On Jan. 9, 2019, both the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published a report on crypto-assets.1 These two reports clarify the application of existing EU rules to crypto-assets and provide advice to the institutions of the European Union on the regulatory issues raised by cryptocurrencies, crypto-assets and initial coin offerings (ICOs).
I. Legal qualification of crypto-assets
Both institutions seek to assess which kinds of crypto-assets (if any) may fall under the various regulated categories according to EU law.
According to EBA, only the qualification of "electronic money" (as defined in the second electronic money directive, EMD22) may apply to a very specific set of crypto-assets: redeemable fiat-backed "stablecoins." These stablecoins may be qualified as electronic money when the following six conditions are satisfied: the token (i) is electronically stored, (ii) has monetary value, (iii) represents a claim on the issuer, (iv) is issued on receipt of funds, (v) is issued for the purpose of making payment transactions and (vi) is accepted by persons other than the issuer.
ESMA, on the other hand, chose to ask the competent national authorities whether a sample of six little-known crypto-assets issued in ICOs (Finom, Polybius Bank, Crypterium, PAquarium, Filecoin and AlchemyBite) would qualify as financial instruments under their respective national laws. The tokens included in the survey present characteristics of investment tokens and utility tokens (or are hybrids of the two). Interestingly, ESMA did not include any pure "payment-type" token in its survey, as these would be unlikely to qualify as financial instruments.3 Based on the replies of the national authorities, four of those six crypto-assets may qualify as transferable securities and/or other types of financial instruments as defined under MiFID II.4 According to most national authorities, the existence of profit rights attached to a token is sufficient to qualify such token as a transferable security, even though ownership or governance rights may not necessarily exist. However, the survey suggests that pure utility tokens may fall outside the existing financial regulation.
ESMA estimates that between 10 percent and 30 percent of all crypto-assets may qualify as financial instruments and therefore should comply with the existing EU financial regulation. A broad range of EU rules would theoretically apply to crypto-assets that qualify as financial instruments (even though they were created to regulate traditional instruments such as shares and bonds): the Prospectus Directive, the Transparency Directive, MiFID II and MiFIR, the Market Abuse Regulation, etc. Therefore, for example, platforms "with a central order book and/or matching orders" trading crypto-assets qualified as financial instruments would likely qualify as multilateral systems and should operate as regulated markets, multilateral trading facilities (MTFs) or organized trading facilities (OTFs). However, if the trading platform is partially or fully decentralized (for example, when the order is matched by the platform but executed through a smart contract), the qualification as regulated market, MTF or OTF may not apply. In any case, the legal qualification is ultimately a prerogative of the competent national authority, as each member state has transposed EU directives in a specific way.
II. Advice to the European Commission
The fifth Anti-Money Laundering Directive of May 30, 2018 (AMLD 5),5 included crypto-to-fiat exchanges and custodian wallet providers within its scope. Now, both ESMA and EBA encourage the EU institutions to further amend the Anti-Money Laundering Directive and extend its scope to crypto-to-crypto exchanges and providers of financial services for ICOs, in accordance with the recommendations of the Financial Action Task Force (FATF)6 published in October 2018.
For crypto-assets that qualify as financial instruments, ESMA believes that the EU legislation should be amended to clarify the application to these crypto-assets of the existing financial regulation (in particular of rules related to custody/safekeeping activities and settlement processes).
ESMA notes that certain EU countries (such as France and Malta) have started to create bespoke regimes for crypto-assets that do not qualify as financial instruments. Even though the need for consumer protection may justify these initiatives, ESMA believes that an EU-wide approach is the most appropriate response, as crypto-assets are by nature transnational. ESMA fears that the multiplication of national regimes in the EU may create an uneven playing field and encourage regulatory arbitrage. In addition, regulatory arbitrage within the EU may be strengthened by the fact that the transposition of MiFID II in national laws is disparate. For example, certain national authorities would consider that an investment-type token is not a transferable security because their national law sets out a restrictive list of transferable securities, rather than relying on a general definition.
However, ESMA does not support the elaboration of an EU bespoke regime for crypto-assets that do not qualify as crypto-assets at this stage, and recommends instead warning buyers and consumers about the risks of those crypto-assets. According to ESMA, creating such a regime would risk "legitimizing" crypto-assets and encourage wider adoption.
Also, EBA has announced its intention to monitor the use of crypto-assets by regulated financial institutions. EBA is currently working with the Basel Committee on Banking Supervision on a clarification of the prudential treatment of banks' exposure to crypto-assets. As prudential rules are often related to accounting rules, the accounting treatment of crypto-assets will need to be clarified and standardized. EBA also notes that the European Commission, in its upcoming assessment, should take into account the environmental impact of some crypto-asset activity.
Finally, it is our view that these reports confirm that France is at the forefront of the regulation of crypto-assets and related activities, although ESMA and EBA would prefer that the regulation be implemented at the EU level. The French regime to be created by the Loi Pacte will probably influence the elaboration of an EU-wide regulatory regime. In any case, as the May 2019 European Parliament election is likely to delay the development of such EU legislation, it is to be expected that member states will keep legislating on their own. As things are moving fast in the crypto-universe, consumers need to be protected and the development of a regulated crypto-industry needs to be encouraged.
1 ESMA, Advice on Initial Coin Offerings and Crypto-Assets, Jan. 9, 2019; EBA, Report with Advice for the European Commission on Crypto-Assets¸ Jan. 9, 2019
2 Directive 2009/110/EC of Sept. 16, 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC
3 According to ESMA, payment-type crypto-assets include most prominent cryptocurrencies such as bitcoin.
4 Directive 2014/65/EU of May 15, 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU
5 Directive 2018/843 of May 30, 2018 amending Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU
6 FATF, Regulation of Virtual Assets, Oct. 19, 2018: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets.html
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