The European Securities and Markets Authority (ESMA) has published on the 9th of January 2019 its advice on Initial Coin Offerings ("ICO") and Crypto- Assets (ESMA50-157-1391), addressed to the European Union (EU) Institutions, that is, the Commission, the Council and the Parliament. The advice is the result of collaboration between ESMA and the National Competent Authorities (NCAs) of the EU Member States.
Crypto-assets are a type of private asset that depends primarily on cryptography and Distributed Ledger Technology (DLT). Crypto-assets are relatively new and the market is evolving. There are a wide variety of crypto-assets, examples of which include, cryptocurrencies or virtual currencies, like Bitcoin, and digital tokens issued through Initial Coin Offerings (ICOs). Most crypto-assets have hybrid features.
This advice highlights a number of issues and gaps in the existing EU regulatory framework and provides insight to the EU policymakers when considering how the regulatory framework can be developed to deal with the use of crypto-assets and investor protection.
The advice summarises a range of legal provisions potentially applicable to crypto-assets when these qualify as financial instruments under MIFID II, including, inter alia, the Prospectus Directive, the Transparency Directive, the Market Abuse and Short Selling Regulation, the AIFMD, as well as, the MIFID II and MiFIR. The Fifth Anti-Money Laundering Directive includes within its scope the currency to fiat exchanges and providers of virtual currency custodian wallet services. In this analysis, ESMA points out that it agrees with EBA's 2014 Opinion and FATF's 2018 recommendation to include also within the scope of AML/CFT obligation (i) providers of exchange services between crypto-assets and crypto-assets and (ii) providers of financial services for ICOs.
The majority of the NCAs take the view that some crypto-assets, e.g. those with profit rights attached, may qualify as transferable securities or other types of MiFID II financial instruments. The actual classification of a crypto-asset as a financial instrument is the responsibility of each NCA and will depend on the specific national implementation of EU law and the information and evidence provided to that NCA.
Most importantly, ESMA identified the following two categories of potential gaps and issues for consideration by the EU policymakers:
a) Firstly, in the existing EU financial services rules when
crypto-assets qualify as financial instruments under MiFID II;
and
b) Secondly, in the existing EU financial services rules when
crypto-assets do not qualify as financial instruments.
ESMA notes in this second category that the size of the crypto-asset market remains relatively modest and is of the opinion that it does not raise any financial stability issues at the moment, however, monitoring of the sector needs to continue and is concerned of the risks crypto-assets represent to investor protection, particularly, stemming from fraud, cyber-attacks, money-laundering and market manipulation.
ESMA foresees two options, one being to implement a bespoke regime for specific types of crypto-assets, tailoring the rules to the specific risks and issues posed by those crypto-assets that do not qualify as financial instruments or electronic money and the second option is not to take any action at all for those crypto-assets that fall outside the scope of the current financial EU regulatory framework with the risk of not addressing investor protection concerns. ESMA is of the opinion that the first option is the most appropriate.
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