MiCAR: ESMA defines the scope of services covered by the regulation

The Markets in Crypto-Assets Regulation: EU Regulation 2023/1114 (MiCar) introduced a specific regulatory framework for the cryptocurrency sector in the European Union. However, the innovative nature and continuous evolution of this market has generated questions as to how the regulation applies to services and activities that are not expressly regulated, but which by their nature could fall within its scope.

The recent Q&A published by the European Securities and Markets Authority (ESMA) (Q&A ESMA_QA_2067 and Q&A ESMA_QA_2463) provide key clarifications on two specific activities that are of particular interest to traders: staking services and copy trading services. 

Staking services: between direct activity and intermediation

Staking is a process that consists, among other things, of the allocation of crypto-assets in special smart contracts to participate in the validation of blocks in a blockchain network through proof-of-stake consensus mechanisms. Such participation contributes to the security and functioning of the network and is compensated through the provision of rewards in the form of additional tokens.

In this regard, ESMA_Q&A_2067 clarified that the MiCAR does not prohibit staking, nor does it subject it to specific authorisation requirements when conducted directly by the crypto-asset holders themselves. 

In contrast, when staking is provided as a service through intermediaries, the intermediaries receive customers' crypto-assets, they immobilise them on the clients' behalf, taking on the role of validators and acquiring the associated rewards, and then distribute the proceeds to their clients in accordance with the relevant agreements. In this case, ESMA has stated that staking services must be considered as ancillary to the provision of cryptocurrency custody and administration services, which are expressly regulated by MiCAR. It follows that providers of such services will need to be licensed as crypto-asset service providers (CASPs) in order to provide custody and administration services, subject to the requirements of, among other things, Article 75 of the MiCAR. 

ESMA has clarified that CASPs may offer the staking service as long as the profits from the staking service are allocated to the clients holding the staked crypto-assets. This rule should, however, still be compatible with the possibility for CASPs to contractually agree to share the proceeds with the clients.

ESMA prohibits CASPs from using clients' crypto-assets to conduct staking activities on their own account. Article 70(1) of the MiCAR, in fact, expressly provides that CASPs must "prevent the use of clients' crypto-assets for their own account", a principle which, in ESMA's view, is also strictly applied in relation to staking activities, even if the client has given its explicit consent.

Copy trading services: the application of MiFID II principles

In addition to staking services, ESMA has also provided clarification on another category of services relevant to the crypto market: copy trading. ESMA's Q&A ESMA_QA_2463 deals with these services, which consist of the automatic replication of investment strategies of other traders, allowing clients to "copy" the trades of "experienced" traders.

Copy trading is not explicitly defined by the MiCAR, so ESMA has adopted an interpretative approach based on its experience with MiFID II. The authority has determined that the definitions of "investment advice" and "portfolio management" under MiFID II are analogous to the services of "crypto-asset advice" and "crypto-asset portfolio management" under the MiCAR.

This parallelism means that the interpretative principles developed for MiFID II also apply mutatis mutandis to the MiCAR. The practical consequence is that copy trading services fall within the scope of the MiCAR, but have to be assessed and qualified on a case-by-case basis as one of the services already covered by the regulation: crypto-asset advice, crypto-asset portfolio management, or other regulated services, depending on the specific model adopted. Providers will therefore have to obtain authorisation as an appropriate CASP based on the qualification of the service they actually offer.

Implications for operators

The clarifications provided by ESMA have significant implications for cryptocurrency operators. Assessment of the business model becomes crucial to determine whether the services offered fall within the MiCAR definitions, which authorisations are required, and to plan the expansion of services with greater certainty so as to evaluate investments in new lines of business and develop competitive strategies that comply with the regulatory framework. This proactive approach to compliance can be transformed into a significant competitive advantage.

Osborne Clarke comment

ESMA's clarifications represent a key step in the practical implementation of the MiCAR. The substantive approach adopted by the European authority provides valuable guidance in navigating the complexities of a rapidly evolving industry, where technological innovation often precedes regulation.

The decision to extend MiFID II principles to copy trading services demonstrates a desire to maintain consistency of interpretation across financial sectors, while ensuring investor protection through appropriate authorisation requirements.

For staking services, ESMA's approach is particularly rigorous: while it recognises the decentralised nature of the activity when carried out directly by the crypto-asset's owner, it sets clear limits in the presence of an emerging intermediary relationship.