Response: MiCA: Three implementation issues to watch

10 July 2023

Flow Traders’ view on the upcoming level 2 regulation.

The Markets in Crypto-Assets Regulation (MiCA) entered into force on 30 June 2023, and the focus of many participants within the digital assets’ ecosystem has shifted from the legislative to the implementation phase. The first package of consultations on the Regulatory Technical Standards (RTS - the level 2 regulation and guidelines) from the European Supervisory Authorities and National Competent Authorities is expected to be published in July 2023, followed by two subsequent rounds of consultation with market participants. Once MiCA and its RTSs apply from December 2024, the European Union will be the first jurisdiction to implement digital assets regulation on a large scale.

As a market maker in the digital assets’ ecosystem, holding a crypto registration with the Dutch Central Bank (DNB), Flow Traders welcomes regulation that creates a level playing field and sets proportionate requirements for this specific asset class. To further develop this ecosystem and bring it to a new level of maturity, a broad, inclusive, and market-driven consultation process is required. An open point when it comes to MiCA is whether it can live up to the high expectations of delivering regulation that will foster and enable the required innovation to continue the evolution of the digital asset towards a resilient and reliable market.

Flow Traders has identified three critical topics when it comes to MiCA that we believe will be significant in applying the regulation successfully, as well as ensuring greater transparency and further development of the competitive European digital assets market:  During the implementation of MiCA all participants should consider the global digital assets landscape and the different legislative approaches across jurisdictions that also want to attract regulated digital asset players. Disregarding these factor increases the risk of creating competitive disadvantages for EU market participants compared to their non-EU peers.

The three critical topics are:

(I) reverse solicitation, (ii) pre- and post-trade transparency and (iii) opportunities arising of the use of blockchain technology.

Reverse solicitation - under MiCA, ESMA is mandated with providing guidance on the approach to take regarding the definition of solicitation in the EU. The stakes regarding this exemption are high as a too soft approach could potentially create a loophole within the regulation and create an unlevel playing field for market participants licensed in the EU. Conversely a strict approach should be communicated well in advance in order for market participants to organize their structure and licensing processes accordingly.

The question arises whether ESMA’s previous approach to reverse solicitation under MiFID will be followed and if so, whether this would provide sufficient certainty for market participants. Given the cross-border nature of digital assets, we expect clear, practical guidance from ESMA on this exemption, addressing current marketing practices.

Pre- and post-trade transparency - merely replicating the MiFID/R obligations would have consequences for market makers trying to maintain liquidity on EU-platforms. Non-EU platforms lacking these transparency requirements could use this to their benefit and offer different trading opportunities pulling flow and liquidity out of the EU. Given that a bespoke legislative instrument was chosen to regulate this new market, we believe that it should implement a tailor-made and flexible approach regarding transparency.

The use of blockchain technology brings many opportunities for market participants as well as for supervisory authorities. A future in which Regulatory Technology (RegTech) provides the opportunity for regulatory bodies to innovate their daily supervisory activities should be embraced in an early stage of the implementation process. We believe that, similarly to the DLT Pilot Regime, the level 2 of MiCA should provide flexibility in the reporting framework to allow testing of more efficient reporting solutions, for example where the regulator plays an active role in accessing the data they require for supervision.

Overall, we are confident MiCA will bring greater transparency, protection, and resilience to the digital assets’ ecosystem. However, achieving these benefits is a matter of thorough and market-wide cooperation involving all relevant stakeholders.