On 5 October 2023, the European Securities and Markets Authority (ESMA) published its second consultation paper on technical standards under the Regulation on Markets in Crypto-Assets (MiCA). Consultation on the first package concluded in September 2023 (please see our earlier blog for additional background).
This second consultation package covers six draft regulatory technical standards (RTS) and two draft implementing technical standards (ITS).
1) Draft RTS on the content, methodologies and presentation of sustainability indicators and adverse impacts on climate
By way of background, MiCA introduces disclosure requirements related to principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the crypto-asset, as part of the white papers for asset-referenced tokens (ARTs), e-money tokens (EMTs) and crypto-assets other than ARTs and EMTs. These requirements are applicable to persons drawing up white-papers for crypto-assets.
ESMA is mandated to specify the content, methodologies, and presentation of the information in respect of the sustainability indicators in relation to adverse impacts on the climate and other environment‐related adverse impacts, taking into consideration the various types of consensus mechanisms used to validate transactions in crypto-assets (including their characteristics and the differences between them) and their incentive structures.
In the consultation paper, ESMA sets out proposals regarding coherence, complementarity, consistency and proportionality, data availability and reliability of the disclosures, including the use of third parties to review such sustainability disclosures. In respect of indicators, methodologies, and presentation of the information, ESMA proposes a targeted set of mandatory disclosures with a limited number of quantitative metrics on the consumption of energy, scope 1 and scope 2 greenhouse gas emissions and the production of waste, together with a qualitative statement on the impact of use of equipment by distributed ledger technology (DLT) network nodes on natural resources.
2) Draft RTS on continuity and regularity in the performance of CASP services
MiCA sets out obligations for all crypto-asset service providers (CASPs), including specific governance arrangements and requirements to take all reasonable steps to ensure continuity and regularity in the performance of their crypto-asset services by employing appropriate and proportionate procedures to ensure resilient and secure ICT systems, as required by Regulation on Digital Operational Resilience (DORA).
ESMA is mandated to further specify the measures that CASPs must take to ensure continuity and regularity in the performance of crypto-asset services. In its analysis, ESMA acknowledges that best practices for business continuity policies, plans, and procedures in the context of crypto-asset services have yet to be established. It reiterates that MiCA calls for a proportionate approach whereby certain CASPs under scope should not be subject to excessive administrative burden and, in this context, it points to a precedent for risk-based assessments of “scale, nature and complexity” of certain entities under the Markets in Financial Instruments Directive II (MiFID II). ESMA is therefore considering replicating this approach, as appropriate, for CASPs.
In respect of measures for permissionless DLT, ESMA proposes to add several provisions that would acknowledge the differences between permissionless DLT and permissioned DLT in the context of business continuity, including an obligation for CASPs to provide regular communications to their clients about whether their funds are at risk due to disruption, and how the distributed ledger will be brought back online. In terms of business continuity management, ESMA proposes to replicate the MiFID II structure and covers in the draft RTS proposed measures on (i) organisational arrangements, (ii) business continuity policy (including independent auditing), (iii) business continuity plan, and (iv) periodic review and testing of the business continuity policy for CASPs. Finally, ESMA proposes a general proportionality principle, calling for CASPs to take into consideration the degree of their use of permissionless DLT in the execution of their services for the purposes of their business continuity plans.
3) Draft RTS on offering pre- and post-trade data to the public
MiCA sets out the operating conditions of trading platforms for crypto assets, including that the trading platform should lay down, maintain, and implement clear and transparent operating rules. MiCA pre-trade transparency requirements for crypto-asset trading platforms requires them to make public any bid and ask prices and the depth of trading interests at those prices which are advertised through the trading platform, as well as make public the price, volume and time of the transactions executed in respect of crypto assets traded on the trading platform. ESMA is mandated to develop RTS specifying the manner in which transparency data, including the level of disaggregation of the data to be made available to the public.
In its analysis, ESMA notes similarities, between centralised exchanges for crypto-assets (CEX) and traditional exchanges and proposes to leverage the existing rules in the Markets in Financial Instruments Regulation (MiFIR) to develop the MiCA transparency framework. To this end, ESMA proposes to set the relevant pre-trade transparency requirements by taking into the account the type of a trading system operated by the CASP (e.g. quote-driven, periodic auction, hybrid). The MiCA regime also sets out post-trade transparency requirements for crypto-asset trading platforms and requires CASPs operating such trading platforms to make the price, volume and time of the transactions executed public; MiCA does not provide for any deferred publication provisions. To this end, ESMA proposes requiring crypto-asset trading platforms to report certain information in respect of transactions executed under their rules. ESMA proposes that trading platforms in crypto assets make post-trade information available to the public as close to real time as is technically possible and in any case within thirty seconds of the relevant transaction.
4) Draft RTS on content and format of order book records and record keeping by CASPs
Amongst MiCA’s organisational requirements for CASPs is the obligation to keep records of all crypto-asset services, activities, orders and transactions undertaken by them, and provide such records to Member State competent authorities (NCAs) and clients upon request. ESMA is mandated to further specify what records shall be kept. ESMA acknowledges the similarities between MiCA and the MiFID II record keeping requirements and proposes to use the MiFID II regime as a baseline for MiCA. As such, ESMA proposes that CASPs should have the flexibility to maintain all the transaction data elements indicated in the draft technical standards in a format they consider most appropriate, provided that some of these elements can be converted into a specified format when NCAs request information.
In respect of crypto-asset trading platforms, MiCA provides for an obligation to keep records of all orders in crypto-assets that are advertised through their systems and to make such records available to the regulators or provide access to the order book. ESMA is mandated to further specify the content and format in which those order book records shall be kept. ESMA proposes to request CASPs operating a trading platform to record data elements that are like those recorded by trading venues, and to do so by using a common format. ESMA proposes to use the Digital Token Identifier (DTI) for the purposes of identifying crypto assets.
5) Draft ITS on machine readability of white papers and the register of white papers
MiCA requires crypto-asset white paper to be made available in a machine-readable format and ESMA is mandated to develop standard forms, formats, and templates. ESMA also intends to require certain metadata so that the white papers are more easily searchable through its database, consistent with the requirements of the upcoming Regulation on European Single Access Point (ESAP). In terms of identification requirements, ESMA considers that issuers, offerors, or persons seeking admission to trading of crypto assets should obtain a legal entity identifier (LEI) for the purpose of fulfilling the obligations under MiCA, even in the cases where they do not already have one.
In addition, in order to allow market participants to familiarise themselves with Inline XBRL, ESMA makes available a Proof of Concept illustrating a concrete application of the proposed format requirements included in the draft ITS: iXBRL report for the MICA taxonomy (europa.eu)
6) Draft ITS on the technical means for appropriate public disclosure of inside information
MiCA establishes rules to deter market abuse with respect to trading of crypto assets, prohibiting insider dealing, unlawful disclosure of inside information, and market manipulation and requiring to publicly disclose inside information. ESMA is mandated to develop draft ITS to determine the technical means for (i) appropriate public disclosure of inside information and (ii) delaying public disclosure of inside information. ESMA considered similarities between the MiCA regime and the regime established under the Market Abuse Regulation (MAR) and proposes to align the requirement for disclosure of inside information under both regimes to leverage on the experience developed under MAR and streamline the regulatory framework on inside information disclosure. To this end, the MiCA draft ITS has been largely based on the MAR ITS, with the addition and adaptation of some provisions targeting features which are specific to the crypto environment.
The deadline for comments on the second consultation package is 14 December 2023. Following that, ESMA will work on its final report and draft technical standards, which it expects to submit for endorsement by June 2024.