MiCAR and Non-EU CASPs – How Can Crypto Service Providers from Third Countries Do Business in Europe?

The European market is also interesting for crypto service providers that are not based in the European Union. Market-leading crypto trading venues from the US or Asia in particular cannot afford not to offer their services to European customers if they do not want to lose their dominant position in the global crypto market in the future. Against this background, crypto service providers from the USA and Asia, but also from Switzerland and the UK, are faced with the question of which opportunities arise for them to be able to offer their crypto services to European customers in the future under MiCAR. In the summer of this year, the European Securities and Markets Authority (ESMA) commented on this topic and further narrowed down the options for crypto exchanges from third countries in particular. Unless a pure reverse solicitation business is to be conducted, in which the crypto service provider must not take any initiative to initiate a business relationship, ESMA recommends to the competent supervisory authorities of the EU member states – in Germany BaFin – that trading platforms for crypto assets from third countries should be required to establish independent European companies under MiCAR, apply for MiCAR authorization with these companies and then run the entire European business through these companies. It shall not be allowed that crypto services be offered in such a way that the European entity merely acts as an intermediary between European customers and companies from a country outside the European Union and the actual service is ultimately provided outside the EU.

MiCAR License Not for Mere Brokerage Entities of Crypto Service Providers from Third Countries

According to the MiCAR regulations, only applicants from the EU that are based in the European Union can receive authorization for crypto asset services. In this way, the legislator aims to ensure that crypto services in Europe can only be provided in compliance with the MiCAR rules. In this respect, ESMA sees the risk that crypto service providers from third countries could set up a mere shell company in Europe in order to use this company to apply for MiCAR authorization for brokerage services such as the execution of orders for crypto assets for clients or the acceptance and transmission of orders for crypto assets for clients. This company would then broker or transmit business with European clients to a trading venue for crypto assets for clients operating outside the scope of MiCAR once the requested MiCAR authorization has been granted. The strict compliance obligations for trading platforms for crypto assets under MiCAR could thus be circumvented, which in ESMA’s opinion would have significant disadvantages for consumer protection in the European Union’s crypto market. ESMA therefore advises BaFin and the competent supervisory authorities to examine in the MiCAR authorization procedure whether such a constellation exists and, if necessary, not to grant the requested authorization.

ESMA Advises Careful Case-by-Case Examination and Cites Indications of Unlawful Client Solicitation

Ultimately, ESMA advises the competent national supervisory authorities, including BaFin, to carry out a careful case-by-case examination to clarify whether a case constellation should ultimately be interpreted in such a way that crypto services subject to authorization under MiCAR are ultimately offered to European clients from a third country. However, it must be taken into account in this examination that MiCAR itself does not prohibit crypto service providers from executing customer orders on trading platforms or other traders in third countries. Only if the overall design suggests that the provider from the third country is targeting European customers in violation of the MiCAR authorization requirements in order to circumvent the strict supervisory obligations of MiCAR should, in ESMA’s opinion, a refusal of authorization be considered. Even if it is always a case-by-case assessment, ESMA formulates a number of constellations that may indicate an unlawful arrangement in individual cases. In particular, competent national supervisory authorities should examine whether a broker authorized in the EU systematically routes client orders to a company outside the EU for execution. It should also be taken into account whether an EU broker analyzes client orders before forwarding them and checks whether other suitable execution venues could be considered. According to ESMA, a further indication may exist if an EU broker uses the brand of a non-EU provider to attract clients, provided that it is difficult for clients to differentiate that the broker’s services are being used and not those of the non-EU provider. Finally, according to ESMA, it is an indication of an abusive arrangement if the broker authorized in the EU receives remuneration for its services that is not in line with the market and is too low.

Attorney Lutz Auffenberg, LL.M. (London)

I.  https://fin-law.de

E. info@fin-law.de

The lawyer responsible for the application for MiCAR authorization and opportunities for crypto service providers from third countries to enter the European market in our law firm is Attorney Lutz Auffenberg, LL.M. (London).