On 29 January 2024, the European and Markets Authority ('ESMA') published two Consultation Papers, one on reverse solicitation and the other on the conditions and criteria for the qualification of crypto-assets as financial instruments. This article focuses on the first paper, relating to reverse solicitation.
The Regulation on Markets in Crypto-Assets ('MiCA') was published in the Official Journal of the European Union ('EU') on 9 June 2023. Under MiCA, ESMA was empowered to develop technical standards and guidelines relating to certain provisions under MiCA. ESMA has been mandated to publish the guidelines by 30 December 2024 and they are intended to provide additional clarity to national Competent Authorities ('NCAs') and market on how to comply with the rules – and how to enforce them.
The Consultation paper on reverse solicitation published on 29 January 2024 sets out ESMA's proposals in relation to draft guidelines on reverse solicitation under MiCA. ESMA's aim with the Consultation Paper is to collect views, comments and opinions from stakeholders and market participants on the appropriate implementation of MiCA and, in particular, in relation to the mandates that have to be developed by December 2024.
The so-called "reverse solicitation exemption" refers to the case where the provision of crypto-asset services or activities by a third-country firm is strictly limited under MiCA to cases where such service is initiated at the own exclusive initiative of a client. ESMA emphasises the extremely narrow nature of the exemption and says that its use must be regarded as the exception. As ESMA says, "it cannot be assumed, nor exploited to circumvent MiCA" and measures will be taken by NCAs to prevent its misuse, following the proposed ESMA guidelines. The starting point is, therefore, a prohibition: third-country firms are prohibited from soliciting clients in the EU, unless the crypto-asset service was requested at the own exclusive initiative of the client. The rationale is that clients shall not be excluded from using third-country firms if they choose to do so without having been solicited by such firms.
In the guidelines, ESMA states that the term "solicitation" should be construed in the widest possible way and will include banner advertisements, sponsorship deals and solicitation by any kind of affiliate such as influencers and celebrities. This broad interpretation of the term "solicitation" reflects the fact that crypto-assets and services are essentially offered online.
A broad interpretation is also given to the person soliciting, and may be the third-country firm or any entity or person acting on its behalf. The relationship between the person soliciting and the firm need not be contractual but may be explicit or implicit.
While a very broad interpretation is given to the term "soliciting" and those who may be doing so, a very narrow interpretation is given to the term "on their own exclusive initiative", with the assessment being based upon the specific underlying facts. Contractual arrangements or disclaimers cannot supersede facts to the contrary.
Timing is similarly important when a firm is relying on the exemption. If the firm meets all the conditions set out in MiCA to rely on the exemption, it may only do so for a very short period of time. For example, if an EU client requests a purchase of a crypto-asset, the firm may at this time market crypto-assets of the same "type" to the client, as permitted under MiCA, but may not do so a month later.
The draft guidelines set out a non-exhaustive list of the types of crypto-assets which should not be included as belonging to the same ‘type’. These include utility tokens, asset-references tokens or electronic money tokens; crypto-assets not stored or transferred using the same technology; liquid and illiquid crypto-assets; and electronic money tokens not referencing the same official currency.
The guidelines also provide guidance on the supervisory practices that should be employed in order to detect and prevent the circumvention of the reverse solicitation exemption. NCAs should focus on monitoring online activities or third-country firms, as crypto-assets are almost exclusively offered online. ESMA provides an example of how NCAs should monitor entities targeting clients in the EU. NCAs may search for third-country firms with telephone numbers starting with local country codes or mailing, email or website addresses indicating or hinting at their presence (at least virtually) in the EU, such as having a website with a URL ending with ‘lu’, ‘de’, ‘fr’ and so on.
The draft guidelines require NCAs to work closely with other authorities (national or foreign) that might have insight into whether third-country firms are offering services in the relevant market. Such authorities may include the police and local tax authorities. In addition, NCAs should follow up on complaints from clients or information from whistle-blowers, indicating that a third-country firm might have been soliciting clients in its jurisdiction.
ESMA is inviting comments on its proposals until 29 April 2024. It expects to publish a report based on the feedback received in Q4 2024.