The European Supervisory Authorities (ESAs) were kept busy in the second half of last year after they were mandated by the European Commission in the FinTech Action Plan 2018 to carry out further analysis on the EU legal framework of crypto assets, initial coin offerings (ICOs) and regulatory sandboxes. However, the efforts paid-off: at the beginning of January, the ESAs published their results, specifically a report on
- crypto-assets prepared by EBA;
- ICOs and crypto-assets prepared by ESMA; and
- regulatory sandboxes and innovation hubs prepared by all three ESAs.
There are three general takeaways:
- the EU crypto-asset activity in the EU does not give rise to implications for financial stability;
- nevertheless, the initial concerns regarding crypto-asset activities remain valid: fraud, money laundering, cyber-attacks and consumer/investor protection are still identified as key risks.
- the divergent approaches across the EU furthermore pose risks to the level playing field and, thus, the EU Commission is advised to assess whether a harmonized EU framework is justified.
EBA report
The EBA focuses in its report on the applicability and suitability of EU regulations to crypto-assets. The analysis is, however, limited to the Second E-Money Directive (EMD2) and Second Payment Services Directive (PSD2). Key observations are:
- Crypto-assets may qualify as electronic money in the meaning of the EMD2 which would require the issuer to obtain an authorization unless a limited network exemption applies.
- Crypto-assets are generally not regarded as funds in the meaning of the Second Payment Services Directive PSD2 (unless they qualify as e-money).
- On the one hand a significant portion of activities do not fall within the scope of the current EU law as set out above (but may fall within the scope of national laws). On the other hand current EU law does not apply to a number of forms of crypto-assets and related activities provided by trading platforms or custodian wallet providers. This issue is accompanied by the emergence of different approaches across the EU member states.
- The main risks of crypto-assets concern consumer protection, i.e. inadequate disclosures or suitability checks.
- In order to improve the monitoring of financial institutions, the EBA intends to develop a “common monitoring template” which NCAs can use to gather information on crypto-asset activity and related risks. Besides, the EBA proposes to the EU Commission to carry out a cost/benefit analysis to assess whether action on EU level is appropriate and feasible to address the issues.
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ESMA report
The scope of the ESMA report is broader as the focus is on the applicability of EU rules to crypto-assets qualifying as financial instruments in the meaning of the Second Markets in Financial Instruments Directive (MiFID2). The ESMA sets out the regulatory implications when a crypto-asset qualifies as a financial instrument and analyses the gaps and issues of the various capital market directives and regulations when applied to crypto-assets.
Where crypto-assets do not qualify as financial instruments (or e-money), the absence of applicable financial services rules pose in particular investor protection risks. ESMA therefore suggests to implement a be-spoke regime for specific types of crypto-assets. In particular, AML rules should apply to all activities involving crypto-assets. As regards ICOs, appropriate risk disclosure requirements should be considered by EU policymakers.
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ESAs report
As a third step, the ESAs report sets out a comparative analysis of the innovation facilitators established in the EU and outline best practices for their design and operation. Currently, five EU Member States have regulatory sandboxes in operation that provide a scheme to enable firms to test innovative FinTech products and business models. Furthermore, the majority auf EU Member States have innovation hubs in place with provide a point of contact for firm to raise queries with NCAs.
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Comment
Especially the reports of EBA and ESMA present an additional component to further specify the legal environment applicable to crypto-assets and ICOs. They provide helpful overviews of the current legal framework and provide general definitions of crypto-assets and descriptions of market players, concepts and technologies. However, in essence, they do not contain any surprises. They furthermore reveal the urgency to establish harmonized EU rules to provide a level playing field between the EU Member States and address risks appropriately. Remarkably, the EU legislator has recently made a first step by adopting the Fifth Money Laundering Directive (to be transposed by 10 January 2020), which includes wallet providers and crypto-currency exchanges within the scope of AML regime.
