Government attitude and definition
The Irish Government has been keen to demonstrate its support of the development and adoption of new technologies, including blockchain, as a way to encourage digitalisation and foster innovation. In a paper issued in December 2019 entitled "International Financial Services Strategy 2025" (IFS2025), the Irish Government stated its commitment to developing Ireland as a global leader in the financial services sector and announced measures aimed at demonstrating Ireland's credentials as an EU centre of excellence for distributed ledger technology (DLT). In its "Action Plan for 2021", launched under the IFS2025, the Irish Government committed to establishing a new Department of Finance Fintech Working Group. The Working Group will develop Ireland's policy positions in response to the EU's Digital Finance Package, coordinate the approach to fintech across the Department, and will engage with external stakeholders to encourage collaboration between policymakers and the fintech community. The Irish Government also committed to establishing an "Expert Group on Future Skills Needs", which will conduct a study to assess the additional skills required to exploit opportunities in subsectors such as fintech and blockchain, to be finalised in 2022.
Since June 2018, the Industrial Development Authority (IDA), a semi-state body with a mandate to attract foreign direct investment into Ireland, has worked with the Irish Blockchain Expert Group on the "Blockchain Ireland" initiative. This forum is led by the IDA and seeks to enhance the blockchain industry in Ireland and to promote Ireland as a blockchain centre of excellence.
However, the Irish Government has so far been reticent in issuing firm guidance concerning its policy towards DLT and the treatment of virtual currencies from a legal and regulatory perspective.
In March 2018, the Department of Finance issued a discussion paper on Virtual Currencies and Blockchain Technology, with the general aim of describing the current environment, providing an overview of the global virtual currencies market and providing an overview of the potential risks and benefits of virtual currencies. On foot of this paper, an intradepartmental working group was established in 2018 in order to oversee developments in virtual currencies and blockchain technology and consider whether policy recommendations are required. No such policy recommendations have been issued to date.
The Central Bank of Ireland (Central Bank), as the authority responsible for the regulation of financial services in Ireland, has led the way in setting policy in this area and has issued a number of consumer warnings on the risks of buying or investing in virtual currencies and initial coin offerings (ICOs).
In February 2018, consumers were warned by the Central Bank about the risks of buying or investing in "virtual currencies" and cryptocurrencies,1 with the Central Bank highlighting risks such as extreme price volatility, and the absence of regulation. The Central Bank emphasised that virtual currencies are a form of unregulated digital money that can be used as a means of payment, noting that they do not have legal tender status in Ireland, and are not guaranteed or regulated by the Central Bank. In 2021, the Central Bank updated the warning to state that, despite the introduction of a new anti-money laundering (AML) and countering the financing of terrorism (CFT) supervisory regime for certain virtual currency exchanges and custodian wallet providers, this does not change the fact that virtual currencies are not currently regulated, and consumers remain exposed to the risks cited above.
Similarly, the Central Bank sought to alert consumers to the high risks associated with ICOs, such as vulnerability to fraud or illicit activities, lack of exit options, extreme price volatility, inadequate information and exposure to flaws in the technology.2 It has also indicated its support of the warnings published by the European Securities and Markets Authority (ESMA) concerning the risks of ICOs and crypto-assets3 whereby ESMA underlined the risks that the unregulated crypto-assets pose to investor protection and market integrity. ESMA identified the most significant risks as fraud, cyber-attacks, money laundering and market manipulation.
Crypto-assets (including cryptocurrencies) are not considered money or equivalent to fiat currency in Ireland and there are currently no cryptocurrencies that are backed by either the Irish Government or the Central Bank.
As discussed below, Ireland has transposed the EU's Fifth Money Laundering Directive (Directive 2018/843/EU) (MLD5) into Irish law, which extends AML/CFT requirements to cover certain virtual currency exchanges and custodian wallet providers.
Cryptocurrency regulation
Although the Central Bank has issued warnings in relation to investment in crypto-assets, there is currently no blanket prohibition or ban on cryptocurrencies in Ireland. However, Ireland has not implemented a bespoke financial regulatory regime for cryptocurrencies and there are currently no plans to do so at a local level.
The question of whether and how crypto-assets are regulated under Irish law turns primarily on whether activities carried on in relation to those crypto-assets are regulated under existing legislation in Ireland, which implements certain EU Single Market Directives, such as the Markets in Financial Instruments Directive 2014/65/EU (MiFID), the Electronic Money Directive 2009/110/EU (E-Money Directive) and the Payment Services Directive 2015/2366/EU (PSD2), and by various EU regulations, such as the Prospectus Regulation 2017/1129/EU, the Market Abuse Regulation 506/2014/EU and the Central Securities Depositories Regulation 909/2014/EU, which have direct effect in Ireland.
The Central Bank has indicated its hesitancy towards issuing new domestic legislation to regulate crypto-assets and cryptocurrencies. In 2018, Gerry Cross, Director of Financial Regulation – Policy and Risk at the Central Bank, indicated that:
"... it can be easy, when faced with a new and challenging issue or activity, for a regulator to say that A or B is very risky, or that X or Y can have harmful effects and to start in straightaway to consider how to restrict them, regulate them or even ban them. This is an approach that Andrea Enria, the Chair of the European Banking Authority has recently described as a "regulate and restrict approach".
However it is important, in whatever we are looking at, that we take a considered approach; that we think about the potential benefits, including longer term benefits, as well as risks. We need to be clear and precise about what it is we are trying to achieve. We need to reflect on approaches to accomplishing those objectives which retain as much as possible of the potential benefits while addressing the harms, approaches that are in other words proportionate. We also need to think about the potential unforeseen consequence of regulation, including the desirability of giving a "regulatory imprimatur to the activity in question"."4
As a result, the Central Bank has maintained a "wait and see" approach with regard to implementing domestic regulation, taking guidance from international regulators and most notably EU supervisory authorities.
On 24 September 2020, the European Commission adopted the Digital Finance Package. The Digital Finance Package includes a proposal for a Regulation on Markets in Crypto-assets (MiCA), in addition to a proposal for a Regulation on digital operational resilience for the financial sector, a proposal on a pilot regime for market infrastructures based on DLT, and a proposal to clarify or amend certain related financial services rules. The MiCA will replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation. It will establish uniform rules for crypto-asset service providers and issuers at EU level, provide measures ensuring consumer and investor protection, and include safeguards to address potential risks to financial stability. In April 2021, Sharon Donnery, Deputy Governor, Central Banking at the Central Bank, stated that:
"... the Central Bank is supportive of the European Commission's work on advancing an EU framework for markets in crypto-assets and welcomes the development of a more harmonised approach to crypto-assets."5
However, until the MiCA enters into force, cryptocurrency will continue to be unregulated, save where it is subject to regulation under existing financial services regulatory regimes or for AML/CFT purposes.
The adoption of the Digital Finance Package follows the publication by the European Commission of a consultation paper on the future EU framework for markets in crypto-assets, on 19 December 2019. The consultation paper consists of three substantive parts, namely: (1) classification of crypto-assets; (2) crypto-assets that are not currently covered by EU legislation; and (3) crypto-assets that are currently covered by EU legislation. This consultation was the first step taken at EU level in preparing potential initiatives to specifically regulate crypto-assets in the EU.
In response to that consultation, the Central Bank issued a letter dated 30 April 2020 to the Directorate-General for Financial Stability, Financial Services and Capital Markets Union of the European Commission, in which the Central Bank advised that it is supportive of the initiative and that it welcomes the development of a more harmonised approach to crypto-assets. The Central Bank expressed the view that a harmonised taxonomy at EU level would facilitate a feature-driven, case-by-case assessment by market participants and, as appropriate, National Competent Authorities, given the evolving nature of crypto-assets.
"Classic" cryptocurrencies (such as Bitcoin, Litecoin and Ether) that are not centrally issued and give no rights or entitlements to holders currently appear to fall outside of the scope of the existing regulatory regime in Ireland. This is on the basis that a pure, decentralised cryptocurrency is unlikely to be a transferable security and the Central Bank has emphasised that such cryptocurrencies are "unregulated".6 However, an exception to this may apply in relation to the category of cryptocurrencies known as "stablecoins" – particularly, where these are pegged to, and are directly exchangeable on demand for, fiat currencies.
In the 2019 consultation, the European Commission sought to determine whether additional regulatory requirements should be imposed on both "stablecoin" and "global stablecoin" issuers when their coins are backed by real assets or funds. The Central Bank's 2020 letter indicates that, in its view, "the risks of 'so called stablecoins' for financial stability, monetary policy, consumer and investor protection, legal certainty and compliance with AML/CFT requirements are a key concern. Among the Central Bank of Ireland's key concerns is that the issuing of currency should firmly remain under the remit of the relevant public authorities (i.e. central bank). Where the reach or other features of 'so called stablecoin' risk it being perceived as a currency, or operating as a quasi-currency, then it should be prohibited".
In the context of true utility tokens (i.e. tokens that can be redeemed for access to a specific product or service), the Central Bank indicated in its 2020 letter that "it is not readily apparent to us that most utility tokens are, or should be, treated as financial products or that they should be regulated as such. However, we recognise that a utility token may, in substance be, or may become, a financial instrument (transferable security or e-money) and, in that case, it should be clear that it should fall within the regulatory perimeter. Cases where crypto assets start as, or claim to be, one thing but morph into the provision of financial services directly or indirectly should be closely monitored". In the absence of clear Irish or EU legislative guidance, a case-by-case basis analysis is required in order to determine whether a utility token falls outside of the parameters of a transferable security for the purposes of MiFID.
In relation to security tokens (which may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits), the Central Bank expressed the view in its 2020 letter that it would be beneficial to have a harmonised taxonomy at EU level in relation to crypto-assets, including a harmonised definition of a security token as a transferable security. Hence, where these security tokens are closer to conventional debt instruments and equity instruments, the Central Bank has called for them to be "consistently regulated, while allowing genuine utility tokens to remain outside the regulatory perimeter".7
Key to any future regulation of security tokens at an EU or Irish level will be the concepts of "financial instrument" and "transferable securities" under MiFID. A transferable security for the purposes of MiFID includes shares, bonds, derivatives and other instruments that give their holders similar rights or entitlements. The definition is not exhaustive and includes any security negotiable on the capital market with the exception of instruments of payment. It is clear that a security token may well be deemed to be a transferable security for the purposes of MiFID, which would mean that any entity providing an investment service or carrying on an investment activity with respect to the relevant crypto-asset will need to be authorised as an investment firm (and will need to comply with a wide range of detailed prudential and conduct of business requirements) unless it benefits from an exemption. The European Commission's Digital Finance Package introduces a draft Directive, which, in addition to clarifying certain provisions in existing EU financial services directives, amends the definition of a "financial instrument" in MiFID to clarify beyond any legal doubt that such instruments can be issued via DLT.8
Finally, money transmission laws and AML legislation may also apply to activities carried out in relation to cryptocurrencies (see below).
Sales regulation
Where a crypto-asset is deemed to involve an offer of transferable securities to the public, the requirements under the Prospectus Regulation (EU) 2017/1129/EU, as implemented into Irish law by the European Union (Prospectus) Regulations 2019 (together, the Prospectus Regulations), may apply.
The Prospectus Regulations impose requirements for an approved prospectus to have been made available to the public before: (a) transferable securities are offered to the public in Ireland; or (b) a request is made for transferable securities to be admitted to a regulated market situated or operating in the EU. Unless an exemption applies (public offers made to certain qualified investors are, for example, exempt), a detailed prospectus containing prescribed content must be drawn up, approved by the Central Bank (or the appropriate EEA Member State financial regulator where Ireland is not the home state of the issuer of the transferable securities) and published before the relevant offer or request is made. These requirements only apply to offers or requests relating to transferable securities, being anything that falls within the definition of transferable securities in MiFID (see above). In light of the Central Bank's 2020 letter, the Prospectus Regulations would appear to be of primary concern for issuers of security tokens in Ireland.
In addition to the Prospectus Regulations, there are various e-commerce and consumer protection requirements in force in Ireland that are potentially applicable to sales of cryptocurrencies or crypto-assets or the offering of services related to cryptocurrencies or crypto-assets (such as exchange or wallet services) in or from Ireland.
Click here to continue reading . . .
Footnotes
1. https://www.centralbank.ie/consumer-hub/consumer-notices/consumer-warning-on-virtual-currencies (updated April 2021).
2. https://centralbank.ie/consumer-hub/consumer-notices/alert-on-initial-coin-offerings.
3. ESMA, Advice on Initial Coin Offerings and Crypto-Assets, 2019.
4. "Tomorrow's yesterday: financial regulation and technological change" – speech given by Gerry Cross, Director of Financial Regulation – Policy and Risk, Central Bank of Ireland, at Joint Session: Banknotes/Identity High Meeting 2018.
5. "The Future of Payments in Ireland and Europe" – opening remarks given by Sharon Donnery, Deputy Governor, Central Banking, Central Bank of Ireland on 28 April 2021.
6. https://www.centralbank.ie/consumer-hub/consumer-notices/consumer-warning-on-virtual-currencies (updated April 2021).
7. Speech at Digital Finance in Europe by Gerry Cross, Director of Financial Regulation – Policy and Risk, Central Bank of Ireland on 14 May 2020.
8. Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, EU/2013/36, 2014/65/EU, (EU) 2015/2366 and EU/2016/2341.
Originally published by Global Legal Insights Guide to Blockchain & Cryptocurrency Regulation 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
