ESMA vs. European Commission: diverging approaches to Conflict of Interest under MiCA

On November 29, 2024, the European Commission sent a letter to ESMA (https://finance.ec.europa.eu/document/download/ff17c445-6a7e-4d48-a9f8-2ae1392429bc_en?filename=241129-letter-esma-mica-crypto-asset-service-provider_en.pdf) regarding the draft Regulatory Technical Standards (RTS) submitted by ESMA on May 31, 2024. The draft pertains to conflict of interest policies and procedures for Crypto-Asset Service Providers (CASPs) under the MiCA Regulation (EU 2023/1114). In its letter, the Commission requested several amendments to ensure alignment with MiCA’s legal mandate.

The proposed amendments primarily address the following points:

?? Personal transactions:

The Commission argued that ESMA's draft RTS (Articles 6 and 7) did not clearly specify how personal transactions and related policies align with MiCA's core mandate (Article 72). To address this issue, the Commission proposed:

• limiting the scope of the RTS to cover only personal transactions explicitly linked to conflicts of interest.
• simplifying these provisions by focusing on the relationship between CASPs and their employees, managers, and stakeholders.

?? Remuneration policies and resource allocation:

The Commission expressed concerns that ESMA's draft RTS may overextend MiCA's mandate by treating remuneration policies and resource allocation as stand-alone obligations. Instead, it recommended clarifying that these obligations should only be considered within the broader conflict of interest framework, rather than as separate regulatory requirements.

The Commission emphasized the need to ensure compliance with the principle of proportionality, aiming to reduce unnecessary regulatory burdens on CASPs and stressing that no additional obligations beyond those required by law should be introduced.

?? This week, ESMA issued its response in a dedicated Opinion (https://www.esma.europa.eu/sites/default/files/2025-01/ESMA35-1872330276-2021_Opinion_on_amendments_to_RTS_on_CoIs_of_CASPs_under_MiCA.pdf).

ESMA's position is notably more stringent across all areas under review.

?? Personal transactions:

ESMA maintains that personal transactions pose a high risk of conflicts of interest and argues that some transactions should be prohibited outright rather than merely monitored. It prefers to keep personal transactions as a stand-alone regulatory requirement, rather than incorporating them into a broader conflict of interest policy.

ESMA proposes to:

• strengthen the connection between personal transactions and conflict of interest policies by specifying clear prohibitions.
• maintain absolute prohibitions on transactions that could violate MiCA or other applicable regulations.
• address conflicts that could harm both CASPs and their clients by prohibiting the improper disclosure or misuse of confidential information.

?? Remuneration policies and conflicts of interest:

ESMA is concerned that inappropriate remuneration structures may incentivize actions that prioritize personal or corporate profits over client interests, potentially leading to unfair treatment or conflicts of interest.

Differently from the European Commission ESMA proposes to:

• reintroduce the definition of “remuneration” to include both financial and non-financial incentives, ensuring that CASPs cannot circumvent their obligations.
• clarify that remuneration policies must take into account short, medium, and long-term client interests, ensuring sustainability and fairness.
• introduce guidance to help CASPs align their compensation practices with conflict management policies to prevent excessive risk-taking.

ESMA opposes the removal of the definition of remuneration, warning that it could allow CASPs to adopt a narrower interpretation, potentially excluding non-financial benefits and performance-based incentives from conflict of interest policies.

?? In conclusion, ESMA takes a notably stricter approach to the Regulatory Technical Standards under MiCA compared to the European Commission, driven by a combination of institutional priorities and political considerations.

While the Commission aims to strike a balance between fostering innovation and ensuring regulatory compliance, ESMA focuses primarily on financial stability and investor protection. This difference in approach reflects broader dynamics within the EU, where the Commission seeks to encourage economic growth and competitiveness, while ESMA, influenced by national regulators, adopts a more cautious stance to prevent potential market disruptions. Its rigorous stance also serves to position the EU as a global leader in financial regulation, ensuring alignment with international standards and safeguarding the European market from emerging risks.

However, this approach, while well-intentioned, would be more effective and fair if ESMA made a greater effort to consider the vast differences in business models and sizes among potential crypto-asset service providers (CASPs). Recognizing these differences and recommending a proportionate approach to national competent authorities (NCAs) would ensure that regulations are applied in a way that fosters innovation while maintaining robust consumer protection.