What has happened?

The head of the European Securities and Markets Authority (ESMA) has said that a "more elaborate bespoke regime" for cryptoassets that do not qualify as financial instruments is "premature".

What does this mean?

Delivering a keynote speech at the FinTech Conference 2019 - FinTech and Regulation - in Brussels, ESMA Chair Steven Maijoor offered some thoughts on cryptoassets, echoing many of the findings and recommendations in the regulator's recent Advice to the European institutions on cryptoassets and initial coin offerings (ICOs).

Maijoor said that cryptoassets and distributed ledger technology (DLT) are at the frontier of innovation and therefore pose a challenge to firms that try to use the technology into workable business models.

Although DLT has "revolutionary origins", it is not guaranteed to revolutionise financial markets, with widespread adoption by financial sector actors being still a long way away.

"Whether firms can develop a ‘killer app’ will depend on whether they meet the challenges that stem from inherent features of the technology," he said.

Further, even if DLT becomes widely used, it may coexist with other technologies or sectors; for example, an accommodation app may exist alongside hotels.

"I do not want to sound unduly negative on this last point, however. If DLT can make some processes within markets run better, it may also spur traditional operators to make improvements," Maijoor said.

Maijoor also summed up ESMA's recent work on cryptoassets and ICOs.

This culminated in the regulator's January Advice to the European Institutions, which clarified existing rules for cryptoassets that qualify as MiFID financial instruments and set regulatory gaps and issues that EU policymakers should consider.

"The first main message of our Advice… is that there may be areas where the nature of cryptoassets, where they qualify as financial instruments, requires potential interpretation, or specific requirements need to be reconsidered, to allow an effective application of regulations," Maijoor said.

He then turned to some of the gaps and issues that may require consideration, highlighting keys, forks, coding errors in particular, but also briefly mentioning that pre- and post-trade transparency or reporting requirements being also in need of attention.

"And we may need to reassess matters as the technology develops", Maijoor added.

As to cryptoassets that do not qualify as MiFID financial instruments and are therefore likely to fall outside the regulator's remit, Maijoor said that ESMA was concerned that an "absence of applicable financial rules leaves consumers exposed to substantial risks".

He said:

"EU policymakers should therefore consider ways to address the risks in a proportionate manner. As a priority, we advise them to extend the scope of [anti-money laundering] rules to all these activities that involve cryptoassets."

However, notably, he added that ESMA believes that a "more elaborate bespoke regime" for cryptoassets that do not qualify as financial instruments is "premature".

"A more elaborate regime may risk legitimising cryptoassets and encouraging greater participation. Any novel framework should also protect the integrity of existing capital markets and be flexible enough to capture the variety of risk factors that the different types of crypto-assets introduce," he explained.

To conclude, Maijoor said that DLTS pose inherent challenges to governance, security, privacy and interoperability, but that ESMA will continue to monitor markets to determine whether firms can meet these challenges, "enabling them to deliver DLT applications in securities markets at scale".

Next steps

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