The background to the publication of the guidelines is concern over the potential risk of market abuse in crypto assets, one that national regulators are required to detect and prevent under EU MiCA.
A deeper concern is that the widespread adoption of crypto assets by investors, coupled with their sometimes extreme price volatility, may pose serious risks for financial system stability. The increasing adoption of digital assets and the structuring of digital asset products by financial institutions means that the systemic risks are being exacerbated by the connection between traditional finance and the crypto sector.
The guidelines highlight some specific features of crypto assets that pose real challenges when it comes to addressing market abuse including:
- more intensive use of social media;
- specific technologies used; and
- the cross-border nature of crypto trading.
To address this the guidelines put forward specific measures intended to ensure that supervisory practices in place can prevent and detect insider dealing, unlawful disclosure of inside information, and market manipulation more generally.
In addition to some general points the guidelines include some recommendations that highlight specific examples of market abuse that needs to be addressed:
| Recommendation | Example of market abuse addressed |
|---|---|
| Monitoring specific technology backing crypto assets | Maximum extractable value (MEV) strategies |
| Monitoring the way that crypto assets are offered or evaluated | Token supply manipulation (crypto) or the assessment of backing assets (stablecoins) |
| Monitoring of social media | Intentional publication and unintentional dissemination of false or misleading information |
| Addressing the potential for the possession of inside information by persons involved in distributed ledger technology | Miners or validators conducting front running or influencing the flow of validated transactions |
ESMA is, as usual, highlighting the importance of information sharing between authorities, including on crypto-asset service providers (CASPs) whose business model might hinder the ability of a regulator to supervise their activities. Information sharing with and education of key market participants and shareholders is also emphasized as important.
The guidelines also point out the importance of data driven surveillance including the:
- monitoring of publicly available data;
- monitoring of regulatory data on orders and transactions obtained from CASPs;
- reconciliation of on -chain and off-chain and cross market data where possible;
- monitoring of communications regarding crypto assets including those taking place on:
- web-based platforms;
- social media and blogs;
- newsletters; and
- podcasts.
The guidelines explicitly envision the use of automated monitoring in this context in order to identify patterns, keywords and trends in order to complement human analysis.
In connection with STORs the guidelines put forward procedures that:
- clearly identify all steps to be followed upon receipt of a STOR;
- indicate the unit/function responsible; and
- provide criteria for the grading of the behavior.
The concern here may stem from the difficulty of incorporating the supervision of crypto assets within supervision frameworks designed to address market abuse in the traditional finance context.
Finally, specifically in connection with cross-border cases, the guidelines envisage a role for ESMA in coordinating inspections or investigations where:
- more than two regulators may be competent for a case;
- uncoordinated action may impair the final outcome of the investigation; and
- uncoordinated action may lead to extra burden for market participants.
This document is essential reading not only for those working at the supervisory authorities, but also for compliance professionals and executives whose organizations intend to engage in crypto-asset activity.
