Following the rapidly increasing use of Initial Coin Offerings (“ICOs”), the European Securities and Markets Authority (“ESMA”) issued two statements to warn investors on ICOs’ risks and to encourage companies involved in ICOs to comply with the relevant European legislation.
ESMA defines an ICO as “an innovative way of raising money from the public, using coins or tokens”. In an online ICO campaign, businesses issue tokens and sell them in exchange for traditional, or more often, virtual currencies like Bitcoin or Ether. The tokens are created and disseminated using distributed ledger or blockchain technology (“DLT”).
Following a similar warning by the U.S. Securities and Exchange Commission (“SEC”), ESMA alerts investors that ICOs might not be captured by the EU regulatory framework and may be used for illicit purposes, including money laundering and fraud. Describing ICOs as extremely risky and speculative instruments, ESMA warns about the possibility of a total loss of invested capital and inability to redeem the tokens, as well as the lack of exit options.
ESMA also cautions investors that ICOs’ underlying blockchain technology might be subject to hacking or malfunction.
In the second statement, ESMA stresses that firms using ICOs have to comply with the EU regulatory framework. More specifically, where tokens qualify as financial instruments and/or transferable securities, firms are likely to be conducting a regulated activity. ESMA thus calls for compliance with relevant EU law.
The Commission seeks views on sustainable finance In September 2016, the Commission set up a High-Level Expert Group on Sustainable Finance (“HLEG”) with the objective to prepare a roadmap on ways to mobilize capital towards sustainable investment.
In its interim report of July 2017, the HLEG recommended, among other measures, that the Commission should better clarify the fiduciary duty of asset managers and institutional investors. The HLEG suggested that the duty explicitly integrates sustainability considerations i.e. environmental, social and governance (“ESG”) factors.
The Commission has launched a public consultation seeking stakeholders’ views on how asset managers and institutional investors could include ESG factors in their decisions. It will help to gather and analyze the necessary evidence for the possible policy actions.
The Commission also published an Inception Impact Assessment setting out identified policy options on this issue. The Commission will consider imposing disclosure rules to document how institutional investors and asset managers are taking into account sustainability factors, and explore ways to enhance the consideration of ESG factors in the investment strategy and asset allocation. Furthermore, it will also analyze the consideration of sustainability risks as part of the risk management processes and look at ways to ensure appropriate decision-making capabilities in the governance arrangements.
As regards forthcoming actions, the Commission explains that the objectives can be achieved either by a non-legislative action, through guidelines clarifying the existing duties, or through a legislative action, by reviewing the existing provisions of the relevant EU legislation governing institutional investors and asset managers.
Stakeholders are invited to express their views by 22 January 2018 here. The final recommendations by the HLEG are expected in January 2018 and will feed into the Commission Impact Assessment. The Commission plans to publish an Action Plan in the first quarter of 2018.