February 26, 2019

The ESMA Chair Steven Maijoor delivered a keynote speech at the FinTech Conference 2019 in Brussels. He discussed the challenges associated with crypto-assets and outlined the response of ESMA in dealing with these challenges. In line with the FinTech Action Plan of EC, ESMA started to assess the applicability of the existing rules to the emerging and very diverse population of crypto-assets. The assessment highlighted a number of gaps and issues in the rules in this regard. In January 2019, ESMA published an Advice to the European Commission, Parliament, and Council and recommended that they consider these gaps and issues and address them where relevant.

Mr. Maijoor emphasized that the existence of varying features of crypto-assets makes it plain to see that crypto-assets cannot be legally qualified via a "one size fits all" approach. ESMA assessed how member states had transposed Markets in Financial Instruments Directive (MiFID) into their national laws and, based on that transposition, whether a sample set of crypto-assets qualified as financial instruments. It was found that most of the national authorities agree that some crypto-assets, such as those with attached profit rights, are likely to qualify as MiFID financial instruments, in which case they should be regulated as such. However, it will have to be seen whether the phenomenon is sustainable once brought within the regulatory remit. Many initial coin offerings have raised large volumes because they have evaded certain regulatory requirements. Meanwhile, a significant share of the existing crypto-assets are likely to fall outside the rules, as things stand.

When regulation applies, it is meant to be technology neutral. However, it was not designed with these new instruments in mind. The first main message of the ESMA Advice, therefore, is that there may be areas where the nature of crypto-assets, where they qualify as financial instruments, requires potential interpretation, or specific requirements need to be reconsidered, to allow an effective application of regulations. He highlighted and discussed three such technical areas that ESMA has analyzed in detail, before moving on to illustrate some issues around the application of the existing rules to crypto-assets. The second key message of the recent Advice is that, where crypto-assets do not qualify as MiFID financial instruments, they are likely to fall outside the remit of ESMA. Meanwhile, ESMA is aware that investors may not easily distinguish between those crypto-assets that are financial instruments and those that are not. Where crypto-assets do not qualify as financial instruments (and unless they qualify as e-money as discussed in the EBA report), ESMA is concerned that the absence of applicable financial rules leaves consumers exposed to substantial risks.

Therefore, he emphasizes that EU policymakers should consider ways to address these risks in a proportionate manner. As a priority, ESMA advises policymakers to extend the scope of anti-money laundering (AML) rules to the activities that involve crypto-assets. ESMA agrees with EBA that providers of exchange services between crypto-assets and crypto-assets (and not only between crypto-assets and fiat currencies) and providers of financial services for initial coin offerings should be within the scope of AML/CFT obligations. In addition, appropriate disclosure requirements should be set up to ensure that consumers understand the risks of crypto-assets prior to investment. This would include requirements to provide relevant information on the issuer, the rights attached to the crypto-assets, and the risks. Importantly, ESMA believes that a more elaborate bespoke regime for those crypto-assets that do not qualify as financial instruments is premature. The phenomenon is still novel and business models continue to evolve. Therefore, a more elaborate regime may risk legitimizing crypto-assets and encouraging greater participation. Any novel framework should also protect the integrity of the existing capital markets and be flexible enough to capture the variety of risk factors that the different types of crypto-assets introduce. 

The ESMA Chair added that the EU Innovation Network is expected to be launched in April 2019 by EC and the three ESAs. This follows a joint report on innovation hubs and sandboxes in EU, which the ESAs published in January. The Network will bring together the national innovation hubs and regulatory sandboxes from the member states to share best practices and promote regulatory and supervisory convergence for innovative businesses in the EU. In conclusion, Mr. Maijoor emphasized that ESMA will continue to monitor markets closely to see whether firms are able to meet these challenges, enabling them to deliver distributed ledger technology applications in securities markets at scale. It will also continue to work closely with the national authorities to support a convergent approach to the supervision of crypto-assets, including in relation to their legal qualification, and other forms of financial innovation. Additionally, since innovations are often global, ESMA will continue to actively cooperate with other regulators internationally, including through FSB and IOSCO.


Related Link: Speech


Keywords: Europe, EU, Banking, Securities, Crypto Assets, Distributed Ledger Technology, Regtech, ESMA