EU clarifies legality of shared order books

A shared order book involving non-EU licensed exchanges would be a breach of Markets in Crypto Assets Regulation (MiCA) rules, the European Securities and Markets Authority (ESMA) has confirmed.

The insight comes from ESMA’s series of Q&As aimed at demystifying MiCA, which governs the provision of digital asset services to EU citizens.

Though MiCA was agreed upon and officially entered into force in 2023, the full suite of rules it institutes only began coming into force at the end of 2024. As such, ESMA has been publishing Q&As on aspects of the rules and how they apply in practice.

Last week, ESMA published an answer that asked about the legality of the shared order book model under MiCA, particularly where the co-sharer is a non-EU trading platform.

A shared order book contrasts with the typical model where each exchange keeps its own order book. If you place a bid on one exchange, you’ll only be matched with a seller on that exchange, while sellers’ offerings will only be available to users of the exchange they choose to list on. Under a shared order book model, orders are propagated to multiple exchanges at once.

One of the specific advantages of a shared order book is increased liquidity. Market participants are also more likely to be given a true view of the market for a particular asset as more exchanges are working off the same order book.

A shared order book might also be more tamper-proof and resistant to manipulation than a siloed order book may otherwise be.

Answering the specific question of whether a shared order book involving a non-EU licensed entity, the ESMA is clear that this would be non-compliant:

“No, this model would be in breach of the authorization requirements under Article 59 of MiCA and would constitute the unauthorized provision of the crypto-asset service of operation of a trading platform for cryptoassets in the Union by the unauthorized entities whose platform(s) share the order book with the EU-authorized CASP.”

This makes sense under MiCA. If entities providing digital asset services (known under MiCA as the ‘crypto-asset service provider’ (CASP) must be registered and licensed under MiCA, then a non-licensed, non-EU company would be breaching MiCA by providing ‘crypto-asset’ services in the EU without authorization. That, of course, says nothing about shared order books involving only EU-registered platforms. The ESMA’s explanation says that its answer should not be taken as an assessment of whether other types of shared order books are compliant. However, provided all parties to the order book are MiCA-compliant, there would presumably be no conflict with MiCA rules.

That’s just as well: it’s an exciting time for digital assets, particularly because the more legal clarity is provided to the industry, the more companies have been willing to experiment with new business models using digital assets, particularly blockchain technology.

Blockchain enthusiasts will almost certainly read this promise of a less centralized, tamper-proof order book and begin thinking about how it might be served by digital ledger technology. What if the shared order book was not entrusted to one managing exchange or intermediary but was run on the blockchain? After all, if the benefits of a shared order book are resistance to manipulation and access to multiple streams of data at the same time, it seems foolish not to take the extra step of ensuring that this order book runs on truly decentralized technology.

In BSV, this is already a reality. Ordinal Lock is a sCrypt Bitcoin script that allows a seller to list their blockchain-based asset—BSV or anything else—and have that asset locked behind a script that will only release the token upon paying the seller a fixed amount of BSV to a user-defined address.

Everything else handles itself: this simple script essentially allows the entire blockchain to function as an order book. Every bid, every sale, and every exchange of BSV is public and auditable, effectively serving as an open order book viewable by anyone.

It’s a good thing MiCA has laid down such concretely defined rules of the road for the provision of this service. Anyone wanting to use Ordinal Lock can do so compliantly within the EU, as long as they register with a national authority as MiCA requires.

Watch: Reggie Middleton on DeFi, booms/busts & crypto regulation