Deciphering the ESMA opinion on MiCAR convergence: broker-dealer models & best execution requirements
At the end of July, ESMA issued an opinion aimed at mitigating regulatory and supervisory risks associated with Multifunction Crypto-asset Intermediaries (MCIs), which are global crypto firms or groups of affiliated firms combining multiple services centred around a trading platform. While not legally binding, the opinion urged NCAs to adopt a harmonised approach in assessing firm applications and subsequent supervision.
The paper ended with a message of intent to applicant firms that should they seek to benefit from jurisdictional variances or regulatory arbitrage, ESMA will use all of its supervisory powers to ensure harmonisation across the EU.
The opinion highlighted several key issues embedded within MiCAR that are of importance to applicant firms, detailing compliance requirements on best execution, reverse solicitation and conflicts of interest. However, some questions remain unanswered. Firms are still unclear on what is expected by NCAs to fully comply with broker-trader models and continue to struggle with models that achieve and evidence best execution requirements. This challenge is further complicated by the fact that, in most cases, the liquidity conditions to meet best price requirements for customers are found outside of the EU, where most of the global liquidity on trading venues is located.
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Deciphering the ESMA opinion on MiCAR convergence: broker-dealer models & best execution requirements
ESMA’s opinion refers to the practices observed following Brexit, when some UK firms attempted to bypass EU oversight by setting up letterbox companies within the EU to retain access to the Single Market, while primarily continuing their operations from the UK. ESMA aims to prevent such tactics under the context of MiCAR by ensuring that firms genuinely contribute to, and engage with, the EU market.
Building on this approach, ESMA plans to implement coordinated oversight through NCAs across all EU Member States. The strategy aims to promote a collaborative and consistent application of regulatory standards. By harmonising the approach to enforcement all NCAs will adhere to a unified set of standards, thereby enhancing enforcement consistency and reducing opportunities for regulatory arbitrage. These measures are designed to eliminate 'Crypto Playgrounds' — jurisdictions that have previously exploited regulatory leniencies, by levelling the playing field and ensuring that all firms, regardless of their location, adhere to rigorous and uniform regulatory requirements.
ESMA’s emphasis on ‘substance’ over ‘shell presence’ underscores its commitment to ensuring that firms operating within the EU engage in genuine economic activities rather than merely establishing a minimal footprint to exploit regulatory leniencies.
Firms are mandated to demonstrate substantial criteria:
Real economic activity,
Adequate EU staffing, and
Jurisdictional decision-making.
However, despite EMSA’s focus on consistency and harmonisation across jurisdictions, it remains an ‘opinion’ and still extends discretion to NCAs to assess firms on a case-by-case basis, so how this consistency is implemented in practice remains uncertain.
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