ESMA guidelines on reverse solicitation under MiCAR

On 29 January 2024, the European Securities and Markets Authority ("ESMA") issued and submitted for consultation draft guidelines on reverse solicitation (“Draft Guidelines”) under the European Markets in Crypto-Assets Regulation (Regulation (EU) 2023/1114 - "MiCAR").

MiCAR represents a significant milestone for the regulation of the crypto sector. A detailed description can be found in our Road to MiCAR.

Article 61(3) MiCAR requires ESMA to issue guidelines by December 2024 specifying the cases in which a third country firm ("third country firm") is deemed to acquire clients established or situated in the European Union. At the same time, the guidelines should address supervisory practice with regard to detecting and preventing the circumvention of the application of MiCAR in context of reverse solicitation.

Reverse Solicitation / Passive Freedom to Provide Services

Article 61(1) MiCAR describes the situation where a customer established or situated in the European Union initiates the provision of a crypto-asset service by a third country firm on its own initiative. In such a case, this third-country firm is not subject to the authorisation requirement for the provision of crypto-asset services. This long-established concept is known as reverse solicitation and is an expression of the freedom to provide requested services (in German: passive Dienstleistungsfreiheit).

MiFID II also recognises the principle of reverse solicitation. Here we have outlined four key lessons from MiFID II reverse solicitation for MiCAR reverse solicitation. These findings are also valid regarding the draft guidelines on reverse solicitation under MiCAR that have been submitted for consultation. In fact, the Draft Guidelines submitted for consultation go beyond the findings from the principle of reverse solicitation known under MiFID II (e.g., specifications on the time period for reverse solicitation).

Back in October 2023, ESMA published an announcement ("ESMA clarifies timeline for MICA and encourages market participants and NCAs to start preparing for the transition") in which it announced its planned implementation of MiCAR. Already in its announcement ESMA made it clear that reverse solicitation is expressly intended to be an exemption. This exemption is to be interpreted very narrowly to prevent the provisions of MiCAR from being circumvented. The aim is to protect investors resident in the EU and MiCAR-compliant crypto-asset service providers from unauthorised entry by non-EU and non-MiCAR-compliant companies.

Consultation Draft of the ESMA Guideline on Reverse Solicitation

The following points in the Draft Guidelines are of particular importance:

Broad interpretation of the term "solicitation" and the person carrying out the solicitation

In view of the fact that crypto assets and crypto services are essentially offered online, the term "solicitation" should be interpreted broadly and expressly include online advertising.

The broad interpretation also applies to persons who solicit customers on behalf of the third country firms. These persons may act both expressly and impliedly on behalf of the third country firms.

Listing of non-comparable crypto assets

In principle, reverse solicitation also includes the case where the customer contacts the third country firms to buy a crypto-asset and the third country firm offers the customer crypto-assets of the same type in the course of this same reverse solicitation activity. This activity is not subject to authorisation in this constellation.

However, it is not immediately clear from the MiCAR what is meant by crypto-assets of the same type, since MICAR does not provide sufficient granularity on the types of crypto-assets. The draft ESMA guidelines contain a non-exhaustive, exemplary list of crypto-asset pairs that are not of the same type, which may be used in the assessment:

• Utility tokens, asset-referenced tokens or e-money tokens;
• Crypto values that are not stored or transferred using the same technology;
• E-money tokens that do not reference the same official currency;
• Asset-backed tokens that are predominantly based on FIAT currencies and asset-backed tokens that are significantly related to cryptocurrencies;
• Liquid and illiquid crypto assets;
• Crypto assets other than asset-backed tokens and e-money tokens with an non-identifiable offeror and crypto assets other than asset-backed tokens and e-money tokens with an identifiable offeror.

Decisive importance of the period for reverse solicitation

Following on from the previous point, however, even the offering of comparable crypto assets is also restricted. Accordingly, the third country firm that fulfils the other requirements of reverse solicitation may not offer any further crypto assets or services if more than one month has passed since the customer's request. This also applies if they are of the same type as those originally requested.

The addition that crypto-assets or services of the same type may still be offered if they are offered in connection with the original transaction ("unless they are offered in the context of the original transaction") appears contradictory. In addition, the term "in the context" is not further defined, which leaves room for interpretation. It is conceivable, for example, that options could be included here.

The significance of contractual agreements or exclusions of liability in relation to categorisation as reverse solicitation

The assessment of whether a provider of crypto assets has solicited a customer or whether the contact was initiated solely by the customer should be a factual assessment. Disclaimers and contractual arrangement shall not mean that the scope of application of MiCAR is excluded.

Consequences of the ESMA Guidelines

The ESMA guidelines paint a picture of what the national and European supervisory authorities will in future regard as circumvention of the MiCAR regulations by third country firms. The short period of one month within which third country firm are allowed to offer crypto-assets of the same type means that the area exempt from the authorisation requirement in which third country firms can operate based on reverse solicitation is significantly restricted.

However, the definition of specific characteristics regarding the understanding of reverse solicitation under MiCAR does not comprehensively lead to a resolution of tensions: for example, the understanding and admissibility of reverse solicitation in the other EU member states is sometimes significantly different to the German understanding. However, the explanations on MiCAR standardise this aspect, at least within the scope of application of MiCAR, which is to be welcomed in this respect.

Comments on the draft ESMA guidelines can be submitted until 29 April 2024.

With the kind support of Franziska Breuer, research assistant, and Apostolos Mitsios, research assistant