On 9 January 2019, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published Advice and a Report, respectively, on the regulatory treatment of assets secured cryptographically (crypto-assets). This follows a request from the European Commission for European Supervisory Authorities (ESAs) to assess the suitability of the EU regulatory framework with regards to Initial Coin Offerings (ICOs) and crypto-assets in its 2018 FinTech Action plan.
Background
Currently there are a wide range of crypto-assets that are used for different purposes, including payment tokens operating as a means of exchange (e.g. Bitcoin), investment-type tokens (e.g. Bankera) and tokens applied to access a good or service (“utility” tokens). While for the time being, the EBA is of the view that crypto-assets do not pose a threat to financial stability in the EU, it expressed concerns with regards to consumer protection, Anti-Money Laundering and Counter Terrorist Financing (AML/CTF), operational resilience and market integrity. At the same time the EBA noted that divergent regulatory approaches at a national level undermine the level playing field between EU Member States.
According to the Report crypto-assets may, depending on their characteristics, be categorised under EU law as electronic money, financial instruments, or none of the foregoing.
Electronic money and payment services
In its Report, the EBA examined the applicability of the second Electronic Money Directive (EMD2) and the second Payment Services Directive (PSD2) to crypto-assets. It concludes that there are circumstances where a crypto-asset could qualify as ‘electronic money’ under EMD2, in which case authorisation as an electronic money institution is required to carry out activities involving electronic money, unless an exemption, like the limited network exemption, applies.
Crypto-assets do not generally fall within the definition of ‘funds’ under PSD2, according to the EBA. However, when a firm carries out a ‘payment service’ using Distributed Ledger Technology (DLT) with a crypto-asset that qualifies as ‘electronic money’, this would fall within the scope of the PSD2, by virtue of it falling under the definition of ‘funds’.
During 2019, the EBA intends to enhance its monitoring of financial institutions’ crypto-asset activities, including those relating to consumer-facing disclosure practices. The EBA has also advised the European Commission to carry out a cost / benefit analysis to assess whether EU-level action is appropriate and feasible at this stage in order to address the issues identified in the Report.
Financial instruments
ESMA’s Advice is based on a survey of National Competent Authorities (NCAs) concerning their approach to crypto-assets and, in particular, whether certain crypto-assets could qualify as financial instruments under the second Markets in Financial Instruments Directive (MiFID II). The findings suggest that the majority of NCAs consider that a number of crypto-assets, for instance those with profit rights attached, could qualify as transferable securities and/or other types of financial instruments, although the legal categorisation greatly depends on the relevant national approach and the national legislation transposing MiFID II. Should crypto-assets be so defined, a number of requirements would be applicable, including those under the Prospectus Directive, the Transparency Directive, the Market Abuse Directive, the Short Selling Regulation, the Central Securities Depositories Regulation and the Settlement Finality Directive. However, ESMA acknowledged that there may still be gaps in the relevant legislation or issues with regards to supervision.
ESMA has identified several gaps in the regulatory treatment of crypto-assets and has called for more clarity, by way of Level 1 measures, on the types of services/activities that may qualify as custody/safekeeping services/activities, on the way that the concepts of settlement and settlement finality applies to crypto-assets as well as on the risks that are specific to the underlying DLT that may require more targeted rules.
AML / CTF
In any case, there is a general consensus among NCAs with regards to the need for the regulation of crypto-assets in respect of AML/CTF. The fifth Anti-Money Laundering Directive (AMLD5), which must be transposed by 10 January 2020, brings cryptocurrency exchanges and wallet providers within scope of the relevant rules.
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