Foreword:
The Markets in Crypto-Assets Regulation (MiCA) represents a significant milestone in the evolution of crypto-asset regulation within the European Union. At its core, MiCA seeks to establish a comprehensive regulatory framework that addresses the complexities and unique challenges crypto-assets pose. Among its extensive provisions, Article 61 revolves around the principle of reverse solicitation, which depicts the circumstances under which EU-based clients can engage with international third-country crypto-asset service providers. This article’s primary aim is to dissect the implications of MiCA’s stance on reverse solicitation, evaluating whether it is a barrier or an enabler for these providers in their efforts to access the European Union market.
In-depth analysis of Article 61:
Article 61 of MiCA outlines the conditions under which reverse solicitation is recognised within the EU’s crypto-asset regulatory perimeter. The principle of reverse solicitation is envisaged under Article 61(1) MiCA, which states the following “Where a client established or situated in the Union initiates at its own exclusive initiative the provision of a crypto-asset service or activity by a third-country firm, the requirement for authorisation under Article 59 shall not apply to the provision of that crypto-asset service or activity by the third-country firm to that client, including a relationship specifically relating to the provision of that crypto-asset service or activity.”[1]
Unlike traditional solicitation, where service providers actively seek clients, reverse solicitation occurs when the initiative to acquire a service stems solely from the client’s behalf. Such authorisation exemption is further clarified upon in Recital 75 of MiCA, where it states that MiCA “should not affect the possibility for persons established in the Union to receive crypto-asset services by a third-country firm on their own initiative”[2]. In brief terms, the reverse solicitation regime established by MiCA comes down to whether the service can be seen as provided within the European Union, as well as depend on the extent to which EU based clients are directly solicited by the Crypto-Asset Service Provider (CASP).
The term “own exclusive initiative” is interpreted with ambiguity and uncertainty as MiCA abstains from providing a precise definition or explanation of the intended interpretation of the term. The only reference to date is identified in the ESMA consultation paper published in accordance with Article 61(3) on the draft guidelines on reverse solicitation under MiCA, stating the following: “The client’s own exclusive initiative should be construed narrowly. The assessment should be a factual one”. The term, therefore, may be interpreted in a way that the client must, exclusively and without any external influence, solely signify that they intend to receive a specific service from a third-country firm. This term aims to eliminate the mere possibility of CASPs in any way attempting to persuade or influence to receive the crypto-asset service. Though, the terms “own exclusive initiative” and the remaining part of Article 61 MiCA signify additional uncertainties revolving around the scope and content of the ‘marketing prohibition’ under Article 61 MiCA.
Scope of solicitation, advertisement, and promotion:
Article 61(1) further states in the second subparagraph that the provision imposes a ‘marketing prohibition’ on unauthorised third-country CASPs “regardless of the means of communication used for solicitation”. Article 61 limits CASPs to actively conduct marketing activities towards EU clients that have not requested the services at its own exclusive initiative. It must be further noted that MiCA does not provide clear definitions of the terms solicitation, advertisement and promotion. All three terms are covered by a broad umbrella term, ‘marketing’, but each specifies exactly how the activity is carried out. It is therefore imperative to adopt a harmonised definition of these terms to eliminate any confusion that may arise in interpretation between the Member States.
The term advertisement is used across different legislative documents more often than the latter two terms. A broad definition appears in EU Directive 2006/114/EC, concerning the misleading and comparative advertising, located in Article 2(a) stating the following: “‘advertising’ means the making of a representation in any form in connection with a trade, business, craft or profession in order to promote the supply of goods or services, including immovable property, right and obligations”.[3]
On the contrary, the promotion term and its respective definition are not as easily found across the available EU legislation and, therefore, subject to a broader interpretation. At first glance, it covers marketing tools such as short-term discounts and offers for a specific service or product.
Similarly to ‘promotion’, the term ‘solicitation’ seeks a unified definition under EU law. Solicitation encompasses a different range of activities such as advertisement or promotion. ESMA’s consultation paper provides a further detailed explanation of the means of solicitation stating that “it includes the promotion, advertisement or offer of crypto-asset services or activities to clients or prospective clients in the Union by any means including by way of, without limitation, internet commercials, brochures, telephone calls, face-to-face meetings, press releases, or any other form of physical or electronic means, including social media platforms, mobile applications. It may also include participations in road shows and trade fairs, invitations to events, affiliation campaigns, retargeting of advertising, invitations to fill in a response form or to follow a training course and messaging platforms as well as promotions, advertisements and 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.”.
Moreover, to assess whether a third-country firm solicits clients established or located in the Union, all facts and circumstances of the case must be relevant. ESMA further clarifies that “a website in an official language of the Union – and which is not customary in the sphere of international finance – should be a strong indication that a third-country firm is soliciting clients established in the Union.”
However, using a geo-blocking tool to prohibit access to a website by clients established or located in the Union should be interpreted as “a strong indication that a third-country firm is not soliciting clients in the Union via such website.”. It may be stated that those mentioned above are subject to a broader debate, specifically about the language used on a website intended to be interpreted as a strong indicator of solicitation, emphasising the wording ‘which is not customary in the sphere of international finance’. One can argue that the main languages used and customary in international finance are English and French; however, other languages of the Union are widely spoken and recognised across the globe, with an evident example of Spanish being spoken in different countries simultaneously. The question remains whether the use of a language recognised and expressed in the Union and other countries on a website, should be a strong indicator of solicitation by third-country firms. In contrast, the use of a geo-blocking tool to prohibit access to a website should be viewed as a strong indicator of non-solicitation, which is questionable due to the existence of specific tools such as Virtual Private Network (VPN) applications which grant their users an ability to bypass geo-blocking tools with ease. ESMA repeatedly stresses that the “assessment should be made on a case-by-case basis, with a substance over form approach”.
In the third subparagraph of Article 61(1) the use of “any contractual clause or disclaimer purporting to state otherwise, including any clause or disclaimer that the provision of services by a third-country firm is deemed to be a service provided on the client’s own exclusive initiative” is prohibited.
Including such wording intentionally limits the scope of attempts to circumvent the principle through contractual clauses, disclaimers, or other methods to pass the responsibility to the clients.
The specific notion of the three discussed activities above emphasises that a wide range of marketing activities can exclude relying on the principle of Reverse Solicitation under MiCA’s Article 61.
The term “new types of crypto-assets or crypto-asset services”
Furthermore, Article 61(2) MiCA states that an initiative by a client to receive crypto-assets or crypto-asset services does not entitle the third-country CASP to “market new types of crypto-assets or crypto-asset services to that client”. The provision further clarifies that the access to provide crypto-assets or crypto-asset services exclusively requested by the client does not extend the provision of new types of crypto-assets or crypto-asset services.
Although not explicitly stated in MiCA, Article 61(2) makes refers to the three categories of crypto-assets, referred to as “types” as described in Recital 18 and defined in Article 3(1). “This Regulation classifies crypto-assets into three types, which should be distinguished from one another and subject to different requirements depending on the risks they entail”.[4].
“Timing is of the essence”:
Article 61 of MiCA entails a question pertaining to the timing of the marketing ban. Whether past marketing conduct by third country CASPs before the entry into force of MiCA will prevent these firms from applying the principle of reverse solicitation in the future. For this purpose, ESMA provided an explanation clarifying that “timing is of the essence when a third-country firm relies on the reverse solicitation exemption”. Suppose the third-country firm meets all the conditions to rely on Article 61 of MiCA. In that case, it may only do so for a very short period of time. Moreover, ESMA further exemplifies that the third-country firm relying on the exemption “is not allowed to subsequently offer the client further crypto-assets or services, even if such crypto-asset or service is of the same type as the one originally requested, unless they are offered in the context of the original transaction.”. Although the consultation does not mention any definite time window during which the exemption principle may be applied, “the lapse of a month or even a couple of weeks between the provision of the crypto-asset service based on a request made at the own exclusive initiative of the client and a subsequent offer by the third-country firm would exclude the application of Article 61.”.
Barriers or enablers for entry?
Article 61 embodies a complex interplay of barriers and enablers for international crypto-asset service providers to engage with clients that are located or based in the Union.
On the one hand, the provision erects significant barriers by imposing strict conditions on how services are to be marketed to EU clients, going as far as to significantly limiting marketing access for non-EU providers with a single aim of protecting EU-based investors and MiCA compliant entities from undue incursions by non-EU and non-MiCA compliant entities. ESMA further urges that Article 61 should be understood as applying in very limited and narrow circumstances. Although it is referred to as the reverse solicitation exemption, it is actually a prohibition and should not be relied upon third-country firms. Article 61 is to be viewed as applying in very limited and narrow case scenarios.
On the other hand, it enables a well-defined pathway for those able to navigate its requirements, offering a legal basis for engaging with EU clients through reverse solicitation. Although a prohibition and applied only in a very limited circumstances, there are still uncertainties revolving around the definitions of terms and their respective application in the context of solicitation. A contemplation argument arises with the scope of application of reverse solicitation due to the accentuation on crypto-asset service providers only. Article 61 is located in Title V of MiCA, pertaining solely to the operation and authorisation of CASPs. It could be presupposed that offerors and issuers of crypto-assets are out of the scope of Article 61, with no specific information to date to state otherwise.
This dual nature of the Article underscores the importance of strategic compliance, where understanding and adhering to MiCA’s provisions can transform regulatory hurdles into competitive advantages.
Existing sources as a tool for interpretation
Article 42 of MiFID II: “Member States shall ensure that where a retail client or professional client within the meaning of Section II of Annex II established or situated in the Union initiates at its own exclusive initiative the provision of an investment service or activity by a third-country firm, the requirement for authorisation under Article 39 shall not apply to the provision of that service or activity by the third-country firm to that person including a relationship specifically relating to the provision of that service or activity. An initiative by such clients shall not entitle the third-country firm to market otherwise than through the branch, where on is required in accordance with national law, new categories of investment products or investment services to that client.”.
An apple of discord lies concerning whether the existing sources for interpreting Article 42 MiFID II can be used on Article 61 of MiCA. MiCA strikes similarities with MiFID II and the reverse solicitation clauses in the two legal frameworks, Article 42 MiFID II and Article 61 MiCA, respectively. Regarding the interpretation of MiFID II Directive, various interpretations exist, ranging from numerous ESMA guidelines, NCAs comments, etc. However, on the contrary, Article 61 MiCA is an unexplored territory with currently only a consultation paper in place, published by ESMA per Article 61(3) on the draft guidelines. Such leads to a question whether the same sources may be applied to interpret Article 42 of MiFID II and can be applied to interpret the Article 61 of MiCA.
It is important to note that the two legislative documents aim to regulate two different industries. The EU regulator has decided not to apply the same regulatory regime for traditional financial instruments on crypto-assets but instead chose to craft a new framework which would be a better fit for the part of the industry that does not neatly fall under the existing frameworks. Sources used to interpret MiFID II may not sufficiently account for perspectives, practices, and unique characteristics of CASPs. When looking at both regulatory frameworks from a fundamental perspective, both frameworks aspire to achieve the same goals, including fair competition, investor protection and market integrity.
Reverse solicitation applies to both retail and professional clients. MiFID II applies to both types of clients, MiCA however, does not distinguish between retail and professional clients in the same way. MiCA simply states ‘client’. The stark contrast is in the language being used in Article 42 MiFID II and Article 61 MiCA, the former in its wording suggest a confirmation of the permissibility of reverse solicitation. In contrast, the latter is being perceived more as a prohibition of reverse solicitation.
Conclusion
Assessing whether an activity constitutes marketing within the meaning of Article 61 of MiCA does not always lead to a straightforward answer due to the nature of the terms used in the regulation; however, with the entry of a consultation paper, third-country firms can already get a sense of where the line is drawn for marketing activities in the EU under the reverse solicitation principle. Moreover, until the interpretation sources for Article 61 are fully developed, third-country CASPs should take a prudent approach to their activities in the European Union.
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[1] Article 61(1) MiCA
[2] Recital 75 MiCA
[3] Article 2(a) EU Directive 2006/114/EC
[4] Recital 18 MiCA
