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ESMA consults on MiCAR technical standards

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    The European Securities and Markets Authority (ESMA) has released its second set of technical standards for consultation under the Markets in Crypto-Assets Regulation (MiCAR). The central body of European supervisors had been tasked to elaborate on certain requirements specified at a high level in MiCAR.

    MiCAR diagram

    There are six Regulatory Technical Standards (RTS) and two Implementing Technical Standards (ITS) in this package, addressing:

    • The content, methodologies and presentation of sustainability indicators and adverse impact on the climate.
    • Continuity and regularity in the performance of services by Crypto-Asset Service Providers (CASPs), such as exchanges, brokers, and custodians.
    • Offering pre- and post-trade data to the public.
    • The content and format of order book records and record-keeping by CASPs.
    • Machine-readability of white paper and the register of white paper.
    • The technical means for appropriate public disclosure of inside information.

    1. RTS on Sustainability Criteria and Indicators

    The RTS introduces proposals requiring "persons required to draw up white papers" (i.e. issuers, offerors of crypto-assets and operators of trading platforms etc.) to provide investors/the market with meaningful information about the potential principal adverse impacts on the climate and other environment-related adverse impacts vis-à-vis the consensus mechanism underpinning a crypto-asset issuance and on-going maintenance of crypto-assets.

    In particular, operators of trading platforms shall ensure by 31 December 2027 that a crypto-asset white paper is drawn up, notified, and published in relation to crypto-assets other than Asset-Referenced Tokens (ARTs) and Electronic Money Tokens (EMTs) that were admitted to trading before 30 December 2024.

    Key Takeaways

    • Content – creators of white papers will be required to provide details of relevant consensus mechanisms and an adverse climate/environmental impact assessment on applicable consensus mechanisms used to validate transactions involving crypto-assets together with applicable incentive structures. This assessment should capture environmental implications arising from validations of transactions and those connected to maintaining the integrity of crypto-asset records via a ledger.
    • Data focus points and methodologies – ESMA has produced a template of indicators to guide environmental assessments. Indicators to consider include (i) energy consumption by Distributed Ledger Technology (DLT) network nodes used to validate relevant transactions, (ii) energy intensity, inferring the production of waste and use of natural resources based on an analysis of the production, use, and disposal of the devices used in the DLT network nodes, and (iii) greenhouse gas emissions related to energy sources used by these DLT network nodes.
    • Data availability - ESMA acknowledges that the sourcing of data is not always possible. If there are gaps in the available information, then creators of white papers and CASPs are required to provide estimates and explain the best efforts used to obtain the missing information. The methodology used, sources of data, and links to third party data providers are to be included in the reporting.
    • Consistency - ESMA proposes to align MiCAR reporting with that under the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD).

    2. RTS on Continuity and Regularity in the Performance of Crypto-Services

    MiCAR requires CASPs to take all reasonable steps to provide for the continuity and regularity of their crypto-asset services by following procedures to ensure resilient and secure technological systems. ESMA proposes to flesh out this requirement with a combination of adopting concepts/requirements in the Digital Operational Resilience Act (DORA) and lessons borrowed from MiFID II.

    Key Takeaways

    • ESMA proposes following the structure of business continuity management measures under MiFID II, i.e. general organisational arrangements to support the governance around the CASP’s business continuity function, followed by the specification of the business continuity policy, and finally, how CASPs should implement the policy via the business continuity plan.
    • ESMA proposes that the requirements for the continuity of ICT systems under DORA should apply, while the MiCAR RTS will address general business continuity measures.
    • The RTS requires firms to consider the impact of using "permissionless distributed ledger technology" versus private permissioned DLT, in configuring business continuity arrangements given the enhanced risk/threat to continuity of services utilising permissionless DLT.

    3. RTS on Trade Transparency and Order Book Records

    MiCAR requires trading platforms for crypto-currency to publish certain pre- and post-trade transparency information. Core data is to be published in defined formats; disaggregated at the levels of crypto-asset type (i.e. asset-referenced token, e-money token, or "other" cryptoasset), trading system, and the currency in which the crypto-assets are traded. Where possible, it should be further disaggregated by crypto-asset. Trading platform CASPs may charge for this data on a reasonable commercial basis.

    Key Takeaways

    • Pre-trade transparency - ESMA proposes to calibrate publication requirements for trading interests with the type of trading system to which an order has been submitted: continuous auction order book; quote-driven; periodic auction; Automated Market Maker (AMM); hybrid; or a residual category of "other" trading systems. This model follows MiFID II but excludes voice and RFQ systems. ESMA proposes that pre-trade details be published using a format derived from MiFID II data arrangements. There are fourteen data points specified in an annex.
    • Post-trade transparency - ESMA proposes that post-trade information on transactions should be published as soon as technically possible and, in any event, within thirty seconds of execution. The data to be made public includes a Digital Token Identifier (DTI) under the ISO 24165 standard.
    • Order book data - CASPs operating trading platforms will be required to maintain data of orders advertised through trading platform systems, akin to MiFIR requirements. This captures the identity of participants on the platform, LEI numbers, trading capacity of participants, trade data (order type, events affecting the status of the order, and pricing information) etc.

    4. RTS on Record-Keeping by CASPs

    Key Takeaways/ Requirements

    • General principles that afford access to competent authorities, ensure the integrity of the records, show where changes have been made, and support analysis using technical tools.
    • Retention of policies and procedures, including audit trails of reviews by the management body of policies and procedures.
    • Retention of documents showing the rights and obligations of the CASP and each client, for at least five years (and seven years on the request of a competent authority) from the end of the agreement to provide services.
    • Records of funds and crypto-assets held for each client, separate from the CASP's own assets and those of other clients.
    • Records of orders and transactions.
    • Data identifying the person or computer algorithm within the CASP making an investment decision under a discretionary mandate from a client or on behalf of the CASP.

    5. RTS and ITS on White Paper Electronic Format Requirement

    Key Takeaways

    • In the RTS, ESMA is required by MiCAR to maintain a central register of white papers as a searchable portal that will give access to "standardised, reliable, and comparable information across crypto-assets." One of the challenges is that the Classification of Financial Instruments (CFI) standard will not be ready for MiCAR. On an interim basis, therefore, ESMA proposes to use the Functionally Fungible Group Digital Token Identifier (DTI) and Digital Token Identifier Foundation systems to identify white papers by type of crypto-asset and the individual DTI assigned to each crypto-asset to which the relevant white papers relate.
    • In this ITS, ESMA sets out the standardised requirements for the creation of a white paper under MiCAR, including the basic data, risk disclosures, asset-specific information, and other elements required by the Regulation and subsidiary rules. ESMA proposes that white papers should be marked up with eXtensible Business Reporting Language (XBRL), which allows for both human- and machine-readability of documents.

    6. ITS on Public Disclosure of Inside Information

    Key Takeaways

    • Issuers, offerors, and persons seeking admission to trading of relevant crypto-assets are required to make public certain inside information. The disclosures are to be submitted to media relied upon by the public (which may include social media channels) and published on the insider's website in the form of a downloadable written statement. To ensure broad reach, investors should be able to receive push notifications or alerts after opting-in. Facilities like invitation-only chat rooms are not sufficient to meet the disclosure requirements.
    • If the immediate disclosure of inside information would prejudice the interests of the issuer, offeror, or person seeking admission to trading, then they may delay the disclosure. Details of the decision to delay disclosure and any information barriers are to be recorded. The competent authority is to be notified of the delay.

    MiCAR Timline

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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