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EU moves to define crypto as financial instruments, tightens rules for non-EU firms

eu-moves-to-define-crypto-as-financial-instruments-tightens-rules-for-non-eu-firms
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EU moves to define crypto as financial instruments, tightens rules for non-EU firms

The European Securities and Markets Authority (ESMA) has recently called for public feedback to help shape the criteria for classifying cryptocurrency assets as financial instruments.

The latest move follows the European Parliament’s passage of the Markets in Crypto Assets (MiCA) regulations in August last year, marking a significant step in the regulation of the crypto market in Europe.

The ESMA’s request for input is part of an ongoing discussion about how to effectively regulate the burgeoning crypto industry in Europe. The authority highlighted the challenge of applying a standardized test to determine what constitutes a financial instrument, given the lack of a “one-size-fits-all” definition in the Markets in Financial Instruments Directive (MiFID).

The ESMA emphasized the importance of considering whether a crypto-asset is a digital representation of value or rights, capable of being transferred and stored using Distributed Ledger Technology (DLT) and whether these represent a right vis-à-vis the issuer.

This regulatory consultation comes at a time when the European crypto market is experiencing significant growth. According to Statista, the market could reach an annual revenue of $18.5 billion by 2028.

A survey by Binance suggests strong optimism about the future of crypto among European citizens, with approximately 73% expressing a positive outlook and nearly 55% using crypto for everyday purchases.

The ESMA’s efforts are part of Europe’s broader initiative to achieve regulatory clarity in the crypto space. Recently, the European Union amended its anti-money laundering laws, expanding the entities required to report crypto transactions exceeding €1,000.

Even before its departure from the EU, the UK had taken steps to regulate crypto, with the Financial Conduct Authority (FCA) classifying crypto as security tokens, e-money tokens, or unregulated tokens based on their characteristics.

Despite the ongoing regulatory debates, major players continue to offer crypto services in the region. For instance, in December 2023, Robinhood launched crypto trading services in the European Union, offering 26 cryptocurrencies to European citizens.

Tightening regulations for non-EU crypto firms

Furthermore, ESMA has introduced a second set of proposed guidelines on regulations for non-EU-based crypto companies, aiming to level the playing field within the European Union.

Under the new proposal, crypto firms outside the EU will face restrictions in directly serving customers within the bloc. These conditions are designed to prevent unfair competition and are part of a broader strategy to regulate the crypto market effectively.

The concept of ‘reverse solicitation,’ where initiation comes from the customer, is a key aspect of these regulations. This approach aligns with other EU financial laws, which have been increasingly tightened, compelling foreign firms to consider establishing branches or subsidiaries within the EU.

ESMA has emphasized that any exemptions allowing non-EU firms to operate within the bloc should be narrowly interpreted and treated as exceptions. The stance is part of a concerted effort to protect EU-based investors and ensure compliance with MiCA regulations. The authority, along with national regulators, is committed to taking all necessary measures to safeguard EU investors from non-compliant entities.

The proposal, which is currently open for public consultation until the end of April, is expected to be finalized by the end of 2024. It explicitly prohibits active business solicitation in the EU by third-country firms, including marketing campaigns within the 27-country bloc.

Additionally, a non-EU firm cannot use any exemption to offer further services beyond the original transaction’s context.