Reverse solicitation under MiCA

What is the scope of this exemption from the licence requirement in practice?

4 April 2024

In the previous editions of our series on the Markets in Crypto-Assets Regulation ("MiCA"), we discussed the two routes by which crypto-asset services can be provided from 31 December 2024: (1) the licence and (2) notification. MiCA offers an exemption from the licence requirement in the event of reverse solicitation. But what is reverse solicitation, and to what extent can crypto-asset service providers ("CASPs") rely on the exemption when entering the EU market without licence or notification? We will answer those questions in this edition.

Reverse solicitation for CASPs under MiCA

Reverse solicitation occurs when an EU client requests crypto-asset services from a third-country CASP. The CASP will be exempt from the MiCA licence requirement on condition that the services are provided on the client's own exclusive initiative. The exemption only applies to the specific service or activity requested by the client, and the relationship that the CASP enters into with the client must be specifically related to the provision of that service or activity.

MiCA also explains what does not constitute reverse solicitation: indirect solicitation of clients, regardless of the means of communication used. Any clause or disclaimer stating that the service is deemed to be provided on the client's initiative will not change this. The CASP must be able to demonstrate the client's own initiative upon request. In addition, the client's own initiative does not entitle the CASP to market new types of crypto-assets or crypto-asset services to this client.

In theory, reverse solicitation could be a significant exemption from the MiCA licence requirement for the crypto market, which is, after all, characterised by large global online service providers that are regularly based outside the European Union. However, reverse solicitation can also create pitfalls. If CASPs wrongly believe they are exempted, they run the risk of breaching the licence requirement and incurring high penalties as a result. It is therefore important to know the conditions under which the reverse solicitation exemption can be relied upon. Since this concept is also found in MiFID II (applicable to investment firms), we will discuss the relevant guidance for reverse solicitation under MiFID II below. This guidance may also give pointers for the scope of the MiCA exemption.

Reverse solicitation for investment firms under MiFID II

The reverse solicitation exemption is construed narrowly under MiFID II. For example, after Brexit, UK investment firms relied on the reverse solicitation exemption with reference to their contracts, which stated that the services were provided on the clients' initiative. The European Securities and Markets Authority ("ESMA") stated its disapproval of these practices. The determining factor is who really took the initiative for the services. This has now been expressly laid down in MiCA.

Another key takeaway from MiFID II is that any form of client solicitation precludes reliance on the reverse solicitation exemption. This applies regardless of whether the advertising or promotional activities are performed by or on behalf of the investment firm or through an entity having close links with it. For CASPs, this requirement is now expressly laid down in MiCA. ESMA gives several examples of promotion and advertising under MiFID II, including press releases, internet commercials, brochures, telephone calls and face-to-face meetings. Accordingly, CASPs should be very much aware of their public communications to ensure their advertising reach does not unintentionally extend to EU citizens. This can readily be the case in this digital age, which may have major consequences for CASPs' licence requirement (and any sanctions).

ESMA Guidelines for reverse solicitation under MiCA

On 29 January 2024, ESMA published draft guidelines on the interpretation of reverse solicitation under MiCA. They largely reflect current practices under MiFID II. Our overall impression is that ESMA aims to limit the use of the exemption as much as possible. For example, the introduction immediately sets the tone: the reverse solicitation exemption can only be relied upon in limited situations. In line with this, ESMA then defines four guidelines:

1. Client solicitation by CASPs should be construed in the widest possible way. This reflects current practices under MiFID II. However, what is new in addition to the MiFID II examples, is that ESMA also expressly states that any form of physical or electronic means of communication can be regarded as solicitation of clients, including social media and mobile applications.

2. CASPs' direct solicitation of clients as well as indirect solicitation through third-party firms preclude any reliance on the reverse solicitation exemption. This is in line with current practices under MiFID II. A new example mentioned by ESMA is using influencers to attract clients. An influencer directing the audience to the CASP's website, explaining how to access the CASP's services, offering promotional deals or even displaying the CASP's logo are all indications that the influencer is acting on behalf of the CASP.

3. MiCA provides that the client's initiative does not entitle the CASPs to then expand their services with new services or activities. However, according to ESMA, this does indicate that a CASP is allowed to proactively market services or crypto-assets of the same type. But what is the same type exactly? That depends on (i) the type of crypto-asset or service and (ii) the risk attached to the new type of crypto-asset or service offered. These elements still leave much room for interpretation and discussion. We advise CASPs to ask an external party to assess their considerations and to keep detailed client records. We would be happy to share our ideas on how to implement these aspects in a pragmatic and practicable way.

4. ESMA believes that the client's own initiative should be construed narrowly and that this is a factual assessment. Even if a client took the initiative and the CASP subsequently provides additional services of the same type (see no. 3 above), there will be a risk that the CASP will be subject to the licence requirement. These additional services may only be offered in the context of the original transaction. If this is not the case, the initiative is no longer the client's. Specifically, this means that the time between the client's request for the original service and the CASP's offering of the second service matters. ESMA states that the lapse of a month or even a couple of weeks excludes reliance on the reverse solicitation exemption. Here, too, recording the own initiative is very important to ensure that any further services are provided within the outlined frameworks of reverse solicitation.

While these ESMA Guidelines have only been presented in draft form for consultation purposes, we do not expect any material changes. This is because the guidelines reflect current practices under MiFID II, which already greatly narrowed the scope of the reverse solicitation exemption. Third-country CASPs should observe caution in various respects. We would be happy to share our ideas on how to set up the communication channels to ensure that EU clients are not unintentionally solicited, which would give rise to the licence requirement. We can also assist you in your reverse solicitation based services to ensure that you continue to operate within the limits of the exemption, preventing any breach of EU regulations and subsequent penalties.