On 29 January 2024, the European Securities and Markets Authority (ESMA) published a consultation paper on the draft guidelines on reverse solicitation under the Markets in Crypto Assets Regulation (MiCA) (the Consultation Paper). ESMA invites stakeholder feedback by 29 April 2024.
What is reverse solicitation?
Broadly, a firm that intends to conduct investment activities or provide investment services in a jurisdiction needs a licence to do so, unless it benefits from an exemption. This applies even to firms that are not situated within that jurisdiction but want to provide investment activities or services on a cross-border basis. Regulators are typically keen to regulate such in-bound activities as otherwise an uneven playing field would be created – firms situated within the jurisdiction would be subjected to requirements that those outside the jurisdiction would not. However, the reverse solicitation exemption permits a narrow exemption. The basic idea is that the regulators of a jurisdiction can permit an overseas firm to conduct investment activities with, and provide investment services to, clients in that jurisdiction without needing a licence there if such firm has not solicited or marketed those activities or services.
Reverse solicitation exemptions are quite common in financial services legislation but can be very different in their breadth and usefulness. In EU financial services legislation, the most well-known reverse solicitation exemption is article 42 of Directive 2015/65/EU (MiFID II), which requires member states to ensure that where a retail or professional client established or situated in the EU “initiates at its own exclusive initiative” the provision of an investment service or activity, that firm does not need to be authorised as a result.
While this exemption was required to be implemented in each member state, in our experience it has generally been interpreted restrictively, albeit with some variations in approach across member states. ESMA warnings regarding Brexit have served to remind member states that the exemption is intended to operate in a very narrow set of circumstances (see ESMA News Article on Reverse Solicitation, for example).
The fact that ESMA has chosen to publish detailed guidance on the intended scope of this exemption in the context of MiCA is part of a wider trend to prevent abuse of what is clearly intended to operate as a very narrow exemption from the requirement to be licensed.
MiCA
Regulation (EU) 2023/1114 (MiCA) was published in the Official Journal of the European Union on 9 June 2023, and sets out a comprehensive framework for the regulation and supervision of crypto-assets, crypto-asset service providers (CASPs) and services related to crypto-assets that are not already covered under existing EU legislation. MiCA requires CASPs to be authorised or registered in the EU and to comply with various rules on capital, governance, the conduct of business, consumer protection, the prevention of market abuse and supervision. MiCA also sets out the conditions under which third-country (non-EU) firms can provide crypto-asset services or activities to EU clients.
ESMA is empowered under MiCA to develop technical standards and guidelines specifying certain provisions of the regulation. The Consultation Paper sets out ESMA’s proposed guidance on reverse solicitation as part of ESMA’s mandate to issue guidance for national competent authorities (NCAs) and market participants on the implementation of MiCA by 30 December 2024.
Reverse solicitation exemption
ESMA has emphasised that article 61 of MiCA, often called the “reverse solicitation exemption”, should correctly be understood as a prohibition on third-country firms from soliciting clients established or situated in the EU, except in circumstances where the crypto-asset service is requested at the client’s own exclusive initiative. The exemption is similar to that in article 42 of MiFID II save that the MiCA exemption forms part of a regulation and therefore has direct effect, whereas the MiFID II exemption required implementation by member states. It is worth noting that the MiCA exemption does not apply to EU-based firms that are subject to MiCA authorisation or notification requirements. ESMA has previously emphasised that the reverse solicitation exemption should be understood as very narrowly framed, and as such should not be assumed or exploited to circumvent MiCA.
The Consultation Paper forms part of ESMA’s mandate under article 61(3) of MiCA to issue guidelines: (i) specifying the situations in which a third-country firm is deemed to solicit EU clients and (ii) on supervision practices to detect and prevent circumvention of the reverse solicitation exemption (the Draft Guidelines). The Draft Guidelines intend to foster convergence and consistent supervision in the crypto-asset market and to protect EU investors and MiCA-compliant crypto-asset service providers from undue incursions by third-country and non-MiCA compliant entities.
(a) Solicitation of clients by third-country firms
The Draft Guidelines propose a broad and technology-neutral interpretation of the term “solicitation”, which includes any promotion, advertisement or offer of crypto-asset services to EU clients or prospective clients by any means, including online platforms, social media, mobile applications, banner advertisements, sponsorship deals, and any other physical or electronic means. The solicitation may be carried out either by the third-country firm itself or by any other person acting explicitly or implicitly on behalf of the third-country firm, including affiliates such as influencers or other celebrities.
The Draft Guidelines also emphasise that the reverse solicitation exemption is based on the premise that the crypto-asset service or activity is provided at the client’s “own exclusive initiative”, which should be narrowly construed and assessed on the factual circumstances of each case. This cannot be superseded by contractual arrangements or disclaimers. ESMA also specifies that the reverse solicitation exemption applies for a limited period of time. For example, if an EU client requests the purchase of a crypto-asset, the firm may market to that client crypto-assets of the same “type”, but only in the context of the original transaction, not at another point in the future.
The Draft Guidelines provide some guidance on how to determine whether two crypto-assets or services are of the same “type” for the purpose of the reverse solicitation exemption. The Draft Guidelines state that this should be assessed on a case-by-case basis, taking into account elements such as the type of the crypto-asset or service and the risks attached to it. The Draft Guidelines also provide a non-exhaustive list of pairs of crypto-assets that would not belong to the same type, such as: (i) utility tokens and asset-referenced tokens, (ii) electronic money tokens referencing different official currencies and (iii) crypto-assets based on different technologies.
(b) Supervision practices to prevent the circumvention of the reverse solicitation exemption
The guidelines also suggest some supervisory practices that NCAs may use to monitor the activities of third-country firms in the EU and to prevent the abuse of the reverse solicitation exemption. Such supervisory practices include the monitoring of marketing activities targeting EU-based clients, conducting consumer surveys, cooperating with other authorities, and putting in place effective systems for handling client complaints and whistleblowing.
(c) Implications and next steps
The Draft Guidelines, if adopted, will have significant implications for third-country firms that provide or intend to provide crypto-asset services or activities to EU clients. Third-country firms will have to ensure that they do not solicit EU clients by any means, and that they only rely on the reverse solicitation exemption in very limited circumstances. Third-country firms will also have to keep records of any EU clients that have solicited services and the origin of the request for the service or activity. Third-country firms that do not comply with the Draft Guidelines may face enforcement actions from NCAs or ESMA, as well as reputational risks and potential claims from clients.
Clients that are EU-based firms providing or intending to provide crypto-asset services or activities should note that the reverse solicitation exemption does not apply to them and that they are subject to MiCA authorisation and notification requirements. They should also avoid redirecting clients to third-country firms that are not authorised under MiCA or facilitating their solicitation activities in the EU.
Clients that are EU-based investors or prospective investors in crypto-assets or crypto-asset services should be cautious of third-country firms relying on the reverse solicitation exemption. They should verify the identity and the regulatory status of the third-country firm before engaging in any crypto-asset service or activity with them. They should also be aware that they may not benefit from the full rights and protections afforded by MiCA if they initiate the provision of a crypto-asset service or activity by a third-country firm at their own exclusive initiative.
ESMA invites comments from all interested stakeholders, especially CASPs, financial entities dealing with crypto-assets and other stakeholders that have an interest in crypto-assets, on the Draft Guidelines and the specific questions summarised in the Consultation Paper. The consultation is open until 29 April 2024 and ESMA expects to publish a final report by the end of 2024.
In-depth 2024-043
