Developments concerning blockchain have been a high priority item for many EU member states; however, to date a coordinated effort from Brussels to establish a harmonized approach across the European Union has been muted. Nonetheless, developments over the past weeks may indicate that a pan-European regulatory regime for blockchain and digital assets could be on the horizon.
First, the Securities and Markets Stakeholder Group (“SMSG”) recently provided important advice to the European Securities and Markets Authority (“ESMA”) concerning Initial Coin Offerings (“ICOs”). On 19 October 2018 the SMSG published its “Own Initiative Report on Initial Coin Offerings and Crypto-Assets.”1 The Report advised ESMA to provide level 3 guidelines2 to national supervisory authorities across the EU or to market participants on the treatment of utility and asset tokens with regard to:
- interpreting the MiFID II3 definition of “transferable securities” and “commodities;”
- reconsidering the concept of multilateral trading facilities (“MTFs”) and organized trading facilities (“OTF”) in connection with the organization of secondary markets in utility and asset tokens;
- applying Market Abuse Regulation4 to such MTFs and OTFs respectively; and
- regulating the activities of persons giving advice on asset and utility tokens, or executing orders in such tokens (together, the “MiFID II implications”).
In a broader context, the SMSG effort is a public initiative for further exploration of distributive ledger technologies in the FinTech space.
Second, on 3 October 2018 the European Parliament adopted a resolution on “Distributed ledger technologies and blockchains: Building trust with disintermediation (2017/2772) (RSP))” (the “DLT Resolution”)5 that urges the European Commission, the European supervisory authorities and other EU institutions to take action.
The DLT Resolution recognizes the great potential of distributed ledger technology (“DLT”), including its ability:
- to give citizens the opportunity to control their own data and to decide which data to share in the ledger; and to choose to whom such data should be exposed (including pseudonymisation of users, but not their anonymisation);6
- to improve transaction cost efficiency by removing intermediaries and intermediation costs;
- to “democratize” data, together with building trust and increasing transparency while providing a secure and efficient route for the execution of transactions; and
- to significantly improve key sectors of the economy (e.g., effective green energy production, distribution and storage) as well as the quality of infrastructure and public services (e.g., transport, healthcare, supply chains utilization, education etc.).
Emphasizing the volatility and uncertainty associated with cryptocurrencies, the DLT Resolution acknowledges that the feasibility of alternative methods of payment and transfer of value using cryptocurrencies should be examined further. Moreover, the European Parliament calls on the European Commission and the European Central Bank to provide feedback on the sources of volatility, to identify threats to the public and to explore potentially incorporating cryptocurrencies into the European payment system.
The European Parliament further encourages the European Commission to explore and undertake an in-depth assessment of the potential utility and legal implications of the use of smart contracts, and to eventually promote the development of technical standards with the relevant international organizations.
Recognizing the strategic importance of DLT, the European Parliament calls on the European Commission to closely monitor technological developments, assess technological risks, support resilience to a cyberattack or a system breakdown, and promote data protection projects that ensure the sustainability of DLT platforms. The European Parliament encourages the competent authorities and the European Commission to develop stress testing for DLT applications, as well as to monitor the potential of DLT for improving “social good” and assess the social impact of the technology.
The European Parliament also calls on the European Investment Bank (“EIB”) and the European Investment Fund (“EIF”) to synchronize action under the EFSI 2.0 regulations7 to create funding opportunities that support DLT-based entrepreneurial endeavors to accelerate innovation and technology development. The European Parliament also requested the European Commission to partner with the Member States to ensure certainty and harmonization of the legal framework within the European Union, including the introduction of a European passport of DLT-based projects.
The European Parliament recognizes the potential of ICOs as an alternative source of funding for small and medium sized enterprises (“SME”) and innovative start-ups. It calls on the European Commission to explore the legal requirements that will allow this asset class to be blended with other financial vehicles. The European Parliament appeals to the European Commission to identify criteria that enhance investor protection, and articulate disclosure requirements and obligations for the initiators of ICOs, including the use of crowdfunding schemes.8
These recent industry and political initiatives are efforts to secure a place for blockchain and DLT in the crowded EU agenda, in order to ensure that the European Union remains a globally attractive and competitive innovations hub. This would be achieved through the establishment of a harmonized legislative environment, creation of attractive funding opportunities and support for the construction of the necessary infrastructure.