ESMA’s new guidelines: Increased regulation of crypto assets and reverse solicitation

Background on the new guidelines

ESMA has received advice from the Securities and Markets Stakeholder Group (SMSG) concerning two central areas under the Markets in Crypto Assets (MiCA) regulation:

1. Reverse Solicitation
2. Classification of Crypto Assets as Financial Instruments

SMSG's advice supports ESMA's restrictive approach on these topics to promote investor protection and fair competition.

1. Reverse Solicitation

Reverse solicitation, also known as reverse marketing, is an exception that allows companies from third countries to offer crypto assets to EU investors. This is only permitted if the service is solely initiated by the customer, meaning that the customer, on their own initiative and without prior marketing by the service provider, approaches the third-country company to receive services from it.

SMSG supports ESMA's restrictive approach to this exception to ensure investor protection while preventing unfair competition for EU-based companies from third countries.

SMSG highlights the following key points related to the use of reverse solicitation:

• Strict time limitation: SMSG supports a strict time limitation for applying the reverse solicitation exception concerning the provision or marketing of the same type of crypto asset, crypto asset service, or activity based on the initial transaction. According to SMSG, such services should be provided within a short time frame, and they suggest a reasonable limit of 10 days after the initial customer request.
• Same type of crypto assets: SMSG particularly emphasizes the importance of clearly defining "same type" of crypto assets to avoid circumventing MiCA, and that the concept of crypto assets of 'the same type' should be very narrowly defined. Specifically, the guideline is that the third-country company claiming the reverse solicitation exception must not offer the customer additional crypto assets or services, even if they are of the same type as those initially requested, unless they are provided in connection with the original transaction.

SMSG also notes that referring to types of crypto assets (including utility tokens, asset-backed tokens, and e-money tokens), as defined in MiCA, may be inappropriate since certain crypto assets, despite being different, could still be classified as 'the same type' under MiCA rules. Therefore, it is crucial for ESMA to carefully assess whether two crypto assets (i) are of the same type and (ii) have the same risk profile/exposure, including the technological basis for applying the exception.

• Additional measures: SMSG proposes several measures to strengthen the restrictive approach to reverse solicitation, including sharing information about non-cooperative third-country providers and monitoring crypto asset offerings rather than just providers.

2. Classification of crypto assets as financial instruments

MiCA does not regulate crypto assets that qualify as financial instruments under MiFID II. SMSG supports the goal of creating high legal certainty around this classification to ensure a uniform regulatory framework across the EU.

In this context, SMSG highlights the following:

• Legal certainty: SMSG supports the need for a common definition of financial instruments across the EU to eliminate national differences and ensure consistent regulation.
• Technology neutrality and substance-over-Form: The classification of crypto assets should be based on the rights and obligations that define their legal and economic profiles, regardless of the technology used. Additionally, SMSG supports a substance-over-form approach to legal classification to enhance investor protection.
• Regulatory consequences: Classification as a financial instrument entails extensive regulatory consequences, including the application of 'passporting' opportunities and investor protection rules under MiFID II. For example, discrepancies in assessments where home and host countries' competent authorities have differing views on whether a crypto asset should be classified as a financial instrument.
• Indirect exposure: SMSG highlights the importance of covering derivatives and structured products that involve exposure to crypto assets, even if the underlying assets themselves do not qualify as financial instruments.
• Hybrid crypto assets: For hybrid crypto assets that combine multiple characteristics, classification as a financial instrument should take precedence to ensure consistent regulation.

SMSG's advice to ESMA supports a restrictive and clear regulation of reverse solicitation and the classification of crypto assets. This will strengthen investor protection and ensure fair competition across the EU. By implementing these recommendations, ESMA can ensure that the crypto asset market operates within a robust and consistent regulatory framework.

LES' comments

At LES, we acknowledge and support the importance of a restrictive approach to reverse solicitation to ensure that EU-based crypto asset service providers are not disadvantaged from a competitive perspective. Furthermore, proper segregation of crypto assets and financial instruments is crucial as the regulatory frameworks depend on it. It is essential to ensure that crypto assets and financial instruments are treated separately to maintain clarity and compliance with applicable legislation. We look forward to seeing the final version of ESMA's guidelines based on the comments received from SMSG.

Have questions?

If you have any questions or need further information about reverse solicitation or the classification of crypto assets, feel free to contact Partner Kim Høibye, Associate Partner Jakub Zakrzewski, or Assistant Attorney Honas Kader.