ESMA responds to MiCAR consultation

The European Securities and Markets Authority (ESMA) has responded to the European Commission's consultation on the review of the Markets in Crypto-Assets Regulation (MiCAR). The targeted consultation contained technical and legal questions on whether MiCAR remains fit for purpose in light of evolving market and international developments. ESMA's recommendations aim to simplify the framework while improving investor protection and addressing innovative business models, such as decentralised finance (DeFi), staking, lending, and borrowing. ESMA's proposals include:

• Enhancing investor protection: New safeguards in areas where investors face risks that are not fully covered under the current framework. This includes: (i) stricter rules for the marketing of cryptoassets; (ii) greater transparency in costs; and (iii) proportionate requirements for staking, lending, and borrowing, including through disclosure obligations.
• Reinforcing supervision: Strengthening supervisory powers and addressing the risks arising from unauthorised services, online fraud, and non-compliant stablecoins by: (i) enhancing the EU's capacity to detect, block and deactivate fraudulent websites and freeze cryptoassets in cases of suspicion of market abuse or terrorist financing; (ii) obtaining reinforced supervisory powers to deal with third-country firms which solicit EU investors without being authorised under MiCAR; and (iii) introducing explicit rules to prevent regulated crypto firms from offering services linked to stablecoins that do not comply with MiCAR requirements.
• Evolving towards DeFi and improving cryptoasset classification: Introducing clearer criteria for identifying which activities can be considered genuinely decentralised, as activity around DeFi and stablecoins evolves. It also proposes a new regulated cryptoasset service for firms that provide users with access to DeFi protocols, adopting rules on how cryptoassets should be classified (including hybrid tokens), and granting powers to ESMA to issue binding opinions on token classification to promote the consistent treatment of products across the EU.
• Simplification and burden reduction: Streamlining parts of the existing rules, including simplifying cryptoasset white-paper notification procedures, reducing duplicative authorisation requirements for some regulated firms, and improving the consistency of prudential requirements.

Beyond the immediate MiCAR review, ESMA also highlights the need for a framework for tokenised securities and on-chain settlement that can support the development of an integrated European tokenised capital market and facilitate cross-border activity in the future.

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