European Union watchdog warns of offshore crypto risks under MiCA regulation

The European Securities and Markets Authority has warned cryptocurrency companies operating globally about the possible hazards of pursuing MiCA authorization.

The European Securities and Markets Authority (ESMA), the regulatory body in charge of overseeing the EU’s financial markets, has issued a new Opinion outlining the significant risks posed by global crypto firms seeking partial authorization under the Markets in Crypto Assets (MiCA) regulation while conducting significant operations offshore. On July 31, the ESMA issued its MiCA-related opinion statement, as it has done previously following the implementation of new industry-wide legislation (for example, in the aftermath of Brexit).

ESMA’s most recent warning focuses on the complex organizational structures of many global crypto businesses, which are known to employ EU-authorized brokers to route orders to execution venues located outside the EU, typically in offshore jurisdictions. According to the EU markets watchdog, this technique has the potential to undermine consumer protection and create an unequal playing field, which is unfavorable to EU-based execution sites.

Complex structures and consumer risks

To address these issues, ESMA has issued an Opinion urging National Competent Authorities (NCAs) in individual EU member states to closely scrutinize these global corporations’ business models during the authorisation process.

According to ESMA, cryptocurrency execution venues are critical to the overall performance of the crypto-asset ecosystem. According to the Opinion, this might resemble 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.”

It also emphasizes the significance of conducting a thorough, case-by-case examination for enterprises seeking MiCA authorization. ESMA has specified certain conditions for these firms to meet, such as guaranteeing the best execution techniques, effective conflict of interest management, and preserving their duty to operate in the best interests of their clients. Furthermore, organizations must follow strict criteria for the storage and administration of crypto assets on behalf of their clients.

MiCA in action

Along with its Opinion, ESMA issued a Final Report under the MiCA framework on July 3, outlining eight draft technical standards aimed at improving transparency and clarity for both retail investors and crypto-asset service providers. These standards address a variety of issues, including sustainability indicators, business continuity plans for CASPs, trade transparency, order book forms, record-keeping protocols, and the readability of white papers. since the MiCA rule went into effect in June 2023, EU authorities have been vigilant in implementing the core requirements of the legislation, while also attempting to clarify any compliance problems that businesses may have.mKey market players have also reacted: Italy’s central bank announced that it will share how it envisions the country’s MiCA application, while crypto exchanges such as OKX are choosing EU locations to serve as MiCA hubs, allowing them to navigate regulatory infrastructure for expanded EU cryptocurrency services.

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