Almost immediately after the adoption of the MiCA at the EU level, crypto law experts became interested in determining the territorial scope of the MiCA, namely, whether the activities of companies providing cryptocurrency services in third countries, i.e. countries outside the European Union, fall under the regulation of this Regulation.
It would seem that article 63 of the MiCA provides an exhaustive answer to this question, according to which “only a firm registered in an EU Member State may be authorised as a cryptoasset service provider”.
However, there is an exception to this rule in article 61(1) of the MiCA: “Where a client established or located in the Union initiates, at its sole and exclusive initiative, the provision of a cryptoasset service or activity by a third-country firm, the authorisation requirement under Article 59 shall not apply to the provision of that cryptoasset service or activity by the third-country firm to that client, including the relationship directly relating to the provision of that cryptoasset service or activity.”
This exception relates to the institution of the so-called “reverse solicitation”, which has become a central focus of the European Securities and Markets Authority (“ESMA”) in its Guidelines on reverse solicitation in the regulation of cryptoassets.
What is a “reverse solicitation”?
The main features of a “reverse solicitation” are disclosed in the MiCA. A reverse solicitation is an exclusive initiative of a client established or located in the EU that initiates the provision of a service or activity in the field of cryptoassets by a third country firm located outside the EU and, accordingly, not subject to the MiCA’s requirements for obtaining a CASP licence.
In general, the legal rationale for the existence of this legal institution is that “clients established or located in the EU should not be prevented from using the services of third country firms if they choose to do so without first contacting such firms”.
The guidelines also address the scope of the exemption from the reverse solicitation exemption, noting that it “only applies to third country firms, in accordance with Article 61 of the MiCA. Therefore, EU firms cannot use it to avoid the authorisation or notification requirements under the MiCA“.
Reverse solicitation has a narrow scope: ESMA argues that this exemption is “very narrowly worded and as such should be treated as an exception, it cannot be used to circumvent the MiCA”.
Main approaches to understanding the institution of “reverse solicitation” according to ESMA guidelines
ESMA emphasises that the rule set out in Article 61(2) of the MiCA is both clear and broad in scope: “…where a third-country firm […] contacts clients or potential clients in the Union, regardless of the means of communication used for such contact, promotion or advertising in the Union, this shall not be considered a client-initiated service”.
On this basis, any offer, promotion or advertising within the EU should be subject to regulation. This explains the broad definition of “offer” set out in the guidelines.
A third-country firm must specifically intend to attract potential customers from the EU, or at least be aware of the high probability that its marketing activities will reach a significant number of customers from the EU. To assess whether such intent or awareness exists, all the facts and circumstances of the particular case should be considered.
Indeed, having a website translated into an official EU language that is not a commonly used language in international finance (e.g. English) may be an important indicator. However, the totality of the facts and circumstances of the case are relevant to assessing whether a third country firm is attracting EU clients. Therefore, the language of the website cannot be the sole factor in determining a firm’s intention to operate in the EU market. If other factors indicate that there is no intention to attract EU customers, national competent authorities should also take this into account.
For example, if a third-country firm has a website in Spanish because it originates from a non-European jurisdiction where Spanish is an official language, this may be justified by its local context. However, even in such circumstances, a firm may target EU clients in a targeted manner, for example, through search engine optimisation (“SEO”) aimed at Spanish users to increase the likelihood that Spanish clients will find its website when searching for information about crypto assets or related services.
ESMA is aware of the concern that the guidelines may restrict publications or activities that are not typically intended to attract customers or promote a brand or service. This applies, for example, to educational materials or industry events aimed at promoting innovation. However, the purpose of the guidelines is not to limit such activities. In practice, however, it is often the case that such publications or events are used to promote a brand, product or service, either directly or indirectly, for example by providing links to a company’s website or app among the learning links of an educational course.
In accordance with paragraph 11 of this guideline, solicitation by third country firms should be interpreted broadly and in a technology-neutral manner.
Solicitation includes the promotion, advertising or offering of cryptoasset-related services or activities to customers or potential customers in the Union by any means. This may include:
- online advertising;
- brochures
- telephone calls
- emails;
- banners, pop-ups and/or similar tools on websites and social media;
- face-to-face meetings;
- press releases;
- other forms of physical or electronic media, including websites, social media platforms, mobile applications;
- participation in roadshows and exhibitions;
- invitations to events;
- campaigns;
- advertising retargeting;
- invitations to complete a survey or take a training course;
- messaging platforms;
- sponsorship agreements.
A company should not be considered to be soliciting customers if the service or activity with crypto assets is provided on the customer’s own initiative. The customer’s own exclusive initiative should be interpreted narrowly.
In general, such measures should not serve as a disguised way to attract customers or advertise in the EU.
Clarification of the issue of the client’s “initiative” in the context of the institution of a reverse solicitation
As can be seen from the definition above, the reverse solicitation exception is based precisely on the assumption that the product or service is provided solely at the client’s initiative and applies only to the specifically requested service or product.
As noted above, Article 61(2) of the MiCA prohibits third-country firms from using a client’s initiative to promote new crypto assets or crypto-related services. However, companies are allowed to sell the same crypto assets or services that were previously requested, provided that the contact was initiated by the client. However, if a certain amount of time has passed since the initial contact, it can no longer be assumed that the contact was made at the sole initiative of the client.
ESMA notes that it is neither possible nor appropriate to clearly define a specific timeframe for such a situation, as it depends on the individual circumstances of each case.
Furthermore, in accordance with paragraph 16 of the guidelines, ESMA considers that an offer, advertisement or promotion does not necessarily have to relate to a specific crypto asset or service to be considered a marketing activity. This eliminates the possibility for third country firms to rely on Article 61 MiCA as a basis for promoting new products.
In addition, paragraph 20 of the guidelines states that a person may seek EU clients on behalf of a third country firm even if there is no formal agreement or remuneration between them.
ESMA emphasises that third-country firms are prohibited from using client initiatives to promote new types of crypto assets or related services. This means that even if the client initiated the contact, the firm cannot use this connection to offer new crypto assets or services. At the same time, MiCA allows the same types of crypto assets or services to be sold, provided that the initial contact was initiated by the customer. However, if sufficient time has elapsed since the contact was made, this cannot be considered a continuation of the original customer initiative.
ESMA underlines that such time limits only apply to the marketing of new cryptoassets or related services of the same type that were originally requested by the client at his or her initiative. These restrictions do not apply to an ongoing relationship between a firm and an EU client if it was initiated solely by the client. For example, if a client has requested a particular service that involves a long interaction between the client and the firm, this relationship may continue without time limits, except when it comes to marketing new products or services.
Thus, a third-country firm is prohibited from using an ongoing relationship with a client to promote new crypto assets or services if they are of a different type or if a significant amount of time has passed since the initial request. In such a case, this marketing can no longer be considered to have been initiated solely by the client.
According to paragraph 8 of Annex II to the guidelines, ESMA establishes that time is of the essence when a third country firm relies on the exemption from the reverse solicitation exemption provided by Article 61 MiCA. If a third-country firm meets all the conditions to rely on the exemption from the reverse solicitation, it can only do so for a very short period of time. It is said that a period of 10 days may be considered reasonable, but again, it is not universal, as each situation should be assessed on a case-by-case basis.
Regarding the regulation of the issue of “types” of cryptoassets, in the context of the institution of reverse solicitation
According to the guidelines, the question of whether a third-country firm is selling the “same type” of cryptoassets, cryptoasset-related services or activities should be determined on a case-by-case basis, taking into account the following elements:
- the type of cryptoassets, services or activities related to cryptoassets offeredж
- risks associated with the new type of cryptoassets, services or activities related to cryptoassets.
Again, the principle of an individual approach to each case is applied.
ESMA also provides a non-exhaustive list of cryptoasset pairs that should not be considered as belonging to the same type of cryptoasset for the purposes of the reverse solicitation exemption.
National competition authorities should take into account all the facts and circumstances to assess whether a third-country firm is seeking customers based or located in the EU. The invitation to tender may be made by the firm itself or by any person acting on its behalf or having close ties with it.
Indications that a person is acting on behalf of a third country firm may include, for example, directing potential clients to the firm’s website, providing access to its services, displaying advertising offers or the firm’s logo. Another important indicator is the existence of any remuneration or benefit (monetary or non-monetary) provided by the company to the third party. This is a good reason to believe that the third party is acting in the interests of the third country firm.
However, the absence of such remuneration does not necessarily exclude the possibility that the person may be acting on behalf of the firm.
As conclusion
In general, the ESMA guidelines clarify in some detail the MiCA requirements for the application of the “reverse solicitation” exception. It is constantly emphasised that this exception should not be abused and that the CASP licensing regulations should not be circumvented.
Thus, as third-country entities may seek to circumvent the authorisation requirements of Article 59 MiCA in various ways and methods, ESMA emphasises that it is very important that competent authorities closely monitor the activities of third-country entities in their jurisdictions, if any. Given that cryptoasset services are almost exclusively offered and promoted online, particular attention should be paid to the online activities of third-country entities.
This guidance is accompanied by an annex containing a non-exhaustive list of examples of circumstances in which a third-country firm may be considered to be soliciting EU customers, i.e. in breach of Article 61 MiCA.
Here are some of them:
- The third-country firm sponsors a sporting event that is focused on the EU or an EU Member State, such as a national championship or European championship.
- A third country firm directs potential EU customers to its website by including a link to the website in its training materials.
- The third-country firm is contacted by an EU customer who wishes to purchase a crypto asset. The EU customer installs the third country firm’s mobile application on his mobile phone to trade in that crypto asset.Two days after the first transaction, the EU customer receives a push notification encouraging him to return to the third country firm’s mobile application to see what crypto assets are trending, including crypto assets that are not of the same type as those originally traded by the EU customer.
- A third-country firm is approached by an EU individual to provide a specific crypto asset management service. In response, the third-country firm offers the individual a crypto asset management package.
In this way, ESMA is trying to strike a balance between the regulation of crypto assets in the EU and the ability of clients to use the services of third-country firms if they have initiated such a relationship, i.e. the freedom of choice of counterparty, which is one of the fundamental principles of law.
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