Navigating MiCAR’s Reverse Solicitation and Authorization Procedures

MiCAR's reverse solicitation clause provides an exception for Swiss CASPs and issuers to offer services to EU customers without needing authorization orestablishment in the EU. This article delves into the reverse solicitation concept, its risks, and the detailed authorization procedures under MiCAR.

Reverse Solicitation: An Exception to MiCAR Authorization

MiCAR explicitly states that no authorization or establishment in the EU is required if the service is provided solely at the initiative of the EU customer. This is referred to as reverse solicitation or "on-customer's-own-initiative" basis. MiCAR only outlines the basics of when reverse solicitation is assumed and when it still constitutes a solicitation requiring authorization.

MiCAR explicitly determines that the EU customer, not the third-country provider, must initiate the provision of the service. An unsolicited communication from the third-country provider already excludes the interpretation as a customer initiative.

Risks

This method of providing services in the EU is not without risk. The service provider must clearly demonstrate that the customer initiated the relationship. If this proof cannot be provided and the lack of an establishment is assumed, the service provider must expect an administrative fine under MiCAR. Therefore, due diligence must be conducted to ensure that the conditions for reverse solicitation are met and can be proven.

Requirements for Reverse Solicitation

If the service provider decides to forego authorization and establishment and to take the risk of reverse solicitation, they can find detailed regulations in ESMA’s guidelines on Reverse Solicitation under MiCAR. These are expected to be issued by December 2024.

At present, these guidelines are only in draft form. However, they impose high requirements on reverse solicitation. This procedure should be clearly defined as an exception and thus narrowly defined. The aim is to prevent circumvention of MiCAR regulations and to protect EU investors and MiCAR-compliant service providers from illicit activities.

The draft includes explicit regulations on online advertising, which should already be considered unauthorized solicitation without permission and establishment in the EU. It also does not matter through whom the third-country company solicits an EU customer. Even if a third party (implicitly) acts on behalf of the third-country company, this action does not fall under the exception.

On the positive side, there should be no authorization requirement if the EU customer approaches the third-country company on their own initiative and is subsequently offered a similar type of crypto asset. However, it is questionable how the EU determines similar types of crypto assets. ESMA’s guidelines are expected to contain a non-exhaustive list of similar cryptoassets, which could pose a risk.

The third-country company is also temporally restricted. It is not sufficient for the EU customer to have initially approached the third-country company on their own initiative. Rather, offering (additional) activities is prohibited if more than one month has passed since the EU customer's inquiry.

Conclusion

Overall, reverse solicitation may offer an opportunity to operate for EU customers without the effort of obtaining authorization and establishing in an EU country, but it also carries significant risks. The third-country company must always be able to demonstrate that it has met all the requirements for the exception at all times during the service provision. This can become a complex process and is prone to errors.

Establishment Obligation and Authorization Procedure Under MiCAR

For those obligated under MiCAR, particularly if they choose not to limit their operations to reverse solicitation, obtaining authorization and establishing a presence in an EU member state is crucial.

Benefits of Establishment and Authorization in an EU State

Once a CASP establishes itself in an EU state and obtains authorization, it gains significant advantages under MiCAR. One of the primary benefits is MiCAR passporting.

MiCAR passporting allows providers authorized and regulated in one EU country to offer their services in other EU states without needing a separate license or physical presence in those countries. This facilitates free trade and integration within the EU internal market, enabling CASPs to:

Simplify Licensing: Obtain only one license to operate across multiple EU states.
Quickly Expand: Advance internationalization without cumbersome establishment processes in each EU state.
Enhance Market Presence: Establish and expand their operations throughout the European market with minimal regulatory hurdles.

MiCAR, therefore, not only imposes obligations but also presents opportunities for CASPs to efficiently scale their operations across the EU.

Requirements for Issuers Under MiCAR

MiCAR establishes comprehensive rules for the offering, issuance, and marketing of crypto assets by their providers/issuers. The requirements are categorized as follows:

1. Offering of Other Crypto Assets (not ARTs or EMTs)

Whitepaper Preparation: Issuers must prepare, publish, and notify the competent authority of a Whitepaper. This document should detail key features of the crypto asset, rights and obligations, underlying technology, and associated risks.
Requirements: The issuer must be a legal entity and comply with conduct requirements. Changes to the Whitepaper must be reported within 7 days.
Exemptions: No Whitepaper is required for free offerings, utility tokens exchangeable for existing goods or services, tokens in limited networks, offerings to fewer than 150 people per member state, sales under EUR 1 million in 12 months, or offerings only to qualified investors.
Trading Platforms: Platforms trading these assets must meet Whitepaper requirements if no Whitepaper is available.

2. Issuance of Asset-Referenced Tokens (ARTs) to the Public

Whitepaper Requirement: ARTs require an approved and published Whitepaper containing information about the issuer, the ART, the public offering or trading admission, rights and obligations, underlying technology, risks, and environmental impacts.
Organizational Requirements: The issuer must be a legal entity in the EU or a credit institution and provide comprehensive information on business models, governance structures, and risk management to the competent authority before issuance.
Conduct Requirements: Issuers must act fairly and professionally, ensure clear and non-misleading communication, and meet capital requirements. Significant ARTs (over EUR 100 million) face additional reporting and capital requirements.

3. Issuance of E-Money Tokens (EMTs) to the Public

Whitepaper Requirement: EMTs require a published and notified Whitepaper detailing the issuer, the EMT, the public offering or trading admission, rights and obligations, and underlying technology.
Organizational Requirements: Only credit institutions or e-money institutions can issue EMTs. They must submit detailed information on business models and risk management to the competent authority before issuance.
Conduct Requirements: The E-Money Directive’s rules apply, including the right to redemption at nominal value and specific safeguards for held funds.

Authorization Procedures for CASPs

Depending on their existing regulation, all CASPs must undergo specific authorization processes. The application for authorization is submitted to the relevant supervisory authority in each EU state. In Germany, for example, the supervision is carried out by BaFin in cooperation with the Bundesbank. MiCAR outlines general organizational, conduct, and transparency requirements for all authorization procedures.

1. Standard Authorization Procedure (Art. 62 and 63 MiCAR)

The standard authorization procedure is the norm and must be followed by Swiss issuers and CASPs. This does not apply if the Swiss issuer or CASP already holds a license in an EU country, in which case only the notification procedure is required.

This is the most comprehensive authorization procedure under MiCAR, necessitating the submission of an application for approval. The content of the application is detailed in MiCAR, but generally does not require documents already provided in previous authorization processes. MiCAR mandates the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) to design standard forms for the application process.

The process includes:

Application Review: The supervisory authority must check the application for completeness within 25 working days of receipt. Incomplete applications must be completed within a specified timeframe.
Decision Timeline: Approval or denial decisions are made within 40 working days of receiving the complete application, with notification within an additional 5 working days.

2. Simplified Authorization Procedure

EU member states are free to regulate a simplified procedure under MiCAR. Unlike the standard authorization procedure, EU member states may provide simplified requirements for companies that, as of December 30, 2024, hold a permit to provide services under national law. Such an application must be submitted by July 1, 2026, at the latest. After this date, all companies must go through the standard procedure.

If a permitalready exists in an EU state, it is advisable to examine the possibility of utilizing this option on a case-by-case basis and for the specific EU country. Notably, Germany has indicated in a draft bill that it intends to utilize the option of the simplified authorization procedure.

3. Notification Procedure (Art. 60 MiCAR)

The notification procedure is only relevant for Swiss companies if they already have a license in an EU country and are thus already regulated at the EU level.

For this procedure, providers only need to notify their intention to commence crypto asset services. This must be done at least 40 working days before the planned start of the activity. For companies, this means that no further permit is required for equivalent activities. Equivalence is particularly assumed under MiFID II concerning securities firms. However, the organizational, conduct, and transparency requirements set by MiCAR must still be observed.

Strategic Choices for Establishing a Presence in an EU Member State

Once the decision to apply for authorization is made, the question remains in which EU country this should be done. It is important to note that the application must be submitted in this EU country, and in addition, the company’s headquarters must be relocated there. The selection is a strategic decision and should be evaluated on a case-by-case basis for legal and timing advantages.

Choosing the right EU member state for establishing a presence involves considering several factors:

Regulatory Clarity and Support: Opt for a country with clear and supportive regulations.
Market Access: Access to a large and relevant market within the EU.
Infrastructure and Business Environment: A well-developed financial and business infrastructure.
Transition Period: Longer transition periods offer more time to adapt to new regulations.

EU Member States Considerations:

Liechtenstein (EEA): Proximity to Switzerland, similar legal frameworks, full access to the EU market via passporting, and a progressive stance towards crypto assets.
Germany: Stable regulation through BaFin, strong financial market infrastructure, and numerous support programs for FinTech companies.
Estonia: Known for digital innovation, flexible crypto regulations, and the E-Residency program.
Malta: Specialized crypto regulations, business-friendly environment, and attractive tax structure.
France: Detailed regulations, strong support for FinTech companies, and access to a large market.
Luxembourg: Financial stability, well-developed financial infrastructure, and a 12-month transition period.
Netherlands: Clear and advanced regulations, strong economy, and a 6-month transition period.

Conclusion

The MiCAR regulation impacts Swiss financial service providers, particularly issuers of crypto assets and CASPs who wish to serve EU customers. They must meet extensive authorization procedures and regulatory requirements for both primary and secondary market crypto services in the EU.

Swiss companies have the option to establish a presence in an EU member state and apply for authorization to utilize MiCAR passporting, or to comply with the complex requirements of reverse solicitation, which involves significant proof obligations and risks.

MiCAR offers Swiss companies opportunities to access the European market more easily and establish themselves in a regulated environment. The choice of the EU state for establishing a presence depends on regulatory clarity, market size, and infrastructural support.