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EU market regulator warns crypto remains unregulated until full MiCA implementation

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(Kitco News) - The European Union’s financial markets regulator has warned investment companies that they must ensure their clients are aware that digital assets like cryptocurrency will remain unregulated in most jurisdictions for the time being.

The European Securities and Markets Authority (ESMA) issued a statement on Thursday directing financial firms operating in the EU to proactively inform their customers of the regulatory status of the products they offer, with crypto a particular area of concern.

“Specifically on crypto assets, while the Markets in Crypto-Assets Regulation (MiCA) is close to adoption, crypto assets offered by investment firms will continue to be unregulated in most jurisdictions until MiCA applies,” they wrote. “Some Member States have domestic legislation and specialist regimes in place which can provide protections for investors in relation to investment firms selling unregulated products and/or services. However, specialist regimes may not exist in all Member States and may also not address all unregulated products encountered.”

On May 16, the EU’s landmark MiCA bill reached another milestone as the finance ministers of all 27 member states voted to approve it. The European Parliament previously approved MiCA on April 20, with 517 members of parliament voting in favor and 38 voting against it.

MiCA is a comprehensive and far-reaching piece of legislation, but its implementation will be carried out in phases. While provisions related to stablecoins could come into force by July 2024, many of the other provisions won’t take effect until January 2025 at the earliest.

The ESMA said that until MiCA is fully implemented across the EU, when investment firms offer both regulated and unregulated products and services “there is a significant risk that investors may misunderstand the protections they are afforded when investing in those unregulated products and/or services,” and may believe that the protections of the regulated ones apply to the unregulated ones.

The regulator is also concerned that “the investment firm’s reputation, or ‘halo effect’, may often serve to provide potentially misguided reassurance in relation to the unregulated products and/or services offered by that investment firm, although such products may present heightened risks relating to complexity, illiquidity or even fraud.” They suggested that “Some investment firms may encourage the confusion between regulated and unregulated products and services.”

The ESMA recommends that investment firms “take all necessary measures to ensure that clients are fully aware of the regulatory status of the product/service they are receiving,” and that they “clearly disclose to clients when regulatory protections do not apply to the product or service provided.”

They also directed firms to “clearly and effectively communicate” the regulatory status of each product “at every stage of the sales process”; to ensure all product information is “fair, clear and not misleading”; to never use the firm’s regulatory status “as a promotional tool”; and to ensure the information on their website about unregulated activities “is clearly distinguished from regulated activities.”

Even as MiCA moves forward, EU legislators have more work ahead as several important sectors of the cryptocurrency ecosystem are not addressed in the bill, including non-fungible tokens (NFTs) and decentralized finance (DeFi) applications.

Reactions from regulators since MiCA’s passage in April have been largely positive, with some focusing on the ways it can be implemented while others see inspiration in it for their own jurisdictions.

On May 11, European Banking Authority (EBA) Chair José Manuel Campa said he wants central banks to use their powers under MiCA to veto big stablecoins if they believe the cryptocurrencies could threaten their monetary policy.

Campa's agency will be directly responsible for supervising major issuers under MiCA. In addition to requiring stablecoin issuers to obtain a license and hold suitable reserves, the legislation allows central banks to intervene on companies’ proposals to issue new stablecoins, referred to in MiCA as ‘asset-referenced tokens.’

It will also require the issuance of the stablecoins to cease if the tokens reach over 1 million transactions per day.

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