United States: ESMA And EBA Assess Whether Crypto-Assets Are Regulated Under Existing EU Rules And Advise The European Commission To Consider An EU-Level Regulation

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.

Footnotes

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

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions