Final report on draft RTS on conflicts of interest under MICAR

General Information

This document is the final report of the European Banking Authority (EBA) published in 2024, entitled "Final report on draft RTS on conflicts of interest under MiCAR." It concerns the draft Regulatory Technical Standards (RTS) defining requirements related to conflict of interest (CoI) management policies and procedures for asset-referenced token (ART) issuers under Article 32(5) of Regulation (EU) 2023/1114 (MiCAR). The scope covers ART issuers in the European Union, focusing on the identification, prevention, management, and disclosure of conflicts of interest related to their activities, notably the management of the asset reserve, remuneration, personal transactions, and relationships with third parties. The document comprises 37 pages and relies on existing regulatory frameworks, notably MiFID II and CRD, adapted to the ART model (p. 1-7).

Executive Summary

The subject concerns the establishment of Regulatory Technical Standards (RTS) by the EBA to frame the policies and procedures of asset-referenced token (ART) issuers to identify, prevent, manage, and disclose conflicts of interest in accordance with MiCAR (Article 32). This topic is crucial as rigorous CoI management ensures the protection of ART holders, trust in the financial system, and stability of the crypto-asset market. Key findings indicate that CoI may arise in various situations, notably during the management of the asset reserve, personal transactions, remuneration policies, and relationships with third parties. The draft RTS specify that policies must be proportionate to the size and complexity of the issuer, involve management in their definition and implementation, and provide for a responsible person with adequate resources. CoI disclosure must be clear, publicly accessible, and updated. The report also highlights alignment with similar RTS for crypto-asset service providers (CASPs) developed by ESMA, while considering the specificities of ART issuers. The main recommendations are the rapid adoption of these RTS by the European Commission to ensure uniform application in the EU, thereby strengthening governance and investor protection (p. 3-4, 8-20).

Context and Objectives

The document was drafted to comply with the regulatory obligation stemming from MiCAR, which requires ART issuers to establish effective conflict of interest management policies. The context is a rapidly evolving crypto-asset market, with increasing integration into the traditional financial system, generating risks for investors, financial institutions, and financial stability. The objective is to ensure rigorous CoI management to protect ART holders and guarantee issuer reliability. The scope covers all issuer activities, including issuance, processing, redemption of ARTs, asset reserve management, and relationships with third parties. The document also aims to ensure regulatory convergence with RTS for CASPs. It takes into account the proportionality principle according to issuer size and complexity. Limitations notably concern the specificity of ART business models compared to other financial entities (p. 4-7).

Summary of Key Points by Theme

Definition and identification of conflicts of interest: CoI are defined as situations likely to influence or appear to influence the ability of issuers or related persons to make impartial decisions. The RTS distinguish CoI potentially detrimental to ART holders and those affecting the issuer itself, notably through economic interests, personal, professional, or political relationships over a three-year period (p. 12-14).

Policies and procedures: Issuers must formalize in writing policies adapted to their size, organization, and business model. These policies must cover identification, prevention, management, and disclosure of CoI, differentiate persistent conflicts from occasional ones, and include specific measures such as control of information exchanges, separation of conflicting functions, and the obligation for board members to notify and abstain in case of CoI (p. 14-16).

Personal transactions: ART exchanges for funds or other crypto-assets involving related persons must be identified, notified, documented, and approved according to thresholds set by the issuer. These transactions must be conducted on objective and fair terms, comparable to those between independent parties (p. 15-17).

Remuneration: Remuneration policies must not create CoI nor incentivize prioritizing personal or issuer interests to the detriment of ART holders. Variable mechanisms must be aligned with risk management and performance, in accordance with governance requirements for significant issuers (p. 17).

Relationships with third parties: Contracts with third parties providing functions related to the management, investment, or custody of the asset reserve must include obligations to comply with the issuer's CoI policies, with objective financial conditions respecting the full competition principle, even within a group (p. 18).

Resources and governance: A person must be designated to manage CoI, independent from controlled activities, with sufficient resources and necessary skills. This person must have access to and report directly to the board at least annually and in case of major deficiencies (p. 18-19).

Disclosure: Information on the nature, sources, and mitigation measures of CoI must be kept up to date, publicly accessible via the issuer’s website, in the official language of the home country and in a commonly used language in international finance (currently English). Disclosure must not be used as a substitute for effective CoI management (p. 19-20).

Regulatory alignment: The RTS are aligned with those developed by ESMA for CASPs, while considering the specificities of ART issuers, notably regarding asset reserve management and token distribution (p. 4, 23-24).

Public consultation and adjustments: Following consultation, some provisions were adjusted, notably the removal of the obligation to identify ART holders among related persons, and clarification on the responsibility of the person in charge of CoI, with proportionate application according to issuer size (p. 28-36).

Main Findings and Lessons Learned

Findings:

- The RTS specify detailed requirements for CoI management policies and procedures of ART issuers, in accordance with MiCAR (p. 3-20).

- CoI must be identified from both ART holders’ and issuer’s perspectives, including economic, personal, professional, and political relationships over a three-year period (p. 12-14).

- Policies must cover asset reserve management, personal transactions, remuneration, and relationships with third parties (p. 14-19).

- A responsible person must be designated with adequate resources and direct access to the board (p. 18-19).

- CoI disclosure must be clear, accessible, and updated, without substituting effective management (p. 19-20).

Assumptions:

- The proportionality principle applies, allowing adaptation of requirements according to issuer size and complexity (p. 4, 18).

- Alignment with RTS for CASPs promotes regulatory convergence while considering business model differences (p. 23-24).

Interpretations:

- Rigorous CoI management will enhance investor protection and trust in the crypto-asset market.

- The removal of certain requirements deemed too burdensome (e.g., identification of ART holders among related persons) shows a willingness to balance rigor and feasibility (p. 29-30).

Uncertainties:

- The exact impact of the RTS on issuers’ operational costs, notably smaller ones, remains moderate but requires monitoring (p. 24-26).

- Future evolution of languages used for disclosure may require adaptations (p. 19).

Conclusions and Recommendations

The EBA concludes that adopting the proposed RTS will strengthen conflict of interest management by ART issuers, ensuring better protection of holders and stronger governance. The report recommends the adoption of the RTS by the European Commission, which will be directly applicable in all Member States. The RTS incorporate the proportionality principle to avoid excessive burdens, notably for small issuers. Adjustments made after public consultation improve the clarity and relevance of requirements. The designation of a responsible person for CoI with adequate resources and direct board access is essential. Public disclosure of CoI must be kept up to date and accessible. These measures will contribute to regulatory convergence within the EU and trust in the crypto-asset market (p. 3-4, 27-37).