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On 29 January 2024, ESMA published two draft guidelines providing clarifications regarding the classification of crypto-assets and the use of reverse solicitation under the Market in Crypto-Assets Regulation (MiCAR).
Is a crypto-asset a financial instrument?
ESMA clarifies that a crypto-asset qualifies as a financial instrument if it meets the definition of one of the types of financial instruments defined under MiFID II.1 For example, MiFID II defines transferable securities as “classes of securities which are negotiable on the capital market, with the exception of instruments of payment”. For a crypto-asset to be considered as a transferable security, it must be a class of securities, negotiable on the capital market and must not be an instrument of payment. Whenever a crypto-asset is a financial instrument, it will be subject to the same regulatory requirements of the said instrument.
Luxembourg perspective
On 22 February 2024, the CSSF updated its FAQ on virtual assets in order to provide more clarification on whether virtual assets are eligible investments for UCITS and AIFs.
According to the CSSF, virtual assets are not considered as eligible investments for UCITS, therefore UCITS are not allowed to invest in such assets either directly or indirectly. However, if the virtual asset meets the criteria of a financial instrument under the 1993 Law, then it may be eligible for UCITS.
In the case of AIFs, the CSSF clarifies that they can invest directly and indirectly in virtual assets if the units/shares of the said AIF are marketed only to well-informed investors.
Can a third-country CASP do reverse solicitation?
MiCAR provides for an exemption of the authorization requirement for third-country firms when a client established or situated in the EU initiates at his/her own exclusive initiative the provision of a crypto-asset service or activity. In this sense, ESMA has clarified when third-country firms are allowed to benefit from this exemption.
ESMA affirms that the solicitation of clients by third-country firms should be understood broadly2 (i.e., it must include the promotion, advertisement or offer of crypto-asset services or activities by any means including, internet commercials, brochures, phone calls, etc.). A third-country firm will also be considered as the person soliciting the client when the solicitation is carried out by another person/entity acting on behalf of the firm (e.g., influencers, other firms) or having close links to it.
In the case of a person/entity authorized in the EU soliciting clients on behalf of a third-country firm, the latter would still be breaching MiCAR even if it is part of the same group of the authorized entity. The idea is that a company is not allowed to use/benefit from the authorization of another company.
MiCAR, however, allows third-country firms to market crypto-assets/crypto-asset services or activities to clients as long as the crypto-assets or crypto-asset services or activities:
- Are of the same type3 as those the client acquired at his/her own exclusive initiative and
- Are offered in the context of the original transaction4
In addition, on 2 February 2024, ESMA published some FAQs providing clarifications on inducements and passporting rights under MiCAR.
- Inducements: CASPs are prohibited from receiving remuneration, discount or non-monetary benefit in return for routing orders received from clients when receiving and transmitting orders on behalf of clients as well as when executing orders on behalf of clients.
- Passporting rights for entities benefitting from grandfathering: Entities benefitting from grandfathering do not benefit from an EU passport. They may provide cross-border services/activities only if the entity complies with the relevant legislation applicable in both the home and host Member States. In addition, if grandfathering is not (or no longer) applicable in a Member State, these entities, which are benefitting from grandfathering, are prohibited from providing cross-border activities/services in the aforementioned State.
It is worth noting that if an entity offering crypto services was not providing such services (or did not exist as a legal entity) under any applicable laws before 30 December 2024, it will not benefit from grandfathering, and will therefore have to apply for authorization under MiCAR.
- MiFID II lists five types of financial instruments, they are: (i) transferable securities, (ii) money market instruments, (iii) units of collective investment undertakings, (iv) various derivative contracts and (v) emission allowances.
- Note that ESMA highlights that a website in an official language of the European Union – and which is not customary in the sphere of international finance – should be a strong indication that a third-country firm is soliciting clients established or located in the Union.
- ESMA provides a non-exhaustive list of pairs of crypto-assets which are not considered as the same type:
- 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
- Asset-referenced tokens based mostly on FIAT currencies (a government-issued currency that is not backed by a commodity such as gold) and asset-referenced tokens having significant crypto-currency ponderations
- Liquid and illiquid crypto-assets
- Crypto-assets other than asset-reference tokens and electronic money tokens with a non-identifiable-offeror and crypto-assets other than asset-reference tokens and electronic money tokens with an identifiable offeror
- ESMA clarifies that a third-country firm is allowed, at the moment of the transaction which started on the client’s own exclusive initiative, to market to the client crypto-assets/services of the same type, but it is not allowed to market the same kind of assets one month later.
Summary
On 29 January 2024, ESMA published two draft guidelines providing clarifications regarding the classification of crypto-assets and the use of reverse solicitation under the Market in Crypto-Assets Regulation (MiCAR).