The European Securities and Markets Authority (ESMA) has issued a stern warning to crypto companies across the EU, telling them to stop misleading customers about how much protection their products offer.
The warning comes as part of the broader rollout of MiCA (Markets in Crypto-Assets), the EU’s sweeping new rules for digital assets. While this regulation brings much-needed clarity to the crypto world, it seems that companies are using their regulatory status in ways that confuse rather than protect investors.
The Problem with Mixed Messaging
ESMA’s main concern centers on how crypto asset service providers (CASPs) are marketing their services. Many companies now offer both regulated and unregulated products on the same platform, which creates a dangerous gray area for customers. When investors see that a company has MiCA approval, they might assume all services on that platform carry the same protections.
This assumption can be costly as MiCA doesn’t cover everything. For example, direct commodity investments like gold and crypto lending services fall outside its scope. Yet some companies are using their regulated status as a marketing tool, suggesting to customers that they’re fully protected when they’re not.
The issue becomes even more complex when you consider that investors exploring upcoming crypto presales and other new opportunities need clear information about what protections apply to different products. Without proper disclosure, people can’t make informed decisions about where to put their money.
Learning from Previous Failures
The push for better disclosure is becoming more relevant in the wake of multiple high-profile failures of crypto platforms that left millions of investors with nothing. The downfall of FTX in 2022 is a prime example of the rapid developments occurring in the crypto sector failing. The failures in the crypto space raised rational questions over the need for stronger investor protections and highlighted the key questions of what companies can and cannot promise to their customers.
European regulators observed these failures and determined they needed to act. MiCA represents their solution – a new framework with provisions for the custody of assets, handling complaints, and clarity of disclosure explaining what protections apply to different products.
New Rules, New Responsibilities
As part of MiCA, crypto companies will now have to apply for a CASP license, on a national basis, through a national regulator. The CASP license also operates as a passport, allowing crypto companies to provide services in all EU member states. But this privilege doesn’t come without obligations. Companies must also be clear about the extent to which the protections apply to their products and which products do not have regulatory protection.
ESMA has also included conditions related to the staff at crypto companies. Employees of crypto companies should have extensive training and experience working in the industry under supervision to properly advise customers. This obligation means that the company should be fully transparent to customers and regulators when representing their products.
Malta Under the Spotlight
The timing of ESMA’s warning was a well-thought-out action. It came just one day after the regulator published a review of Malta’s licensing process, which highlighted some concerning gaps. The review examined how Malta’s Financial Services Authority reviewed crypto companies and found that the process “partially” meets expected standards.
In particular, the review found that the Maltese regulator did not conduct a proper assessment of the risks posed by an unnamed crypto company. Although Malta had the skills and resources to assess the business properly, the review concluded that they did not follow the approval of the company to the level that was expected.
Malta’s response was defensive, with the entity saying it was proud to be “early adopters” of rules for digital assets, but did not contest the specific issues raised by ESMA. This response indicated a clash between national regulators who are motivated to invite crypto businesses to their location and the EU regulatory authority, focused on investor protection.
Speed vs. Safety
Some regulators have expressed concern in private about how quickly some EU member states are providing crypto licenses. This rush to approve companies could be due to competition between countries to become the crypto equivalent of Miami or New York.
However, ESMA’s warning alluded to the idea that speed should not sacrifice proper oversight. The warning indicated that the regulator wants to ensure licensing processes are sufficiently thorough and that companies understand their obligations to investors before onboarding immediate customers.
What This Means for Investors
Concerning individuals who are investing in crypto, these regulatory changes should provide enhanced protections and clarity. Companies are required to be more transparent in identifying which products are covered under MiCA protections or other requirements. This creates greater transparency for investors and is designed to help them make better decisions as to where they want to invest.
The new rules will also have implications for crypto companies operating in the EU, as they will have to adopt higher standards of customer service to physical asset protection. While this may incur additional costs for some services, it is meant to reflect the time and attention needed to deliver safer services and products.
Looking Forward
ESMA’s news release represents a significant milestone in the development and growth of euro-crypto regulation. The release indicated that licensing is not a license to mislead consumers and that licensed companies are expected to provide consumer protections and proper disclosure of the protections that apply to different products.
This forms the basis for a broader emerging approach by regulators, which recognizes the potential of digital assets and an overall shift from regulatory attempts to ban all digital assets, towards creating crypto regulation and frameworks for innovation in which protections for clients and consumers hinge on investors’ understanding their obligations and responsibilities as they conduct business.
The challenge now is for regulators and companies of all sizes to deliver regulation and static frameworks that will fulfil their requirements.
Peyman Khosravani is a global blockchain and digital transformation expert with a passion for marketing, futuristic ideas, analytics insights, startup businesses, and effective communications. He has extensive experience in blockchain and DeFi projects and is committed to using technology to bring justice and fairness to society and promote freedom. Peyman has worked with international organizations to improve digital transformation strategies and data-gathering strategies that help identify customer touchpoints and sources of data that tell the story of what is happening. With his expertise in blockchain, digital transformation, marketing, analytics insights, startup businesses, and effective communications, Peyman is dedicated to helping businesses succeed in the digital age. He believes that technology can be used as a tool for positive change in the world.
