In the course of consultations, rules regarding authorization and potential conflicts of interest for crypto companies have been brought up for discussion.
The European Union’s enactment of the Markets in Crypto Assets (MiCA) law presented new powers upon the European Securities and Markets Authority (ESMA), with the aim of providing specific recommendations on licensing requirements for crypto companies as it was seen of highly necessary to do so.
Within its 160-page consultation, the European Securities and Markets Authority (ESMA) presents suggestions on how cryptocurrency firms are to address user complaints and manage conflicts of interest.
By 2024, when fully implementing MiCA, crypto asset service providers (CASPs) such as wallet providers and exchanges will only require a single license to operate within the 27-nation bloc. The implementation will also establish reserve requirements for stablecoins, which are digital currencies tied to the value of another asset.
ESMA’s decision appears to have been influenced by subsequent reports of poor governance and security within the cryptocurrency sector, including those following the bankruptcy filing of FTX exchange in November 2022. This occurred even though the law had been largely finalized by June 2022.
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The consultation notes that “some of the recent collapses in the crypto world have shown misuse of clients’ funds and crypto-assets.” Additionally, it draws attention to “media reports about hack attacks at CASPs, which have often led to the theft of large amounts of client crypto-assets.” During the consultation, which will end on September 20th, the agency is also looking for confidential information regarding the amount of money cryptocurrency companies expect to make, the number of white papers those companies have, and whether or not those companies use on-chain and off-chain trading.
ESMA announced that they will conduct another round of consultations in October, with the final round focusing on long-term viability and accurate record-keeping and scheduled for the beginning of 2024. The consultations will explore the determination of when crypto is considered a security and address the provision of services by companies based outside the EU-to-EU customers.
The document states that applicants must demonstrate that they store customers’ funds and cryptocurrency in separate locations and do not use them for the company’s own account. Additionally, they must explain how they ensure the security of their information and communications technology system, as well as their distributed ledger technology.
If a company executes orders for clients while also operating a trading platform or if an employee has access to confidential information about the issuer of a cryptocurrency asset owned by the company, the company must proactively identify and address any potential conflicts of interest between its clients or with its clients.
On the same day, the EBA, the counterpart for banks to the ESMA, urged stablecoin issuers to prepare for MiCA rules to avoid a cliff-edge in June 2024 when new regulations for fiat-backed cryptocurrencies will come into effect.