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ESG Disclosure Requirements for Crypto-Asset Service Providers in Europe – Everything You Need to Know

Learn about ESG disclosure requirements for crypto-asset service providers and their implications under the MiCAR regulation.
Crypto Risk Metrics
24.10.2024
ESG disclosure requirements for CASPs in Europe under MiCAR

Readers of this article will gain extensive insights into the ESG disclosure requirements for crypto-asset serivce providers (CASPs) actively addressing the European market, including a critical examination of the parts that might leave room for interpretation. If you are responsible for MiCAR implementation in your company, we believe this article is pretty much all you need to know for the ESG part.

Who Needs to Disclose ESG Data?

When new regulatory requirements arise, the first question that needs to be answered is which entities need to obey the novel rules, and which don’t. And although it is stated that all CASPs, which are further defined in Article 3 of the MiCA Regulation (https://eur-lex.europa.eu/eli/reg/2023/1114/oj), are in scope of the regulation, we believe there was room for interpretation opened up, stemming from the table provided on page 13 of the RTS (https://www.esma.europa.eu/sites/default/files/2024-07/ESMA75-453128700-1229_Final_Report_MiCA_CP2.pdf). In that table, the different entities in scope as well as their obligations are laid out.

The following entities are mentioned in the table

  • Person drafting crypto-asset white paper
  • CASPs providing one or more of the following services: Operating a trading platform, exchanging crypto-assets for funds or exchanging crypto-assets for other crypto-assets
  • CASPs only providing services other than those listed above

Commission agents will most likely need to disclose ESG data

As financial commission agents were not specifically mentioned, some players try to interpret this aspect in their “favor” of not falling under the entities in scope, as they are not “operating a trading platform”, which – technically – is correct. Nevertheless, one can clearly derive the intention of the lawmakers by looking at page 84 of the RTS:

“There may also be cases where a crypto-asset service provider legitimately provides services in relation to a crypto-asset for which no crypto-asset white paper has been produced or is required. Article 4(5) provides some exceptions for which Article 66(5) may not apply, however ESMA has considered that where Article 66(5) does apply, more considerable requirements would be justified for crypto-asset service providers that are client facing and/or that directly provide opportunities for transactions, namely those operating trading platforms, those offering the exchange of crypto-assets for funds and those offering the exchange of crypto-assets for other crypto-assets, than for other types of crypto-asset service providers.“

The “will” of the lawmaker is clear: Potential investors shall be able to base their investment decision on the ESG data provided. Wording such as “crypto-asset service providers that are client facing and/or that directly provide opportunities for transactions, namely those operating trading platforms,” emphasizes that the intend of the regulation was to catch the point where the investors make their decision, regardless of that entity qualifies as a “trading platform” or a “commission agent”.

The 500.000 kWh threshold does not ease the burden significantly

As stated in the above-mentioned table, different entities need to report different numbers – we call this the 1+5 approach, as 1 figure (the total electricity consumption) must be disclosed by every CASP, whereas the disclosure of the five numbers on top are related to the type of CASP and the amount of electricity consumption. ESMA emphasizes to have significantly reduced the burden for the companies by introducing a 500.000 kWh threshold, under which only electricity consumption needs to be displayed. Although this was meant to relieve the CASPs from some of the reporting burden, one still must measure if the threshold is met, and if material changes in the consumption were to be detected. Therefore, the newly introduced threshold does not ease the efforts too much in our point of view.

ESG disclosure requirements for CASPs under MiCAR - Crypto Risk Metrics

CASPs Will Most Likely Buy External ESG Data

The next question circles around the best way of obtaining the data. Theoretically, CASPs are free to either buy the data from third parties or come up with their own data-sets. Furthermore, “estimates” are deemed sufficient. Seems pretty easy, right? Well, lets dive in.

In Article 6(5) on page 186 of the RTS, the lawmaker states “Where the information relating to the climate and other environment-related indicators is not readily available, the persons referred to in paragraph 1 of Article 4 and crypto-asset service providers shall provide estimates, together with details of the best efforts carried out to obtain the information by conducting additional research, cooperating with third party data providers or external experts or making reasonable assumptions.“ Although coming up with estimates and the details of the best efforts carried out to obtain the data seems challenging and cumbersome at the first place, we would argue that there are data-providers out there one can rely on, therefore weakening the argument that these data-sets are not available.

But even if the relevant NCA would accept the justification that this data is not available, every CASP would have to ask itself what method of obtaining the data seems better suited and more cost effective. We believe the way CASPs will go is to buy the data from a trusted third party with strong internal compliance procedures (as a provider of this data, we are of course slightly biased here).

Reasons for external data provision

First, CASPs must spend time coming up with the numbers and the respective monitoring systems, as they are required to update their numbers when material changes arise, and the 500.000 kWh threshold is met. This takes valuable time of the developers, that could have been invested in listing new tokens or coming up with better solutions for clients.

Second, CASPs remain “exclusively responsible for the content of the white paper.”, if they were to use content from other whitepapers (which we will dig deeper into below) (see Page 179, (4)). We believe that no regulated financial institution will risk the accusation of potential greenwashing, as this is explicitly stated in (9) on page 180. Imagine a regulated financial institution copying content from a source that contains false or greenwashing information. The risk for the top management is simply too high.

Third, the “safest” way for a CASP to be compliant is always to show the “best effort”, which in this case will be searching for a third party. And given all the effort, this solution is also the best alternative when it comes to cost.

Centralization will be the most likely outcome

Although we are talking about distributed systems, centralization of the data will be the most likely outcome. The first reason for this is economies of scale – as a lot of CASPs need the same data, prices for single CASPs go down when more CASPs are buying from the same supplier.

Second, the European Commission also sees the challenge of investor confusion, if the numbers for the same crypto-asset differ when looking at various platforms. This even led to the phrase that ESMA calls for a “coordination” between market participants. As ESMA can clearly not call for a cartel, the most likely scenario will be the formation around a common denominator that every industry player will implement anyway, which we believe will most likely be the ISO 24165-1:2021 token identifier, provided by the Digital Token Identifier Foundation. That is also the reason why we entered into an exclusive ESG data delivery contract with the foundation, as we are setting the market standard.

Providers & closing words

When looking at different providers, potential buyers of the data need to assess credibility of the data-vendor, experience in the field and potential conflicts of interest as well. Some providers do also accept payments from Layer-1-protocols, whereas other providers explicitly refrain from that to avoid conflicts of interests. Furthermore, there are fundamental differences in the quality of the technical measurement set-ups.

Although the industry is still very young and there are uncertainties on the way, it was always clear that ESG-reporting would someday be required. Looking further down the road we suspect the regulator widening the disclosure requirements to the providers of securities as well – as nobody would be able to explain, why crypto-asset service providers need to disclose these numbers, and Delta-1-Certificate-Issuers don’t. That’s simply doesn’t make sense, as it is either nobody or everybody. Furthermore, we do expect taxes on the horizon, as we have seen with the airline industry, for example.

If you found this helpful (or if not): We are always happy for feedback. We also developed a decision-making matrix which you can use as an inspiration when looking for a provider. Please reach out to b.becker@crypto-risk-metrics.com if you need the matrix/want to share something with us.

For more information on the latest developments and partnerships of Crypto Risk Metrics, please refer to the following articles:

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