New Regulatory Framework to Detect and Prevent Crypto-Asset Fraud

The European Securities and Markets Authority (ESMA) recently published its final report on the guidelines for supervisory authorities to detect and prevent market fraud in crypto assets under the Markets in Crypto-Assets (MiCA) Regulation.

The purpose of these guidelines is to provide uniform, risk-based tools to all EU supervisory authorities for enforcing the MiCA Regulation against the abuse or manipulation of information in the crypto market.

The guidelines will come into effect three months after their publication date, but the ESMA recommends authorities start implementing them now. EU member states must inform the ESMA within two months if they intend to implement the guidelines.

What Do the New Guidelines Include?

• Risk-based supervision – The guidelines call on European supervisory authorities to take a risk-based approach and be particularly alert and vigilant to possible new forms of market abuse, while adapting their supervisory efforts to the unique characteristics of crypto activities, such as cross-border trading, the widespread use of unregulated platforms, and the heightened use of social networks.
• Market scams – The guidelines drew some inspiration from the experience gained from the Market Abuse Regulations (MAR) governing the securities market, but are adapted for the unique characteristics of the crypto market. For example, they place special emphasis on influencers, automated trading, and online groups such as Telegram, Discord, and Twitter as potential sources of coordinated market manipulation.
• Collaborations between supervisory authorities – The report emphasizes the need for coordination and information sharing between various supervisory authorities in the European Union, as well as between regulatory authorities outside the EU, considering the global nature of crypto activities.
• General principles of action by supervisory authorities – The guidelines call on supervisory authorities to act transparently, to encourage dialogues with market players, and to regularly publish criteria and guidance enabling entities in the market to understand the mode of supervision and enforcement.

A Global Trend, and Not Only in Europe

Although the guidelines were published in Europe, this trend is not unique to the EU. The United States is also increasing its supervisory measures to detect market fraud and abuse of insider information in the crypto market. Over the past year, the SEC and the US Department of Justice (DOJ) announced several enforcement proceedings against former employees of NFT platforms who used insider information to profit from presales of digital tokens. It is evident that, even without formal guidelines, the enforcement authorities are not complacent and are continuing to apply existing principles of market fraud also to crypto assets.

Implications for Crypto Market Players

For crypto platforms, exchanges, and crypto-asset service providers (CASPs), these additional measures demonstrate tightening supervision over market activities. It is extremely important that these entities implement procedures to prevent market fraud, to detect and monitor anomalous activities, and to maintain internal documentation of material information.

What’s more, marketing or advertising activities, especially by influencers or viral campaigns, might be tested under new regulatory principles that may consider them to be an unlawful influence over the market.

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Adv. Andrey Yanai is a partner and Adv. Avihai Tal is an associate in the firm’s Regulation Department.

Barnea Jaffa Lande’s Regulation Department is one of the leading departments in its field in Israel. The team provides ongoing counsel to clients from various sectors, including technology companies, startups, trading platforms, and investment funds. Inter alia, the department provides legal advice on fundraising processes through issuances of digital currencies (ICOs, STOs, IEOs), licensing and regulatory compliance, taxation, data security, and anti-money laundering regulations. Thanks to its multidisciplinary experience, international network of connections, and expertise in the market, the team is able to provide clients with comprehensive, innovative legal services in this dynamic, rapidly evolving cross-border market.