The European Securities and Markets Authority (ESMA) recently published its Final Report covering conflicts of interest for crypto-asset service providers (CASPs).

Article 72 of the Markets in Crypto Assets Regulation (MiCA) addresses the identification, prevention, management and disclosure of conflicts of interest for CASPs. Article 72(5) tasks ESMA to develop dedicated, regulatory technical standards (RTS) on conflicts of interest to elaborate on: (a) the various requirements within policies and procedures; and (b) the details and methodology for website disclosures.

The danger of a conflict of interest is not the conflict of interest itself. Rather, the danger rests on how it is managed, the lack of transparency, and the disclosure vis-à-vis clients. A broad range of situations, relationships and affiliations may lead to a conflict of interest. ESMA confirms that, while the conflicts of interest regime under MiCA is similar to the MiFID II regime, the two frameworks differ on some points and, accordingly, ESMA did not adopt an identical approach. Instead, ESMA relied on the MiFID II regime, where appropriate, and adopted new provisions to cater specifically for the crypto-asset market.

The RTS on Conflicts of Interest (which are set out in Annex II of the Final Report) provide guidance on methodology, proportionality and transparency, requiring CASPs to allocate resources for effective conflict management. ESMA has submitted the RTS to the European Commission, which now has three months to decide whether to adopt them.

Author: Mark Caruana Scicluna