Crypto-assets are becoming more prominent, as highlighted by the recent launch of Bitcoin spot exchange-traded funds and the first application of asset-referenced tokens (ART) and e-money tokens (EMT) under the Markets in Crypto-assets Regulation (MiCA).1 With ARTs and EMTs effective from 30 June and crypto-asset services in full enforcement by 31 December, the crypto landscape is set to take off. The global crypto-asset management market is predicted to grow at a CAGR of 24.6% between 2024 and 2030.2
In this article we look at MiCA’s key requirements for crypto-asset service providers (CASPs), with a focus on market and trade surveillance.
Requirements for CASPs to Prevent Market Abuse
To regulate direct investments in crypto-assets, MiCA partially extends the Market Abuse Regulation (MAR) requirements to crypto-assets, imposing strict prohibitions on CASPs to prevent market abuse by implementing trade surveillance systems for detecting suspicious orders and transactions.3
MiCA encompasses a comprehensive array of market and trade surveillance measures aimed at safeguarding both individual and institutional investors. These measures can be grouped into four primary categories:
In the process of applying for authorization as a CASP many factors must be transparently disclosed to regulators, such as governance arrangements, proof of sufficient competence to manage a CASP and non-technical descriptions of information communication technology systems.
MiCA further specifies the expected behaviors of key parties regarding insider market dealing and market manipulation and the use of tools for the prevention and detection of market abuse.
Given the substantial amount of paperwork involved, software vendors have emerged with solutions that streamline processes through features like report-generation modules and audit trails, allowing for the creation of customizable system reports. These tools are essential for improving efficiency and accuracy. Additionally, functionalities such as regulator-facing accounts enable supervisory authorities to directly access data, allowing them to monitor internal records, identify issues, and pinpoint areas for improvement effectively.
To combat market manipulation, advanced tools are now available that provide critical functionalities, such as benchmarking abnormal crypto orders and execution patterns against market norms. These tools can alert businesses to potential breaches of trading rules or unusual activity in real time, ensuring compliance and security.
Detection models offer extensive customization options, empowering businesses to detect and prevent market manipulation through sophisticated methods like AI algorithms that analyze trading patterns and prevent cross-market manipulation. These tools are crucial for maintaining the integrity of trading practices and safeguarding against fraudulent activities and have become the standard for ensuring a secure and compliant market environment.
Specific Requirements for the Operation of a Trading Platform
While the aforementioned categories establish foundational requirements, MiCA also introduces additional surveillance requirements for the various services that CASPs may offer.
As the crypto market evolves, running a compliant trading platform will require CASPs to do more than simply integrate banking standards - they need to anticipate and respond to the unique dynamics of the crypto landscape.
Unlike traditional assets, crypto markets operate 24/7, and are often influenced by global events, making real-time surveillance and adaptive algorithms crucial. CASPs should consider leveraging AI-driven models that not only detect market manipulation but also predict potential risks based on emerging patterns in crypto-specific contexts. This forward-looking approach can help CASPs not just comply with MiCA, but lead in setting new industry benchmarks for security and transparency.
As a key requirement, CASPs seeking to operate a trading platform must perform customer due diligence procedures before providing platform access. Subsequently, robust monitoring systems and protocols must be established to monitor client activities and detect and prevent market abuse, such as spoofing, wash-trading, or price and volume manipulation.
Ensuring the integrity of trading operations requires thorough scrutiny before admitting a crypto-asset for trading, aligned with the platform's operational rules. It is also necessary to evaluate whether the reliability of the technical solutions used by the crypto-asset and the potential association with illicit or fraudulent activities can be detected.
Providers of solutions for such use-cases are varied, ranging from companies extending their services, like Nasdaq SMARTS or OneTick, to newly established vendors specializing in crypto, such as Eventus and Solidus Labs.
Adopting these current banking standards is crucial for the development and regulation of this emerging market. In addition to monitoring market and trade activities on crypto-asset trading platforms, it is also essential for CASPs to individually assess other MiCA-regulated services (e.g. reception and transmission of orders for crypto-assets on behalf of clients) to ensure comprehensive compliance.
Outlook
By the start of 2025, MiCA is set to see the full application of its regulatory framework. This underscores the significance for both established entities and newcomers to the industry to thoroughly familiarize themselves with relevant regulations to ensure compliance.
Established institutions like banks and asset managers already boast robust trade and market surveillance systems as required by MAR. However, as they venture into offering crypto-related products, it becomes essential for them to enhance their existing infrastructure by integrating necessary components seamlessly.
On the other hand, new entrants face the necessity to construct comprehensive market and trade surveillance mechanisms from scratch. The selection of appropriate software solutions and vendors is of paramount importance in this process, enabling new players to commence operations in full compliance with regulatory standards right from the start.
How Can Capco help?
In today's rapidly evolving regulatory landscape, we recognize the critical importance of preparing your organization for the upcoming MiCA regulation and its potential impact on your operations. Our goal is to support you in assessing MiCA's specific requirements, designing compliant frameworks, and executing sustainable solutions that align with your unique business needs.
Contact us to find out how we can help you engage in thorough preparations across multiple dimensions to meet the requirements set forth by MiCA, recognizing synergies with related regulations. For example, the Digital Operational Resilience Act (DORA) offers crucial guidelines for effective risk management and control measures specifically for issuers of asset-referenced tokens, among others.
For more insights into upcoming regulatory requirements such as MiCA or DORA, refer to our Regulatory Heatmap for 2024-2027.
References
1 https://www.esma.europa.eu/esmas-activities/digital-finance-and-innovation/markets-crypto-assets-regulation-mica
2 https://www.grandviewresearch.com/industry-analysis/crypto-asset-management-market-report
3 https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014R0596