The European Securities and Markets Authority (ESMA) has taken a significant step towards greater transparency and investor protection in the crypto-asset market with its draft technical standards on conflicts of interest (CoI). These standards, issued under the Markets in Crypto-Assets Regulation (MiCA), provide a comprehensive framework for how CASPs must identify, prevent, manage, and disclose conflicts of interest.
What's in the Draft Standards?
Borrowing from Tradition: The draft standards draw heavily from existing regulations for investment firms (MiFID II) and credit institutions (CRD), ensuring consistency and a level playing field across financial sectors.
Proportionality is Key: The ESMA recognises that one size doesn't fit all. The requirements are designed to be proportionate to the scale and complexity of each CASP's business model.
Broad Scope: The standards cover a wide range of potential conflicts, including those between the CASP and its shareholders, management, employees, and clients, as well as conflicts between different clients.
Specific Rules for Placing Crypto-Assets: Additional procedures are outlined for CASPs involved in placing crypto-assets to address unique conflicts that can arise from incentivized offers.
Detailed Disclosure: CASPs must provide a clear and detailed description of the general nature and sources of conflicts, along with the steps taken to mitigate them. This disclosure must be readily available on their websites.
Implications for CASPs: What You Need to Do
Robust Policies & Procedures: Develop and maintain comprehensive policies and procedures tailored to your business activities and risk profile.
Thorough Risk Assessment: Identify all potential conflicts of interest, including internal relationships, external affiliations, and specific activities like crypto-asset placement.
Effective Mitigation: Implement appropriate measures to prevent, manage, and mitigate identified conflicts, always prioritising the best interests of your clients.
Transparent Disclosure: Ensure clear and detailed disclosure of conflicts of interest on your website, allowing clients to make informed decisions.
Stay Compliant: Once adopted, these standards will become mandatory. Ensure your CoI policies and procedures are fully compliant with the final RTS.
Additional Considerations
Vertically Integrated CASPs: Even if your firm offers multiple crypto-asset services, you are still subject to the exact CoI requirements.
Confidentiality Concerns: While the RTS acknowledges the need to protect sensitive information, transparency is paramount for investor protection.
Resource Allocation: Allocate sufficient resources to effectively manage conflicts of interest, including appointing a designated person responsible for this function.
A Step Toward Trust and Transparency
These draft technical standards signal a significant shift towards greater transparency and investor protection in the crypto-asset market. By implementing these standards, CASPs can demonstrate their commitment to ethical practices and build trust with their clients.