ESMA’s Advice to the EU Institutions on ICOs and crypto-assets
The European Securities and Markets Authority ("ESMA") has recently published its Advice to the European Union (EU) Institutions on initial coin offerings and crypto assets (the “Advice”).
The Advice seeks to clarify the existing EU rules in relation to crypto-assets that fall within the definition of financial instruments and highlights ESMA’s perception of the gaps and issues in the existing EU financial regulatory framework.
The gaps and issues identified by ESMA can be put into two categories:
Crypto-assets falling within the definition of financial instruments under MiFID – in this regard, ESMA considers that certain requirements may be re-considered or have the potential to be interpreted in order to admit to an effective application. Indeed, ESMA’s main recommendations included the following:
Providing clarity in relation to the types of services or activities that may qualify as custody/safekeeping services or activities;
Providing certainty about the concept of settlement and settlement finality and also how miners would be handled under existing rules; and
Ensuring that the protocol and smart contracts underlining crypto-assets and crypto-asset activities achieve minimum reliability and safety.
Crypto-assets falling outside the definition of financial instruments – in this regard, ESMA believes that the lack of regulation exposes investors to significant risks. ESMA foresees that one option could be for financial regulators to decide not to regulate as this might fall outside their remit but believes that this is not a desirable option. Indeed, ESMA believes that the most appropriate course of option would be to employ a bespoke regime for certain types of crypto-assets, which at minimum, would include the application of Anti-Money Laundering requirements and appropriate risk disclosures.
While most of the issues highlighted in the Advice are not within its remit, ESMA is committed to continue monitoring the market developments in this area while cooperating with National Competent Authorities and global regulators. Meanwhile, EU Institutions are urged to seek possible ways to address the gaps and issues identified.
European Banking Authority reports on crypto-assets
The European Banking Authority (the “EBA”) has published the its conclusions in relation to the applicability and suitability of European Union law to crypto-assets.
According to the EBA, although activities involving crypto-assets do not seem to hinder financial stability, EU regulation relating to banking, payments and electronic money does not cater for these activities and the resulting divergences that are starting to emerge between Member States creates risks to the level playing field. As a result, the EBA sets out its advice to the European Commission highlighting the need for a comprehensive cost/benefit analysis in order to determine the required action. The EBA further advises the European Commission to take into consideration the Financial Action Task Force recommendations issued in October 2018 in relation to ‘virtual asset’ activities and to take initiative in encouraging consistent accounting treatment of crypto-assets.
In its report the EBA also provided the measures it will take during this year in order to enhance the monitoring of institutions' crypto-asset activities and consumer-facing disclosure practices.These measures include an optional common monitoring template and an assessment of various business practices employed by institutions, in order to determine what actions may be required in order to ensure a high standard of consumer protection.
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