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Freshfields TQ

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

| 3 minutes read

Protecting clients from foreign crypto firms - ESMA consults on Guidelines on Reverse Solicitation

In the area of crypto regulation, two opposite forces currently collide. On the one hand, the European regulatory framework, MiCA (or MiCAR), which is expected to protect European consumers from fraudulent crypto service providers by setting high regulatory standards for crypto-asset services. On the other hand, the inherently global nature of crypto-assets and their offering online.

The European Securities and Markets Authority (ESMA) is striving to extend the scope of MiCA as far as possible. For this reason, ESMA has already previously emphasised that it interprets “reverse solicitation” as the only exception to the licensing requirement “very narrowly”. The reverse solicitation exemption states that a license is not required for a third‐country firm as long as clients request its crypto-asset services at their own exclusive initiative.

This trend carries over into ESMA’s new consultation on Guidelines on Reverse Solicitation. The consultation includes a few remarkable statements by ESMA that go beyond what is known from their Q&As on reverse solicitation under MiFID, and that we summarise in this brief blog:

  1. (Active) solicitation is understood beyond what one would actually expect to fall within the meaning of the term. It does not only include traditional means of advertising including “social media platforms or mobile applications.” The draft includes less obvious activities such as “invitations to fill in a response form or to follow a training course.” The consultation also seems to prohibit advertising that is not targeted towards offering a specific service but used for brand-building. To this end, “offers of a general nature and addressed to the public (with a broad and large reach) such as, for instance, brand advertisements by way of sponsorship deals” would be considered solicitation.
  2. Solicitation by third parties will be attributed to a third country firm. This explicitly includes influencers and other celebrities that, e.g. direct EU clients to the website of the firm, offer promotional deals or display the firm logo. ESMA also suggests that the underlying cooperation does not require to be a contractual relationship and may be “explicit and implicit.” Here, ESMA seems to (over-)stretch the boundaries of what activities of third parties can be attributed to a third country firm. It needs to be ensured that the result of such broad interpretation is not a de-facto obligation of third country firm to prevent any positively connotated statement and activity by influencers and other third parties.
  3. EU firms (licensed or not) may not redirect their clients to unregulated third country firms. In a group context, this means that the regulated activity must always be provided by the licensed EU firm (which may of course outsource certain activities to its foreign affiliates).
  4. However, even if a client requests services “on its own exclusive initiative,” the third country firm: 
  • may not market crypto-assets or crypto-asset services or activities of a different type than requested; and
  • may not market crypto-assets or crypto-asset services or activities of the same type, unless they are “offered in the context of the original transaction.”

The main factor to determine the “context of the original transaction” seems to be time. Reliance is only possible for a “very short period of time” and the lapse of one month or even a couple of weeks is arguably already too long. This approach ignores a fundamental distinction made for reverse solicitation under MiFID II. The MiFID II Q&As distinguish between “one-off services” and “ongoing relationships” (e.g. portfolio management agreements). In ongoing relationships, a time limit does not exist. It is not clear why ESMA does not follow the same approach here. For instance, providing portfolio management for crypto-assets is a regulated activity under MiCA as well and should be treated alike.

Whether crypto-assets or crypto-asset services or activities are of “the same type” will require a case-by-case assessment. Even tokens that fall within the same category under MiCA (e-money token, asset-referenced token, other token) are not necessarily of the same type. For example, if the tokens reference different official currencies (for e-money tokens), reference a basket mostly composed of fiat currencies vs. crypto-currencies (for asset-referenced tokens), or have an identifiable offeror vs. a non-identifiable offeror (for other tokens), then they are not of the same type. The same applies for tokens that are liquid vs. illiquid and for crypto-assets “not stored or transferred using the same technology” (which may refer to different Layer 1 blockchains or Layer 2 scaling solutions).

ESMA explicitly states that it follows “largely, but not at all regards, the established practice” under the MiFID II framework. Accordingly, the relevance of the statements therein for traditional financial services should not be overemphasised. At least the considerations on what can constitute a “solicitation,” however, should, in our view, be considered as a reflection of what solicitation constitutes in an all-online service environment and should therefore not be neglected for purposes of “reverse solicitation” under MiFID II (and potentially in the future also for CRD VI).


blockchain, cryptocurrency, financial institutions, ico, regulatory