On 24 September 2020, the European Commission (the Commission) published a proposed regulatory framework for Markets in Crypto-Assets (Proposed Framework) as part of its Digital Finance Strategy for Europe 2020. This FAQ addresses the background and the key proposals contained in the Proposed Framework.

WHAT IS THE BACKGROUND TO THE PROPOSED FRAMEWORK?

Since publication of the EU Fintech Action Plan in March 2018, the Commission has been examining the opportunities and challenges presented by crypto-assets in financial services. Following a review by the Commission, it found that whilst some crypto-assets may fall within the scope of existing EU regulation (such as MiFID II), effectively applying existing regulatory frameworks to crypto-asset activities is not straightforward. Furthermore, some EU Member States already have bespoke crypto-asset regulatory regimes, risking market fragmentation, regulatory arbitrage and distortion of the Single Market in financial services. Against this background, the Commission is proposing a bespoke EU regulatory framework for markets in crypto-assets that promotes markets by embracing crypto-assets as welcome technological advances in financial services facilitating the tokenisation of traditional financial assets.

WHY IS THE PROPOSED FRAMEWORK BEING INTRODUCED?

The reasons cited by the Commission include legal certainty; supporting innovation; introducing appropriate consumer and investor protection in relation to crypto-assets; and ensuring financial stability. The Proposed Framework is in the form of a draft Regulation in order to achieve maximum harmonisation across EU Member States' regulatory treatment of markets in crypto-assets.

ARE 'STABLECOINS' REGULATED UNDER THE PROPOSED FRAMEWORK?

Stablecoins are crypto-assets that seek to retain a stable value by referencing one or several fiat currencies or a basket of traditional assets. The Proposed Framework regulates stablecoins that fall within the definition of 'asset-referenced tokens' and 'e-money tokens' with bespoke regulatory requirements applicable to each category (see further below). Issuers of stablecoins that are classified as 'significant asset-referenced tokens' or 'significant e-money tokens' will be subject to enhanced rules, for example, relating to capital requirements and the investment of reserve funds, and are to be supervised by the European Banking Authority (EBA).

WHO IS THE PROPOSED FRAMEWORK APPLICABLE TO?

The Proposed Framework is applicable to, and brings in scope, two entity types that currently fall outside the ambit of EU financial services regulation, namely issuers of crypto-assets and cryptoasset service providers.

Issuers of crypto-assets

  • Issuers of crypto-assets are defined as any legal person who offers to the public any type of crypto-asset or seeks their admission on a trading platform (noting that natural persons may not issue crypto-assets).
  • The Proposed Framework applies various authorisation requirements to issuers of crypto-assets, depending on the type of crypto-asset they are issuing (see below) and whether the issuer holds an existing authorisation (e.g. credit institutions that issue asset-referenced tokens would be permitted to issue such assets without obtaining a separate authorisation under the Proposed Framework).

Crypto-asset service providers

  • there are two sub-categories:
    • Providers of crypto-asset trading platforms are providers exchanging crypto-assets for fiat currencies or other crypto-assets by dealing on own account and ensuring the custody and administration of crypto-assets or the control of crypto-assets on behalf of third parties.
    • Providers involved in the placing of crypto-assets are providers that receive and transmit orders for crypto-assets, execute such orders on behalf of third parties and/or provide advice on crypto-assets e.g. custodian wallet providers.

Under the Proposed Framework, both types of crypto-asset service provider require authorisation by their competent authority and are subject to a supervisory regime comparable to a scaled-back and adjusted version of the MiFID II regulatory regime. Credit institutions and certain MiFID investment firms would be permitted to provide crypto-asset services without obtaining a separate authorisation under the Proposed Framework.

The European Securities and Markets Authority (ESMA) is mandated to establish a register of all crypto-asset service providers. Specific regulatory requirements would apply to crypto-asset service providers under the Proposed Framework, including for the custody of crypto-assets, the execution of orders and the giving of advice in relation to crypto-assets.

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Originally published 14 October 2020

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.