Europe’s MiCA regulations require crypto exchanges and other providers active in the European Union (EU) to get a license. Take this scenario. I’m based in the EU, and a friend of mine outside of Europe uses a Canadian cryptocurrency exchange they think is great. They are so keen on it, that I decide to sign up. This exchange, let’s call them fabDAM, has not registered as a crypto asset service provider (CASP) under Europe’s MiCA regulations. That’s because it isn’t interested in targeting Europeans, so it doesn’t conduct marketing in Europe.
So what should happen next? Should fabDAM geo-block all EU website visitors? Or should it reject my application? Or is it okay to allow me to sign up?
MiCA regulations cover this situation explicitly in Article 61 (see below). It says I can sign up as a customer, provided fabDAM is not part of a group that conducts marketing or ‘solicits’ in the EU. That’s because I approached fabDAM at my “own exclusive initiative“.
However, fabDAM has to be careful, because it still can’t market ‘new’ types crypto-assets or services to me. (We’ll come back to that).
Last week European Securities and Markets Authority (ESMA) published guidance on EU residents signing up to foreign platforms, which is referred to as the ‘reverse solicitation exemption’.
Crypto lawyer Jonathan Galea of BCAS accused ESMA of over-reach, because it suggests that non EU providers should geo-block or reject applications. However, ESMA’s guidance only made that suggestion under certain circumstances. The issue is those circumstances are very broad.
Based on this guidance, there’s a good chance that foreign crypto providers will block EU clients, because it’s just too much of a hassle. That limits EU consumer options, whereas Article 61 seemed intended to prevent this.
ESMA’s guidance re third country crypto providers
Here’s what ESMA says:
ESMA acknowledges that there are circumstances where third-country firms might also be considered to be soliciting EU clients, though not exclusively. In such cases, the third country firm may take precautionary measures to make sure that it does not breach the authorisation requirements under MiCA by refraining from providing any crypto-asset services or activities to EU clients. To do so, the third-country firm may, for instance, not accept any new EU clients’ accounts or geo-block the means of access to its cryptoasset services or activities.
It makes sense for the fabDAM exchange to avoid attending events in Europe, and if running internet ads, to request that EU jurisdictions should be excluded. The challenge with ESMA’s guidance is that it’s so broad, that if fabDAM does pretty much any type of marketing which could inadvertently reach an EU resident, it would have to block EU residents. For example, if it does any of these things (not particularly targeting EU residents): issues a press release or hires an influencer that posts on X or Youtube. About the only thing that seems okay is for fabDAM to have a website.
There are very few companies in the crypto sphere that are low key in terms of marketing, but even they would probably fall foul of these requirements.
ESMA states in the guidance that, “The client’s own exclusive initiative should be construed narrowly”, but is it so narrow that it’s impractical in the internet age?
To block or not to block?
In other words, to Mr Galea’s point, this pretty much means any non EU crypto provider would have to geo-block the EU or reject EU applications, which is not the regulation’s intent. He wrote on Linkedin:
“No reasonable person would agree that third-country firms should geo-block the EU and disallow any new users from the EU from signing up in order to fall within the reverse solicitation exemption – because the very essence of that exemption must allow for the possibility of a client registering for a service at their own exclusive initiative.”
Peter Kerstens, the European Commission adviser involved in drafting MiCA, chimed in:
“Put simply: If you are a non-EU crypto service provider and you are not soliciting business from the EU, Mica simply does not apply to you. What amounts to solicitation is a question of facts and circumstances. But if you are a crypto service provider in a foreign country, minding your own business and not doing anything to attract business from the EU, and some EU person walks into your virtual crypto shop and wants to buy your wares, there is nothing EU authorities can or should do about this.”
He also noted that for any non-EU crypto service providers, it will be tricky for the EU to take enforcement action if you have no presence or activities in Europe.
Post signup, it’s also harsh
The guidance also covers the situation where somehow an EU resident manages to sign up to a non EU provider at their own initiative. Article 61 says that the crypto provider should not subsequently market different types of assets or services to EU resident.
Had I not read ESMA’s guidance, this is what I might expect: After signup, the crypto provider should probably avoid targeting me with most new promotions. So I shouldn’t see website popups or get email promotions for other types of assets or services.
But given it’s at my own initiative, I’d still expect to be able to trade stuff on the exchange, provided the exchange doesn’t promote to me. Regarding ‘types’ of assets, I’d probably differentiate between stablecoins, crypto and NFTs.
ESMA has a different take. It construes ‘types’ very narrowly, differentiating between different stablecoin currencies (eg. USD v Euro), blockchains, stablecoins versus utility tokens and more. It probably also considers marketing more narrowly, but is a little less clear on that point. Both are important, but the marketing is far more so.
If I’m reading the guidance correctly, if I sign up and buy a US dollar stablecoin, the only thing I can do after signup is buy other US dollar stablecoins on the same blockchain! I can’t buy a dollar stablecoin on a different blockchain, I can’t buy a euro stablecoin, and I definitely can’t buy ETH or Bitcoin. I’m not even sure I can buy a different US dollar stablecoin in the same blockchain.
If I’m a client, what counts as ‘my initiative’?
Most crypto exchanges show all trading pairs to users. Technically, that’s an “offer”. Is that classified as them marketing to me? Is marketing defined as an explicit promotion or simply allowing me to see the trading pairs?
If I’m not allowed to see the trading pairs, do I have to email the exchange to allow me to view a trading pair for that to be classed as my own initiative? That would be impractical. (Update: Mr Galea told us that displaying trading pairs would not be considered as marketing, only directly targeted promotions. So I don’t have to ask the exchange to let me view a trading pair.)
Here are the relevant clauses from the ESMA guidance:
“The said provision should thus be construed as not permitting third-country firms to offer the client further crypto-assets or crypto-asset services or activities, even if such services or activities are of the same type as the one(s) originally requested by the client, unless they are offered in the context of the original transaction.”
We might be being too harsh on ESMA because we’re less clear regarding ‘own initiative’ when it comes to signed up clients:
“Third-country firms should be able to provide records tracking the relationship with the client and, in particular, whether the client has taken the initiative to receive crypto asset services with respect to a new product.”
Stepping back, there are two points of view. From ESMA’s perspective, there are doubtless many non-EU crypto exchanges that will try to game the rules. Their viewpoint should be recognized.
At the same time, there are some knowledgeable EU residents, that may want to be able to access non-EU exchanges at their own risk. Article 61 catered for this type of person, but ESMA’s guidance appears to largely shut down this option.
When the EU first introduced GDPR, if was incredibly frustrating because EU residents were initially blocked from viewing a ton of foreign websites. It looks like that could happen soon in the crypto sphere.
MiCAR Article 61
Provision of crypto-asset services at the exclusive initiative of the client
1. Where a client established or situated in the Union initiates at its own exclusive initiative, the provision of a crypto-asset service or activity by a third‐country firm, the requirement for authorisation under Article 59 shall not apply to the provision of that crypto-asset service or activity by the third‐country firm to that client, including a relationship specifically relating to the provision of that crypto-asset service or activity.
Without prejudice to intragroup relationships, where a third‐country firm, including through an entity acting on its behalf or having close links with such third‐country firm or any other person acting on behalf of such entity, solicits clients or prospective clients in the Union, regardless of the means of communication used for the solicitation, promotion or advertising in the Union, it shall not be deemed to be a service provided on the client’s own exclusive initiative.
The second subparagraph shall apply notwithstanding any contractual clause or disclaimer purporting to state otherwise, including any clause or disclaimer that the provision of services by a third-country firm is deemed to be a service provided on the client’s own exclusive initiative.
2. A client’s own exclusive initiative as referred to in paragraph 1 of this Article shall not entitle a third‐country firm to market new types of crypto-assets or crypto-asset services to that client.
3. ESMA shall by … [18 months after the date of entry into force of this Regulation] issue guidelines in accordance with Article 16 of Regulation (EU) No 1095/2010 to specify the situations in which a third-country firm is deemed to solicit clients established or situated in the Union. In order to foster convergence and promote consistent supervision in respect of the risk of abuse of this Article, ESMA shall also issue guidelines in accordance with Article 16 of Regulation (EU) No 1095/2010 on supervision practices to detect and prevent circumvention of this Regulation.
The author is not a lawyer. This is not legal advice.
