MiCA's Approach to Market Abuse in Crypto-Assets Trading

Question

How does MiCA address the issue of market abuse in crypto-assets trading?

Executive Summary

In response to the entrepreneur’s question on how MiCA addresses market abuse in crypto-assets trading, the following summary outlines the key aspects of the regulatory approach:

  • Market Abuse Definitions: MiCA specifies what constitutes inside information and market abuse, focusing on non-public, price-sensitive details that could unfairly influence crypto trading.
  • Market Manipulation Prohibited: Any deceitful actions that misrepresent supply, demand, or price of crypto-assets are prohibited, except for transactions carried out for legitimate reasons.
  • Insider Dealing and Disclosure: Trading on inside information, or its unlawful disclosure, is strictly forbidden, protecting market integrity.
  • Enforcement and Penalties: Authority to demand information, suspend services, and impose administrative penalties provides robust tools to clamp down on market abuse.
  • Transparency and Cooperation: Swift public disclosure of inside information is mandated, along with cooperation among competent authorities to preserve market fairness.

These points encapsulate MiCA’s comprehensive safeguards against market abuse, ensuring a fair and transparent crypto-assets trading environment.

Legal trace

Market Abuse Definitions and Scope

For the purposes of this Regulation, inside information shall comprise the following types of information:… (a) information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers, offerors or persons seeking admission to trading, or to one or more crypto-assets, and which, if it were made public, would likely have a significant effect on the prices of those crypto-assets… Article 87

The definition of “inside information” sets the stage for what constitutes market abuse in the context of crypto-assets, targeting unfair advantages in trading arising from access to non-public, price-sensitive information.

During its preparatory work and to assist the Commission, ESMA may take into account international developments and experience acquired in cooperation with the competent authorities of third countries as well as the experience relating to other Union market abuse frameworks… Article 87

This framework is contemplated within wider international and Union contexts, with the potential to adapt based on global market trends and best practices, ensuring that MiCA remains relevant and effective in combating market abuse.

Market Manipulation Prohibitions

No person shall engage in or attempt to engage in market manipulation. Article 91(1)

A blanket prohibition against market manipulation is stated, making any engagement or attempt at such behavior unlawful.

unless carried out for legitimate reasons, entering into a transaction, placing an order to trade… which: (i) gives, or is likely to give, false or misleading signals as to supply, demand, or price of a crypto-asset… Article 91(2)(a)

Market manipulation can occur not only through transactions but also through deceptive signaling about supply, demand, or price, albeit with exceptions for legitimate purposes.

Insider Dealing and Disclosure Regulations

For the purposes of this Regulation, insider dealing shall be deemed to arise where a person possesses inside information and uses that information by acquiring or disposing of…crypto-assets to which that information relates. Article 89(1)

Insider dealing is clearly defined and prohibited, with the articulation that using inside information for any trade affecting the relevant crypto-assets stands against legal and ethical trading norms.

No person in possession of inside information shall unlawfully disclose inside information to any other person… Article 90(1)

MiCA also combats insider dealing by restricting the flow of inside information, making any unlawful disclosure to third parties an infringement upon the market’s integrity.

Enforcement and Investigative Authority

(a) to require any person to provide information…which the competent authorities consider could be relevant… Article 94(1)(a)

To enforce the rules against market abuse, authorities are armed with expansive powers, including compelling information disclosure, critical for investigating potential abuses.

to suspend, or to require a crypto-asset service provider to suspend, the provision of crypto-asset services… Article 94(1)(b)

Suspension of services is a potent tool for competent authorities, acting as a strong preventative and punitive measure for non-compliance.

Penalties and Compliance Mechanisms

Member States shall…provide for competent authorities to have the power to take appropriate administrative penalties… Article 111(1)

MiCA establishes a regime of administrative penalties that underscore the significant legal and financial consequences of market abuse, incentivizing compliance through substantial fines linked to the benefits obtained from infractions.

ESMA shall develop draft regulatory technical standards… Article 92(2)

Service providers have a duty to report suspicious transactions and are instructed to adhere to specific standards, reinforcing compliance through ongoing reports and monitoring obligations.

Market Integrity and Transparency Framework

Issuers, offerors and persons seeking admission to trading shall inform the public as soon as possible of inside information… Article 88(1)

The swift public disclosure of inside information by relevant entities is mandated, facilitating transparency and informed decision-making within the market.

Cooperation in Combating Market Abuse

Competent authorities shall cooperate with each other for the purposes of this Regulation. Article 95(1)

MiCA emphasizes collaborative engagement among member states and EU bodies, sharing the responsibility to maintain the integrity of the crypto-asset market and counteract market abuse.

MiCA presents a comprehensive approach to addressing market abuse in crypto-assets trading, encompassing definitions and scope, prohibitions against market manipulation and insider dealing, authoritative enforcement powers, a rigorous penalty framework, reporting obligations for service entities, requirements for market integrity, and a cooperative cross-border regulatory structure. This multilayered defense against market abuse is designed to protect the emerging crypto-asset market from manipulation and insider wrongdoing, ensuring a fair and transparent trading ecosystem.

PDF Repository

We have searched through the PDF repository of draft EBA and ESMA guidelines, draft technical standards, and other documents to provide this supplemental answer.

Details

In light of the query about how the Markets in Crypto-Assets Regulation (MiCA) addresses market abuse in crypto-assets trading, this answer provides enriched insights into regulatory background, classification criteria for crypto-assets, and compliance mechanisms.

Legal trace

Regulatory Oversight and Classification of Crypto-Assets

The Regulation on markets in crypto-assets (MiCA) was published in the Official Journal of the EU on 9 June 2023. The European Securities and Markets Authority (ESMA) has been empowered to develop technical standards and guidelines specifying certain provisions. (Draft) Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments, page 4

This quote illuminates ESMA’s role under MiCA, highlighting the establishment of a regulatory framework for crypto-assets, including the development of guidelines and standards aimed at establishing a clear, uniform application of the law. The empowerment of ESMA is critical for refining the classification of crypto-assets, which indirectly impacts market abuse by ensuring a robust regulatory environment.

The guidelines apply to competent authorities and to financial market participants, including issuers as defined in Article 3(1), point (10), of MiCA, crypto-asset service providers as defined in Article 3(1), point (15), of MiCA, investors and all persons engaging in activities relating to crypto-assets. (Draft) Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments, page 26

This statement elucidates who must adhere to MiCA guidelines, underscoring the broad scope of regulatory compliance. By clarifying the parties subject to these rules, this enhances our comprehension of the ecosystem built to mitigate market abuses through classification and compliance.

Enhancing Market Integrity through Regulatory Frameworks

The reverse solicitation regime leaves open the possibility for a third-country firm to market crypto-assets or crypto-asset services or activities of the same type, subject to the third-country firm also complying with Guideline 3 above. (Draft) Guidelines on reverse solicitation under MiCAR, page 20

This extract delves into the control of third-country firms under MiCA, shedding light on the necessity for these firms to comply with EU regulations, thereby ensuring a level playing field and mitigating market abuses by reinforcing the integrity of the EU crypto-asset market.

If crypto-assets are capable of being traded on a multilateral system equivalent to a MiFID trading platform, this will be a conclusive indication that they are negotiable on a capital market. (Draft) Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments, page 33

By emphasizing the criteria for crypto-assets’ negotiability on capital markets, this quote directly relates to the regulatory oversight that ensures market transparency and integrity. The capacity for trading on platforms akin to those regulated under MiFID suggests a higher level of scrutiny and governance, crucial for preventing market manipulations and insider dealing.

Collaborative Regulation and Compliance Mechanisms

Competent authorities should follow up on complaints from clients or information from whistle-blowers indicating that a third-country firm might have been soliciting clients in its jurisdiction. (Draft) Guidelines on reverse solicitation under MiCAR, page 21

This demonstrates the proactive measures in place under MiCA for regulatory authorities to respond to potential infringements or abuses, highlighting the importance of collaboration and vigilant oversight in maintaining market integrity and combating abuse.

Definitional Clarity and Regulatory Implications

Non-Fungible Tokens refer to crypto-assets that are unique and not fungible with other crypto-assets as mentioned in Article 2(3) of MiCA. (Draft) Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments, page 28

The classification of Non-Fungible Tokens (NFTs) within the MiCA framework provides foundational clarity that is paramount for regulatory purposes. Understanding such definitions is critical for stakeholders to navigate the regulatory landscape effectively, which indirectly aids in the prevention of market manipulation and abuse by delineating clear boundaries and obligations for different asset types.

By integrating these insights into our analysis, we offer a multifaceted perspective on how MiCA and associated regulatory efforts contribute to combating market abuse, enhancing market integrity, and ensuring transparency within the crypto-asset trading ecosystem.