Market surveillance tools are an essential part of every business that is trading in regulated markets. In TradFi, surveillance software has become increasingly sophisticated in line with both the speed and complexity of modern capital markets and the increase in regulatory requirements.

In crypto markets, the focus on surveillance is growing as regulators across the globe develop frameworks for the trading of crypto assets and more institutional firms enter the market, bringing with them expectations of standards similar or equivalent to traditional financial markets.

The European Union’s Markets in Crypto Assets (MiCA) regulation, which is being implemented from June this year, provides the most comprehensive regulatory framework to date for trading digital assets. 

Contained within MiCA are a set of surveillance requirements, based upon the Market Abuse Regulation.

The rules will require Crypto Asset Service Providers to prevent market manipulation and abuse within the crypto market, have in place certain systems and controls, keep detailed records of all orders and transactions and report suspicious trades to the relevant authorities.

While some of the details are still subject to consultation and the publication of final regulatory technical standards, firms across the crypto market are investing in surveillance software ahead of the implementation of MiCA and in order to meet the demand from institutional investors for trading infrastructures that mirror those in TradFi.

Acuiti recently partnered with Eventus to conduct a study into how both TradFi and native crypto firms are approaching investment in market surveillance.

The research paper, which was published this month, was based on a survey and series of interviews with 68 firms engaged in crypto trading across the buy-side, sell-side and exchanges.

It found that a move to establish market surveillance systems is well underway across the industry. Although a higher percentage of firms that were coming into scope for MiCA had established systems or were investing in market surveillance, over half of firms that did not think they were in scope already had market surveillance systems in place.

Building market surveillance operations in crypto trading presents some unique challenges compared with traditional financial markets. Trading across crypto markets tends to be more fragmented, both from a liquidity and regulatory perspective. In addition, factors such as the 24/7 nature of crypto trading and different patterns of market abuse mean that firms cannot simply copy and paste TradFi infrastructure to the crypto market.

Indeed, the survey found that adapting to the nuances of crypto surveillance vs TradFi was the third biggest challenges firms faced in developing market surveillance processes for crypto trading.

For native crypto firms, MiCA will likely be the first major regulatory framework that they have had to come into scope for.

This presents several challenges from absorbing the costs of compliance to finding staff with knowledge of both MiFID II, which will cover derivatives trading, and MAR, which forms the basis for much of the market abuse regime under MiCA as well having knowledge and understanding of crypto markets.

A further challenge identified in the study is the extent of firms that are unsure as to whether they are coming into scope for MiCA or think that they will not be in scope but conduct activities that will be included.

This is similar, to some extent, to the introduction of MiFID II. Ahead of the implementation of that regulation, significant numbers of firms thought that they would not be caught up in the rules – primarily over ongoing disagreements regarding the definition of direct market access.

Many of these firms ultimately found out at a relatively late stage that they would be coming into scope resulting in a scramble to ready their business and operations for the rules.

With the implementation of the full suite of MiCA requirements approaching fast and uncertainty in many areas of the market over the scope of the regulation, this late dash to comply is likely to be repeated.

All this is driving a trend towards investing in third-party software among crypto trading firms, many of whom have traditionally built all their systems inhouse.

While some technology pertaining to trading can be seen to have proprietary value, particularly in the relatively nascent world of crypto trading, software for regulatory compliance offers less of a competitive advantage to firms.

Indeed, for many in the traditional world, the group-comfort that the outsourcing of compliance software provides, and regulator familiarity with the products on the market, provides significant advantages when it comes to working with a third-party vendor.

The Acuiti study found that 64% of the firms that were investing or planning to invest in market surveillance software were doing so with a third-party provider such as Eventus.

This trend is likely to accelerate as the deadline for MiCA approaches and firms evaluate the cost, complexity and time to market for inhouse builds.

To download the full whitepaper, visit: https://info.eventus.com/the-impact-of-mica-on-crypto-market-surveillance-insights-and-challenges