This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.

Freshfields TQ

Technology quotient - the ability of an individual, team or organization to harness the power of technology

| 3 minutes read

The prisoner’s dilemma in MiCA – ESMA’s strong push for supervisory convergence

The day on which the EU’s comprehensive set of crypto-regulation rules, the Market in Crypto-Asset Regulation (MiCA) will enter into force, is still more than one year ahead. With the exception of the rules on stablecoins (referenced in MiCA as “asset-referenced tokens” and “e-money tokens”), the provisions and requirements of MiCA will generally apply on 30 December 2024. 

The European Securities and Markets Agency (ESMA) is currently tasked with preparing more than a dozen regulatory and technical standards as well as guidelines. These rules will determine how the often principle-based rules in MiCA will be applied by market participants and national competent authorities. The myriad of often very technical provisions follows the objective to apply MiCA in a harmonised manner. This serves a general objective of MiCA, i.e. to provide a level playing field for crypto-asset offerings and services and to end the current fragmented regulatory landscape in the Union.

However, two recent statements by ESMA provide evidence that ESMA considers MiCA to be an imperfect tool to reach that objective in due course. On 17 October, ESMA issued a statement on clarifying the timeline for MiCA and encourages market participants to start preparing the transition to MiCA. One the same day, ESMA sent a letter to the ECOFIN council, in which the economic and finance ministers from all member states meet. In both documents, ESMA explains their aspirations to avoid “forum shopping” in member states and ensure investor protection throughout the Union.

The grandfathering clause’s potential to distort the level plying field

ESMA’s main concern is a broad “grandfathering clause” that has been adopted (Article 143(3) MiCA):

Crypto-asset service providers that provided their services in accordance with applicable law before 30 December 2024, may continue to do so until 1 July 2026 or until they are granted or refused an authorisation pursuant to Article 63, whichever is sooner.

Member States may decide not to apply the transitional regime for crypto-asset service providers provided for in the first subparagraph or to reduce its duration where they consider that their national regulatory framework applicable before 30 December 2024 is less strict than this Regulation.

If this option is heavily relied on by member states, it could result in MiCA applying to many market participants not by the end of December 2024, but only on 1 July 2026. In fact, member states may be inclined to keep the maximum transition period in order to not put their domestic crypto-asset service providers to a competitive disadvantage. On the other hand, the optimal result (a harmonised market with sufficient investor protection) could be better reached if MiCA applied as soon as possible in all member states. There seems to be a prisoners’ dilemma in MiCA.

ESMA therefore invites Member States to consider reducing the duration of the grandfathering clause at a maximum of twelve months for entities that have not “been through a fully-fledged authorisation process” and are not yet “subject to effective supervision.” This would presumably render most of the current ca. 2.000 crypto-asset service providers ineligible that ESMA has counted in its recent stocktake. Most of these crypto-asset providers will presumably be registered in accordance with Article 47(1) AMLD, but not treated similar to other financial institutions so that their national regulatory framework is expectedly “less strict” than MiCA.

A “very narrow” reverse solicitation exemption

ESMA also addresses license obligations for crypto-asset service providers in third-countries, which provide their services without a local presence into the Union. These service providers fall within the scope of the license requirement insofar they “solicit” EU clients. MiCA exempts these service providers from the license requirement only if clients initiate the provision of a crypto-asset service or activity at their own exclusive initiative. Third-country firms may have hoped that this exemption could help them to avoid a license and a local presence in the Union on a broader scale. However, ESMA discourages third-country firms to make use of that exemption for their businesses and confirms that “it should be understood as very narrowly framed” and that “reverse solicitation” cannot be “assumed, nor exploited to circumvent MiCA.” Additional guidance will be issued to ensure that “reverse solicitation” is applied similarly by the member states, but it can already be expected that there will not be much leeway for market participants.


To summarise, ESMA has apparently acknowledged that their role in fostering harmonised crypto-markets should not be limited to the function as standard-setter and supervisor, but that there are circumstances beyond the mere adoption and application of law that need to be shaped in a more favourable way to reach that objective. European crypto-asset service providers should monitor these developments carefully and not be too convinced that they can rely on their existing set of permissions until July 2026. Instead, they may consider transitioning to MiCA before that date.


blockchain, cryptocurrency, europe, financial institutions, financing and capital markets, fintech, regulatory, smart contracts