Title VI Foreword
Among MiCA’s extensive provisions, Title VI, focusing on the prohibition of market abuse, emerges as a regulatory instrument inspired by the Market Abuse Regulation (MAR) already in place for crypto-assets that constitute financial instruments under MiFID II. Therefore, market manipulation, insider trading, and other forms of market abuse via or in relation to crypto-assets are all prohibited under MiCA’s provisions in Title VI. This article aims to provide a detailed overview of market abuse under MiCA’s regulatory scope and distinguish whether the obligations and prohibitions introduced are appropriate safeguards against such abuse.
Introduction to Market Abuse
Title VI serves as the regulatory backbone against market abuse in the crypto-asset space within the EU, primarily aiming to foster a market environment where investor protection is of prime importance. Despite being inspired by MAR, Recital 95 of MiCA signifies its abstention from fully replicating it on the grounds that “issuers of crypto-assets and crypto asset service providers are very often SMEs, it would be disproportionate to apply all of the provisions of MAR to them.” It goes further into stating that it is necessary for the adoption of specific rules prohibiting behaviours that are likely to undermine user confidence in markets pertaining to crypto-assets. In view of the above statement, the scope of Title VI is extensive, managing to encompass a wide array of actions and activities that could potentially harm the EU’s market integrity, succinctly within seven articles.
Title VI begins with Article 86(1) which depicts the scope of the rules on market abuse: “This title shall apply to acts carried out by any person concerning crypto-assets that are admitted to trading or in respect of which a request for admission to trading has been made.”[1] The applicability of Title VI extends beyond crypto-asset issuers and service providers and is intended to cover the widest spectrum of persons possible by intentionally referring to “any person”. Therefore, irrespective of their status, function, or geographical location - the only qualification is that the acts concerned are committed in relation to crypto-assets admitted to trading, or for which a request for admission to trading has been made. Actions and omissions shall also be within the scope of the provision and may include instances such as unlawful insider dealing, or market manipulation conduct in decentralised finance (DeFi) applications. MiCA further clarifies that it is immaterial whether such acts, namely a transaction, order, or behaviour take place on a trading platform or not, underpinning that the concept of market abuse is multifaceted, which requires the scope of legal oversight to be extended significantly to effectively prevent and regulate instances of market abuse.
Article 87 further entails an explanation of which types of information should be regarded as ‘inside information’ for the purpose of MiCA Title VI “information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers, offerors or persons seeking admission to trading, or to one or more crypto-assets, and which, if it were made public, would likely have a significant effect on the prices of those crypto-assets or on the price of a related crypto-asset”.[2]
Furthermore, Article 87(2) introduces a set of circumstances in which information shall be deemed of a precise nature, and the criteria provided emphasise a reasonable expectation of an event or a circumstance to take place which would result in a material effect on the price of the crypto-asset in question. In specific case scenarios, it may be difficult to fulfil such expectations and conclusively distinguish whether certain information is public or not, moreover, whether such information when made public has the capacity to have a significant impact on the price of a crypto-asset in question. Notwithstanding the influence and similarities of MAR to MiCA, it may be stated that the existing sources on MAR may be used to interpret MiCA’s provisions on market abuse, though with an essential mention of MiCA not including any reference to such ability. Recital 26 of MAR states that “the competent authorities should consider what a normal and reasonable person knows or should have known in the circumstances”[3] to adequately assess whether any information constitutes ‘information of a precise nature’.
In conjunction, the article sheds light on the context of a protracted process which is intended to bring about or result in particular circumstances or a particular event, those future circumstances or that future event may be deemed to be precise information, as well as an intermediate step in a protracted process (“if, in and of itself, it satisfies the criteria of inside information referred to in paragraph 2”). Although MiCA does not address delayed disclosures in the case of a protracted process, Article 87 of MiCA does bring protracted processes and their intermediate steps within the scope of ‘inside information’; therefore, the same conditions applicable under MiCA to the delay of disclosure of inside information would apply in cases of a protracted process, according to ESMA.[4]
Public Disclosure of Inside Information
Title VI imposes a duty on issuers, offerors, and persons seeking admission to trading to disclose inside information as soon as possible to the public, in order to ensure market transparency and safeguard investors’ interests, as well as to maintain such information on their website for a minimum of five years when that information directly concerns them. Moreover, a delay in the disclosure of inside information is accounted for under the provisions of the Article 88, when certain conditions like “the information disclosed not likely to mislead the public” are met.
It is worth mentioning that the competent authority shall be duly informed with a written explanation of how the conditions set out in paragraph 2 were met to justify a delay in disclosure. ESMA, on their behalf, has issued a consultation paper on the appropriate public disclosure of inside information in accordance with Article 88(4) where it differentiates that “publishing information simply by making it available on the website and leaving to the public the duty to retrieve it would not be sufficient to ensure fast access by investors. Therefore, ESMA concludes that active dissemination of inside information and its publication on the website are two separate obligations, meant to achieve different objectives.”[5] Whilst the statement in relation to two separate obligations is true, they serve distinct functions which together achieve the same objective of upholding financial market integrity and safeguarding investor interests. Active dissemination addresses the immediate need for market equality, while website publication ensures long-term accessibility and accountability.
Prohibitions under Title VI
For the purposes of MiCA Title VI, Articles 89 to 91 outline the prohibitions on insider dealing, unlawful disclosure of information and market manipulation within the EU. Article 89 begins with a depiction of instances where insider dealing may arise stating the following “where a person possesses inside information and uses that information by acquiring or disposing of, for its own account or for the account of a third party, directly or indirectly, crypto-assets to which that information relates.”[6] Arguably one of the most common cases of insider dealing revolves around trading of crypto-assets based on information which is only accessible to some privileged entities such as node operators. This situation raises concerns about insider dealing because, despite the theoretical public availability of the information, in practice, the technical complexity or resource requirements to access or interpret this data can create informational asymmetries akin to traditional insider trading. Node operators, by virtue of their technical capacity or positional advantage, can access critical market-moving information such as pending transactions before they are confirmed on the blockchain which may provide an undue advantage of front-running a large pending order to trade, thus undermining the principles of market fairness and transparency that are central to MiCA. For this reason, Recital 96 of MiCA explicitly states that factors like “the use of smart contracts for order executions and the concentration of mining pools”[7] should be taken into account in the context of preventing market abuse. ESMA further notes that MiCA is clear when indicating that orders, transactions, and other aspects of the Distributed Ledger Technology (DLT) may suggest the existence of market abuse.
The use of inside information shall comprise submitting, modifying, or withdrawing a bid by a person for its own account or for the account of a third party. It is further explained in subparagraphs 2 and 3 of the Article 89 that “no person shall engage or attempt to engage in insider dealing, nor recommend or induce another person to engage in insider dealing”.[8]
Moreover, unlawful disclosure of information is also prohibited under MiCA’s provisions. Article 90 clearly states that “No person in possession of inside information shall unlawfully disclose inside information to any other person, except where such disclosure is made in the normal exercise of an employment, a profession or duties.”[9] Furthermore, the onward disclosure of recommendations or inducements should amount to an unlawful disclosure of inside information in instances where the person disclosing the recommendation or inducement acknowledges that the disclosure was based on inside information.
Lastly, the most extensive provision of the Title is contained in Article 91 outlining an explicit prohibition of market manipulation stating that “No person shall engage in or attempt to engage in market manipulation.” The main activities which shall amount to market manipulation include various types of behaviours which either give false or misleading signals as to the supply, demand, and price of a crypto-asset or which is likely to secure, the price of one or several crypto-assets at an abnormal or artificial level. Over and above that, transactions or orders, which impact the price, while employing a fictitious device and dissemination of information through media should all amount to market manipulation under MiCA. The specific notion of these behaviours above emphasises that MiCA covers and prohibits all the basic types of manipulation, as well as includes a full list in Article 91(3) of examples that ‘shall, inter alia, be considered as market manipulation’.
Prevention and Detection of Market Abuse
Article 92 outlines the practices of preventing and detecting market abuse, which state the following “Any person professionally arranging or executing transactions in crypto-assets shall have in place effective arrangements, systems and procedures to prevent and detect market abuse.”[10] The Article further elucidates instances where there might exist circumstances indicating that market abuse has been committed, is being committed or is likely to be committed, obliging any person to without delay report to the competent authority of that member state any reasonable suspicion regarding an order or transaction, including any cancellation or modification thereof, and other aspects of the functioning of the DLT such as the consensus mechanism. The competent authorities receiving a report of suspicious orders or transactions shall transmit such information immediately to the competent authorities of the trading platform concerned. Considering that crypto-asset markets are global and thus inherently cross-border, ESMA notes that the coordination procedures between competent authorities shall be addressed in the draft technical standard, specifically what cross-border market abuse situations are and what they entail. In addition, ESMA is of the opinion that these systems, arrangements, and procedures should be updated regularly to ensure that they remain fit for purpose.
Legal experts and commenters have pointed out that Article 92, when read at a prima facie level, seems to apply to any individual, including issuers, offerors, or CASPs. However, a deeper and more nuanced examination of its provisions reveals that Article 92 specifically targets individuals who are professionally involved in the reception and transmission of orders or executing transactions in crypto-assets, essentially pointing to CASPs. This interpretation is further supported by the language used in Article 92, which specifically uses terms from MAR about individuals engaged in ‘professionally arranging or executing transactions’ (PPAETs), thus causing a deviation from MiCA’s terminology, where CASPs are tasked with executing ‘orders’ rather than ‘transactions’. Therefore, it might be suggested that the Article 92(1) should ideally be read in harmony with the framework established by MAR, indicating its applicability to CASPs engaged in processing orders for clients, facilitating the exchange of crypto-assets, and managing the reception and transmission of orders.
ESMA further supports the above in their recently published Consultation and its preliminary view is that Article 16 of MAR on the prevention and detection of market abuse can be taken as a precedent for the mandate on the arrangements, systems, and procedures for PPAETs. Moreover, CASPs operating a trading platform should be considered PPAETs and therefore be subject to the regime foreseen in Article 92 of MiCA. Persons dealing on their own account in crypto-assets on a professional basis or as part of their business activity, along with brokers engaging in similar activities, may also be classified as PPAETs. This classification arises due to the mere fact that they operate with staff or maintain a dedicated structure aimed at systematically dealing on their own account. Such systematic activities typically involve regular and organised trading patterns that go beyond occasional or non-professional trading, reflecting a level of sophistication and continuous engagement in the market that necessitates enhanced regulatory oversight to ensure market integrity and protect less informed participants.
Implementation of Provisions and its Respective Application Challenges
Firstly, considering the wide scope of the Title VI applicability covering “any person”, “irrespective of their status, function, or geographical location”, may present significant hurdles to its application. Article 92 is a prime example of such an instance where “any person” may be referring to CASPs rather than any other participant, considering they are professionally engaged in arranging or executing transactions in crypto-assets, creating a legal uncertainty of implementing such provisions amongst other participants and obliging them to rely on ESMA’s guidelines.
Secondly, the obligation of having adequate arrangements, systems, and procedures to prevent and detect market abuse may not be as easily implemented among participants seeking authorisation, considering the complex nature and timely costs of these practices. Those participants that have not previously implemented market abuse surveillance solutions, will have to undertake an extensive process of aggregating data, conducting risk assessments and team training ahead of their date of application. In addition, following the date of application, national competent authorities will have to facilitate a large number of these new applications, responding and asking questions, as well as resolving issues to be authorised before the implementation date. The question remains whether the obligation leverages the organisational and time constraints in view of participants who have not previously implemented solutions concerning market abuse.
Conclusion
To conclude, it may be stated that while the premise of Title VI is to provide enhanced protection for investors in their transactions, these prohibitions create a complex landscape to navigate for service providers and regulators alike. It can also be said that, in mirroring MAR’s regulations on market abuse, MiCA has inadvertently introduced a scenario akin to ‘rearranging the deck chairs on the Titanic’, suggesting that while emancipation can and should be achieved, significant underlying issues remain unaddressed. The clarity around how DeFi operations and various participants within blockchain networks, like node operators, can or should be held accountable under MiCA’s rules against market abuse is still lacking. It is anticipated that a complete resolution of these ambiguities will necessitate further developments and clarifications.
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[1] Article 86(1) MiCA - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
[2] Article 87(1)(a) MiCA - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
[3] Recital 26 MAR - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0596
[4] ESMA Second Consultation Paper on MiCA - https://www.esma.europa.eu/sites/default/files/2023-10/ESMA75-453128700-438_MiCA_Consultation_Paper_2nd_package.pdf
[5] ESMA Second Consultation Paper on MiCA - https://www.esma.europa.eu/sites/default/files/2023-10/ESMA75-453128700-438_MiCA_Consultation_Paper_2nd_package.pdf
[6] Article 89(1) MiCA - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
[7] Recital 96 MiCA - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
[8] Article 89(2-3) MiCA - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
[9] Article 90 MiCA - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
[10] Article 92(1) MiCA - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1114
