ESMA concerned about unregulated crypto products ahead of MiCA rollout

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Another EU watchdog has drawn attention to potential risks in the crypto industry.

In a recent statement, the European Securities and Markets Authority (ESMA) and National Competent Authorities (NCAs) said cryptocurrencies must be clearly labeled as unregulated if a company is offering the asset class to investors.

In particular, these offers are marketed as alternatives to financial instruments regulated under MiFID II.

Introduced in 2014 and implemented in 2018, MiFID II stands for the second Markets in Financial Instruments Directive, which is a legislative framework instituted by the European Union (EU) to regulate financial markets.

Although the landmark European Crypto Asset Markets (MiCA) legislation, which will introduce a framework for crypto companies, is about to be passed, these assets are expected to remain unregulated in many jurisdictions until MiCA comes into force in 2025.

Meanwhile, ESMA has expressed concerns about potential investor protection and prudential risks.

Risks include investors being misled about their level of protection, product confusion and mis-selling, or selling a product to a customer using misleading information.

The statement highlights that activities related to unregulated products could pose a significant risk to the proper management of the investment firm and potentially jeopardize the firm’s compliance with its regulated business obligations.

ESMA advocates that investment firms act in the best interests of their clients by acting fairly, professionally and by providing clear and unambiguous communication.

He recommends that companies ensure that customers are fully informed of the regulatory status of the product or service they receive and clearly disclose when regulatory protections do not apply.

Finally, the statement emphasizes that companies should be wary of using their regulatory status as a promotional tool and should distinguish between regulated and unregulated activities on their websites.

EU gives way to crypto

ESMA’s press release is another way to provide more clarity in a rapidly changing regulatory environment.

Voted on last April by Europan MEPs, MiCA will create a framework for crypto businesses at European level.

It will introduce stricter rules on stablecoins, require additional disclosure obligations for all crypto businesses, and ensure the implementation of anti-money laundering (AML) and data security procedures.

The text will enter into force in July 2023 but will only be applicable 18 months after this date, i.e. in January 2025.

Until then, as ESMA points out, investors and companies must act with caution.

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