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October 19, 2018

ESMA published a report presenting advice of the Securities and Markets Stakeholder Group (SMSG) on the steps that ESMA can take to contain the risks of initial coin offerings (ICOs) and crypto assets, on top of the existing regulation. Since there are no obvious stability risks yet in this respect, the report mainly focuses on risks for investors.

The report engages in a fact-finding exercise and provides a taxonomy of crypto assets, based on the Swiss FINMA distinction between payment tokens, utility tokens, asset tokens, and hybrids. To inspire potential regulatory initiatives, the report further provides an overview of the recent ICOs and market developments in respect of crypto assets and of the most important existing regulations for crypto assets, ICOs, and sandboxes and innovation hubs in 36 jurisdictions: EU and European Economic Area member states, Gibraltar, Switzerland, Jersey, Guernsey, and the Isle of Man. The second part of the report offers advice to ESMA on whether and how ICOs and/or crypto assets should be regulated. 

First, SMSG advises ESMA to provide level 3 guidelines or to aim at supervisory convergence on the following:

  • Interpretation of the Markets in Financial Instruments Directive (MiFID) definition of transferable securities and clarification on whether transferable asset tokens that have features typical of transferable securities are subject to MiFID II and the Prospectus Regulation
  • Interpretation of the MiFID definition of commodities, since that concept is crucial to determine whether an asset token with features typical of a derivative is a MiFID financial instrument or not
  • Interpretation of the multilateral trading facility (MTF) and organized trading facility (OTF) concepts, clarifying whether the organization of a secondary market in asset tokens that qualify as MiFID financial instruments is indeed an MTF or an OTF
  • When issuers of asset tokens are to be considered to organize an MTF or an OTF in accordance with the above, the MAR applies to such MTFs and OTFs
  • In all situations where an asset token is to be considered a MiFID financial instrument, persons giving investment advice on those asset tokens, or executing orders in those asset tokens, are to be considered investment firms, which should have a license as such, unless they qualify for an exemption under MiFID II.

Second, transferable payment and utility tokens are often used as investment products, while the asset tokens may in the future be used as such. In view of the transferability and fungibility of these tokens, risks arise that are very similar to risks on the capital markets (in terms of investor protection and market abuse). SMSG recognizes that ESMA is not competent to change the level 1 MiFID II text listing the MiFID II financial instruments. The SMSG nevertheless urges ESMA to consider sending a letter to EC asking it to consider adding these tokens to the MiFID list of financial instruments. Finally, SMSG opines that, although sandboxes and innovation hubs should not be overly regulated, some coordination is necessary. SMSG advises ESMA to provide guidelines with minimum criteria for national authorities that operate, or want to operate, a sandbox or innovation hub.


Related Link: SMSG Report

Keywords: Europe, EU, Securities, Initial Coin Offerings, Crypto Assets, MiFID II, MAR, SMSG Advice, Regtech, ESMA


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