The European Securities and Markets Authority (ESMA) provided additional guidance to EU institutions in connection with initial coin offerings (ICO’s) and crypto-assets in a 49-page Advice report. The Advice addresses two broad categories of crypto-assets—those that qualify as financial instruments under MiFID, and those that do not so qualify. The Advice also recommends that a common EU approach for crypto-assets be adopted.
Clarification provided for crypto-assets qualifying as financial instruments. In connection with the release of the Advice, ESMA Chair Steven Maijoor remarked that "the survey of National Competent Authorities (NCAs) highlighted that some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply." He added, "However, because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets."
Specifically, the Advice clarifies 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 policy makers. 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.
Crypto-assets falling outside financial regulatory framework pose substantial risks to investors. Meanwhile, Maijoor noted the concerns reflected in the Advice with regard to crypto-assets that fall outside the current financial regulatory framework, and cautioned, "This poses substantial risks to investors who have limited or no protection when investing in those crypto-assets." Moreover, and according to the Advice, ESMA believes at a minimum that Anti Money Laundering (AML) requirements should apply to all crypto-assets and activities involving crypto-assets. 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.
Potential DLT benefits recognized. The Advice voiced concerns about the risks crypto-assets pose to investor protection and market integrity, particularly with regard to fraud, cyber-attacks, money laundering, and market manipulation. Nonetheless, ESMA recognized there could be benefits associated with ICOs provided the appropriate safeguards were in place. The Advice noted that the development of tokenization—meaning the representation of traditional assets on the digital ledger, could bring benefits to the markets. Noting that crypto-assets are one application of digital ledger technology (DLT), ESMA envisioned a number of potential benefits in DLT but noted important challenges remain.
Moving forward. The Advice recognized that ESMA’s work on crypto-assets highlighted a number of issues that are outside of ESMA’s direct regulatory turf. Accordingly, the Advice allows for EU Institutions to consider various possible ways by which the noted gaps and issues may be addressed and subjected to further analysis. Notwithstanding, Maijoor stated his preference, concluding, "In order to have a level playing field and to ensure adequate investor protection across the EU, we consider that the gaps and issues identified would best be addressed at the European level."
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