The European Securities and Markets Authority (ESMA) published advice to EU legislative bodies on initial coin offerings and cryptoassets. It clarifies 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 policymakers.
At the same time, the European Banking Authority also published the results of its assessment of the applicability and suitability of EU law to crypto-assets.
ESMA has been working with National Competent Authorities (NCAs) on analyzing the different business models of cryptoassets, the risks and potential benefits that they may introduce, and how they fit within the existing regulatory framework. Based on this work, including a survey of NCAs during 2018, ESMA has identified a number of concerns in the current financial regulatory framework regarding cryptoassets. These gaps and issues fall into two categories:
- For cryptoassets 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. At a minimum, ESMA believes that Anti Money Laundering (AML) requirements should apply to all cryptoassets and activities involving cryptoassets. 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 cryptoassets.
Steven Maijoor, ESMA’s chair, said: “Our survey of NCAs highlighted that some cryptoassets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply. 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 cryptoassets.”
He added: “Meanwhile, a number of cryptoassets fall outside the current financial regulatory framework. This poses substantial risks to investors who have limited or no protection when investing in those cryptoassets. “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.”
ESMA’s work on cryptoaassets has highlighted a number of issues that are beyond ESMA’s remit. Its advisory document allows EU Institutions to consider possible ways in which the noted gaps and issues may be addressed and subjected to further analysis. ESMA will continue to actively monitor market developments around cryptoassets while cooperating with NCAs and global regulators.
The EBA’s executive director, Adam Farkas, said: “The EBA’s warnings to consumers and institutions on virtual currencies remain valid. The EBA calls on the European Commission to assess whether regulatory action is needed to achieve a common EU approach to cryptoassets. The EBA continues to monitor market developments from a prudential and consumer perspective.”