shall be interpreted in an extremely strict manner as an exception to the main prohibition. As mentioned already, ESMA and the other European authorities will mostly leverage on the experience and the work carried out already in the context of MiFID on the issue of reverse solicitation. The ESMA guidelines will also contain best supervisory practices to detect and deter practices of reverse solicitation essentially aimed at circumventing the rules under MICA. 

The Dimensions of Reverse Solicitation under MICA    

The ESMA consultation on the guidelines on reverse solicitation under MICA introduce different dimensions to reverse solicitation. These are the actors, the means, the timing and the objects. Using these dimensions, ESMA intends to offer a blueprint to regulatory authorities for the effective supervision of marketing practices related to crypto assets.

As we mentioned already, marketing of crypto assets and related services has been carried out in the past in a very glamorous fashion. So-called finfluencers might be involved in recommending the virtues and the upsides of investing in crypto or buying related services. One of the ways for European supervisory authorities to conduct effective supervision of crypto related marketing practices disguised as reverse solicitation is to adopt a look through approach. That is the case both when finfluencers are involved as well as European authorised entities. References to logos or even websites of third country firms in any marketing or advertisement shall be seen in the eyes of European authorities as direct offers made by the third country firms and exclude reverse solicitation.

ESMA also recommends a technology neutral approach for what concerns the marketing of crypto assets and related services. Here supervisory authorities should not only keep an eye on every type of traditional way used so far to conduct marketing, from cold calling to roadshows, but all the new avenues for marketing that take place on the internet, including the offer of training courses, which might disguise offers of crypto assets and related services. As a general principle already in force before MICA, the use of a specific local language that is not English shall always be construed as indicative of something more akin to marketing than reverse solicitation in a specific jurisdiction. The same can be said for suffixes of website addresses that are more local in nature.

For what concerns the timing of reverse solicitation, what ESMA recommends in the context of MICA does not diverge in principle from the current practice relative to more traditional financial services and activities. Once a relationship has been established as true reverse solicitation, the crypto service provider might offer additional assets or services of the same nature to that client strictly within the context of that original transaction to qualify under reverse solicitation. ESMA here is also crystal clear in saying that the context of the original transaction is defined in time. Not more than a couple of weeks from the original transaction. Attempts to offer assets or services of the same type, for instance, after a month from the original transaction would qualify as a new and unauthorised offer rather than a reverse solicitation.  

The most controversial point remains the one of the sameness of any crypto assets or services offered in addition to the ones object of an original transaction under reverse solicitation. Here ESMA suggests that the sameness of any additional crypto asset or service shall be evaluated on a case-by-case basis. Taking into account not only the nature but also the risks attached to them. The ESMA guidelines attempt to also identify pair of assets and services that in principle shall not be considered the same.  

Conclusions 

The ESMA proposed guidelines on reverse solicitation under MICA are indicative of the level of maturity reached by European authorities on certain topics, including reverse solicitation. We may want to expect that the recommendation contained therein for supervisory authorities will find their application more broadly and will not be confined exclusively to the space of crypto assets and services.