With the rapid economic growth of the crypto-asset, regulatory authorities across the globe are struggling to catch up with the complex and often ambiguous nature of these digital innovations. The European Securities and Markets Authority (“ESMA”) recently released a comprehensive consultation paper outlining draft guidelines on the classification of crypto-assets as financial instruments under the European Union’s financial regulatory frameworks. These guidelines are crucial for providing clarity to market participants, regulators, and other stakeholders in distinguishing between different types of crypto-assets and determining which regulatory frameworks apply to them.
The guidelines, shaped by the European Union’s Markets in Financial Instruments Directive (“MiFID II”) and the newly introduced Markets in Crypto-Assets Regulation (“MiCA”), are aimed at achieving consistency and regulatory certainty across member states. ESMA’s central objective is to develop a structured framework for assessing whether crypto-assets should be classified as financial instruments, ensuring that national competent authorities (“NCAs”) adopt a harmonised approach to regulating the crypto-asset market.
The ESMA guidelines advocate for a “substance over form” approach when assessing whether a crypto-asset should be considered a financial instrument. This approach focuses on the economic and functional characteristics of the crypto-asset rather than its technological form or how it is labelled. ESMA emphasises that the legal qualification of a crypto-asset should not be determined solely by its blockchain-based infrastructure. Instead, the rights conferred by the crypto-asset and its tradability on the capital market are essential factors.
One of the primary classifications which is addressed is whether a crypto-asset qualifies as a “transferable security” under MiFID II. To meet this definition, the asset must be tradable, form part of a “class of securities,” and confer rights typically associated with traditional securities such as shares or bonds. The guidelines stress that a crypto-asset conferring financial rights, such as dividends, ownership, or voting rights, should be regulated under MiFID II. Additionally, ESMA points out that even if a crypto-asset lacks explicit ownership or governance rights, it could still be classified as a transferable security if it represents a share in a company’s profits or other financial claims.
The guidelines also provide specific conditions for classifying crypto-assets as other types of financial instruments, such as money-market instruments, derivatives, and emission allowances. A crypto-asset can be classified as a money-market instrument if it meets criteria such as having a short-term maturity, exhibiting minimal volatility, and being linked to short-term interest rates. Examples include crypto-assets that function as digital representations of treasury bills, certificates of deposit, or short-term debt obligations.
For emission allowances, the guidelines clarify that crypto-assets representing rights to emit greenhouse gases can be classified as financial instruments under MiFID II if they are tradable within the EU Emissions Trading Scheme or an equivalent regulatory framework. Such crypto-assets must represent a right to emit a specified volume of greenhouse gases and be exchangeable on authorised trading platforms.
For derivatives, the guidelines stipulate that a crypto-asset must derive its value from an underlying asset, such as a currency, commodity, or index. This classification applies if the crypto-asset behaves similarly to traditional derivatives in terms of cash settlement or physical settlement based on the value of the underlying asset.
ESMA’s guidelines aim to clarify the distinction between crypto-assets falling under MiCA and those that should be regulated by MiFID II. MiCA categorises crypto-assets into three primary types, Asset-Referenced Tokens (“ARTs”), Electronic Money Tokens (“EMTs”), and other crypto-assets. ARTs and EMTs are designed to maintain a stable value by referencing another asset. These tokens are governed by distinct regulatory frameworks to manage the risks associated with their stabilisation mechanisms.
The third category, encompassing utility tokens, does not confer financial rights but provides access to a good or service within a blockchain ecosystem. The guidelines emphasise that utility tokens should not be confused with financial instruments if they lack investment, ownership, or governance characteristics. However, ESMA’s guidelines clarify that even utility tokens may be classified as financial instruments if they display characteristics such as profit participation or voting rights. While utility tokens typically provide access to an application or service, they should be carefully assessed to ensure they do not inadvertently offer financial returns or rights similar to those of securities. For example, a utility token that offers governance rights in a company’s operations or future profits may qualify as a financial instrument under MiFID II.
One of the most debated aspects of crypto-assets is the classification of non-fungible tokens (“NFTs”). According to the guidelines, NFTs that are genuinely unique and non-fungible should not fall under MiCA. However, NFTs that are part of a larger series or collection, and whose value is derived from comparability with other similar assets, may not qualify as unique and could be regulated as financial instruments.
The hybrid nature of some crypto-assets adds another layer of complexity. Hybrid tokens can serve multiple purposes—acting as both a utility token and a financial instrument. ESMA advises that NCAs should prioritise the financial instrument characteristics in their classification. If a token exhibits features of a financial instrument, such as offering financial returns or entitlements, it should be regulated under MiFID II, even if it also serves as a means of access or utility within a digital ecosystem.
ESMA’s draft guidelines represent a significant step toward regulatory clarity in the European crypto-asset market. By establishing clear conditions and criteria for the classification of crypto-assets as financial instruments, these guidelines aim to harmonise regulatory practices across EU member states and ensure that market participants understand their obligations. The guidelines underscore the need for flexibility and a substance-over-form approach, allowing regulators to adapt to the rapidly evolving nature of crypto-assets. As the consultation process continues, ESMA will likely refine its approach based on feedback from stakeholders, with the ultimate goal of finalising the guidelines by the end of 2024.
