01 Feb MiCA – Market Abuse Prevention under MiCA
Market integrity has long been considered a key aspect of investor protection in traditional finance. Measures guaranteeing equal access to information and fair price formation with regard to financial instruments have been the subject of EU wide harmonization since 2003, which has resulted in the Market Abuse Regulation (MAR). As a new type of asset class, crypto products that do not qualify as financial instruments fall outside the scope of MAR, yet the markets that have grown around them have exhibited many of the same market abuse practices observed in traditional finance. In light of this, MiCA intends to introduce rules for the prevention of market abuse and market manipulation that closely resemble the legal framework established by MAR. Their scope will encompass all persons who carry out actions that concern crypto-assets admitted to trading platforms authorized under MiCA or crypto-assets that have requested admission to trading. One of the major differences between the market abuse regime under MAR and its corresponding counterpart under MiCA is that the latter has been adapted to take into account the relatively smaller size of issuers and service providers operating within the crypto industry, refraining from the imposition of measures that would cause a disproportionate administrative burden on such entities. The following paragraphs will examine the provisions contained in the draft Regulation, drawing parallels with MAR where appropriate in order to give a perspective on the extent of leniency afforded to crypto markets by legislators.
2. Disclosure of inside information
One of the pillars of preventing market abuse and manipulation is ensuring that all market participants have access to equal information. In order to achieve this, MiCA will require crypto-asset issuers to publicly disclose inside information regarding their company and tokens as soon as possible and in way that guarantees its quick and widespread dissemination among the public. According to the draft Regulation all data concerning issuers that is likely to have a significant impact on the value of their crypto-assets falls under the definition of inside information. Exceptionally, issuers can choose to delay the disclosure of inside information but only in circumstances when to do otherwise would prejudice the company’s legitimate interests. In order to be lawful, delays should not create a risk of misleading the public and the confidentiality of the information concerned must be guaranteed. Some illustrative examples of issuer legitimate interests can be sourced from the ESMA MAR Guidelines, which include but are not limited to situations where issuing companies are in the process of negotiating some type of restructuring or reorganization, such as mergers, acquisitions or splits, the outcome of which may be jeopardized by immediate disclosure as well as instances when the financial viability of an issuer is at stake and immediate disclosure could threaten the successful conclusion of recovery negotiations. Information regarding such events may cause frenzy buying or market panic that would fundamentally change the circumstances surrounding a planned corporate transaction.
3. Prohibition of insider dealing and unlawful disclosure of inside information
Insider dealing occurs when a person who possesses undisclosed inside information regarding an asset uses it to complete trades for his own benefit or recommend investment actions to another person. As already mentioned, information asymmetries within markets may put some investors at a disadvantage, which is why trading crypto-assets on the basis of undisclosed inside information will be prohibited by MiCA. By the same token, the disclosure of inside information to third parties regarding DLT products, outside the normal procedures and channels established for public dissemination will also become illegal following the entry into force of the draft Regulation. It is in relation to these rules that we notice some divergence between the upcoming MiCA Regulation and the already established MAR. In order to ensure better monitoring and enforcement of market abuse rules, MAR requires issuers of financial instruments to prepare and maintain insider lists, identifying all persons who have access to inside information by virtue of their occupation within the company. Under MiCA, however, crypto-asset issuers will have no such obligations. Likewise, entities expected to fall within the scope of the draft Regulation will not need to notify competent authorities whenever members of their management bodies conduct transactions on their own account with crypto-assets issued by their employer, while that is already a requirement for issuers of financial instruments under MAR. In the spirit of proportionality, MiCA intends to apply a shortened set of market abuse rules to crypto-asset issuers, alleviating the ongoing compliance costs that such companies will face.
4. Market manipulation
Market manipulation is a term that lacks regulatory definition due to the complex combination of factors necessary to establish its presence. Sometimes a perfectly legal action may comprise market manipulation if it was committed by a person in position to understand the misleading impact of his conduct. Therefore, in order to prohibit such practices, both MAR and the upcoming MiCA Regulation resort to generalized descriptions of behavior that may give rise to market manipulation. One broad category of activities that could comprise market manipulation is entering into transactions or placing orders that distort signals regarding demand and supply of a particular crypto-asset, setting its price at an abnormal or artificial level. Examples of this behavior include ‘pump and dump’ schemes, which involve significant crypto-asset purchases that artificially push up prices and encourage other unsuspecting investors to buy as well as unfair trading techniques such as ‘spoofing’ and ‘layering’, whereby fraudsters place multiple transaction orders to seemingly boost trading volumes but then cancel them right before execution. The other major approach to market manipulation is the outright public dissemination of false or misleading information that is likely to deceive market participants about the genuine supply and demand for a particular crypto-asset. Unfortunately due to the novelty of the distributed ledger technology, price volatility and often high ownership concentration of crypto-assets, markets in those instruments are especially vulnerable to manipulative practices.
Despite using the same indicators to identify market abuse as MAR, MiCA’s provisions will apply solely to crypto-asset transactions that require input from crypto-asset service providers (CASPs). Adopted in 2014 against the backdrop of the 2008 financial crisis, MAR sets out to regulate not only financial instruments admitted to regulated trading venues, but also derivatives of such instruments traded over-the-counter (OTC), as abusive practices in those markets were found capable of influencing the underlying assets. MiCA will deviate from this approach, making no mention of crypto-asset peer-to-peer trading in its tailor made market abuse regime. Probably done because of the small number of token holders who engage in crypto exchange without any assistance from CASPs, this omission is still peculiar given the high potency of peer-to-peer trading to exert direct influence over the market value of the DLT assets concerned.
Finally, the market abuse regimes in respect of financial instruments and crypto-assets will differentiate with regards to the types of sanctions they impose. To better understand this point it is important to note that unlike MiCA, MAR is part of a sequence of legislative acts, one of which, the Criminal Sanctions for Market Abuse Directive (CSMAD), is still in force. CSMAD, as the name suggests, called on Member States to adopt a harmonized framework of criminal sanctions for market abuse, which was later supplemented by the detailed infringement definitions and administrative sanctions introduced by MAR. MiCA, on the other hand, while not excluding the right of Member States to establish criminal penalties, makes obligatory only a list of administrative sanctions that competent authorities must have at their disposal as an absolute minimum. Among these rudimentary powers are orders requiring restitution of profits gained or losses avoided due to infringements, suspension or withdrawal of CASPs’ authorizations, temporary or permanent bans on members of CASPs’ management bodies held individually responsible for infringements, a maximum administrative sanction of at least EUR 5 000 000 for natural persons and a maximum administrative sanction of at least EUR 15 000 000 or 15% of their total annual turnover for legal persons. Member States are further authorized to provide their NCAs with additional powers and increase the maximum amount of pecuniary sanctions in respect of both natural and legal persons.
Series of blogs ‘MiCA’
The draft Markets in Crypto-Assets (MiCA) Regulation was released by the European Commission in September 2020. As with most markets-focused regulations, one of MiCA’s priorities is to limit the potential risks to the consumer. But the EC’s proposal also aims to address certain issues that it sees as hindering the EU crypto-asset sector.
Watsonlaw will publish a series of blogs about MiCA over the coming weeks.
The following topics are covered:
MiCA – Introduction to the Markets in Crypto-Assets Regulation
MiCA – Reasons and Objectives
MiCA – Choice of Legislative Instrument and Scope
MiCA – Offering of Crypto-Assets and Admission to Trading
MiCA – Offering and Admission to Trading of Asset-referenced and E-money Tokens
MiCA – Regulation of Crypto-asset Service Providers
MiCA – Market Abuse Prevention under MiCA
If you have any questions about the MiCA, please contact new tech expert Willem-Jan Smits or Camiel Vermeulen. Our cryptoteam has extensive knowledge of the crypto- asset sector and are ready to help you.