The European and Securities Markets Authority (ESMA) has issued an Advice to the EU institutions on Initial Coin Offerings (ICOs) and Crypto-Assets. The Advice aims to clarify the existing EU rules applicable to Crypto-Assets that qualify as financial instruments and provides ESMA’s position on any gaps and issues in the current EU financial regulatory framework for consideration by EU policymakers.
Where Crypto-Assets qualify as financial instruments under MiFID, the full set of EU financial rules apply. A number of Crypto-Assets however do not qualify as financial instruments, posing substantial risks to investors who have limited or no protection when investing in those Crypto-Assets. ESMA considers that there is a range of Crypto-Assets that all need to be monitored. Examples of Crypto-Assets include so-called cryptocurrencies or virtual currencies, like Bitcoin, and so-called digital coins or tokens issued through ICOs. Some Crypto-Assets have a ‘utility’ or ‘consumption’ value, while others provide some profit or governance rights and are therefore more akin to traditional financial instruments. Others are meant to be used as a means of exchange. It is also important to note that many Crypto-Assets have hybrid features and they may evolve through time, meaning that they may cut across several categories.
Following consultation with the National Competent Authorities, ESMA has identified a number of concerns in the current financial regulatory framework regarding these types of assets. These fall into two categories:
- For Crypto-Assets that qualify as financial instruments under MiFID, there are areas that require potential interpretation or re-consideration of specific requirements to allow for an effective application of existing regulations; and
- Where these assets do not qualify as financial instruments, the absence of applicable financial rules leaves investors exposed to substantial risks. ESMA believes that as a minimum, AML requirements should apply to all Crypto-Assets and activities linked to them. There should also be appropriate risk disclosure in place, so that consumers can be made aware of the potential risks prior to committing funds to crypto-assets.
In order to have a level playing field and ensure adequate investor protection across the EU, ESMA considers that these gaps and issues should be addressed at EU level. The Advice issued by ESMA is intended to allow the EU Institutions to consider possible ways in which the noted gaps and issues may be addressed and subjected to further analysis.
In a separate report, the European Banking Authority (EBA) has also published the results of its assessment of the applicability and suitability of EU law to Crypto-Assets. The EBA considers that the relatively low level of such activities currently observed in the EU does not appear to give rise to implications for financial stability. Typically, activities related to Crypto-Assets do not constitute regulated services within the scope of EU banking, payments and electronic money law. Echoing ESMA’s sentiment, the EBA considers that this lacuna may also create risks for consumers as well as give rise to other risks such as money laundering.
The EBA has thus recommended that the European Commission carry out further analysis to determine the appropriate EU-level action. The EBA has also identified a number of actions that it will take in 2019 to enhance the monitoring of financial institutions’ Crypto-Asset activities and consumer-facing disclosure practices.