News & Analysis


ESMA Report on Initial Coin Offerings and Crypto-Assets

On 19 October, the European Securities and Markets Authority (ESMA) published its own internally commissioned report on initial coin offerings (ICOs) and crypto-assets (used to collectively herein to refer to coins, tokens, crypto currencies and other digital or virtual assets). The report has been produced by the Securities and Markets Stakeholder Group (the Stakeholders Group) as a brief to advise ESMA on the steps it can take to manage the risks (to be mainly understood as risks for investors) of ICOs and crypto-assets.

The Stakeholders Group has advised ESMA to provide level 3 guidelines or to aim at supervisory convergence on:
• The interpretation of the MIFID II definition of “transferable securities”, and clarify whether transferable asset tokens which have features typical of transferable securities are subject to MiFID II and the Prospectus Regulation;
• The interpretation of the MiFID II definition of “commodities”, as that concept is crucial to determine whether an asset token with features typical of a derivative is a MiFID II financial instrument or not;
• The interpretation of Multilateral Trading Facilities (MTF) or Organised Trading Facilities (OTF) concepts, clarifying whether the organisation of a secondary market in asset tokens which qualify as MiFID II financial instruments is indeed an MTF or an OTF;
• Whether, when issuers of asset tokens are considered to be organising an MTF or an OTF in accordance with the above, the Market Abuse Regulation (MAR) applies to such MTFs and OTFs; and
• Whether in all situations where an asset token is considered to be a MiFID financial instrument, persons giving investment advice on those asset tokens or executing orders in those asset tokens, are to be considered to be investment firms, and be licenced as such, unless they qualify for an exemption under MiFID II.

The Stakeholders Group recognises that ESMA is not competent to change the level 1 MiFID II text listing the financial instruments, however advises that they should consider sending a letter to the European Commission asking for a review of these tokens being added to the MiFID II list of financial instruments.

Were those tokens to become MiFID II financial instruments, secondary markets in such payment tokens may also qualify as MTFs or OTFs, be subject to the MAR, and advisors in respect of such tokens would become subject to MiFID II. Finally, although sandboxes and innovation hubs should not be overly regulated, some coordination is necessary, and ESMA should provide guidelines with minimum criteria to national authorities which operate or want to operate a ‘regulatory sandbox’ or ‘innovation hub’. Those minimum criteria should relate to:

• Information on the exact scope, operating conditions of the sandbox or innovation hub, as well as on the measures taken to ensure investor protection;
• Transparency to the public in respect of the same;
• Regular reporting to ESMA and to the public on the experience gained from use of the sandbox or innovation hub and from the initiatives tested in the sandbox or innovation hub.

The report also includes an interesting section on background information and fact finding.

The report highlights that Malta, Switzerland, Lithuania, Gibraltar, Jersey, and the Isle of Man have expressly legislated or specifically developed methodologies, criteria or guidelines for assessing how and to what extent ICOs could be considered as financial instruments, thus falling under their respective framework of financial services legislation. Current rules on securities business, prospectus, anti-money laundering, financing of terrorism and/or market abuse continue to apply to such offerings. France is in the process of following suit on the back of recent statements.

Austria, Belgium, Bulgaria, Denmark, Estonia, Finland, Germany, Ireland, Luxembourg, Netherlands, Portugal, Spain, the United Kingdom, Lichtenstein, and Guernsey do not specifically restrict or prohibit ICO’s or crypto-assets initiatives but would take a measured approach to related proposals on a case by case basis.

Securities authorities in Croatia, the Czech Republic, Greece, Hungary, Italy, Latvia, Poland, the Republic of Cyprus, Romania, Slovakia, Slovenia, Sweden, Norway, and Iceland do not provide clear information as to their stance in these areas.

This highlights the very divergent regulatory approaches to crypto assets within the European Union, which creates an uneven playing field and hampers the creation of an internal market in this innovative field. ESMA, therefore, has been advised to take steps to clarify the application of existing financial regulation to virtual assets and coordinate the way national supervisory authorities deploy regulatory sandboxes and innovation hubs.

The benefits and risks of payment tokens, utility tokens (which are comparable to a voucher and to crowdfunding by coupon) and asset tokens (which represent physical goods) are also analysed in the report, with a view to determining what crypto-assets are or should be covered by what regulation. It is argued that, since transferable crypto assets used in payments (such as bitcoin) are increasingly considered as investments, the related risks are very similar to those seen in the capital markets. Annex I and II of the report includes a map of securities authorities’ positions and initiatives on ICOs, digital currencies, sandboxes and innovation hubs in Europe.

This report follows the House of Commons Treasury Committee report on crypto assets and digital currencies in UK, and on how regulation could provide adequate protection for consumers and businesses without stifling innovation, which was published last month. It should not go unnoticed that the request for crypto assets regulation is coming from multiple institutions and stakeholders. The EU is urged to adopt common and comprehensive rules to control risks and exploit the potential innovation that crypto assets might provide in the field of finance.

When the Fifth AML Directive is incorporated into the national legislation of EU member states at the end of 2019, virtual currency exchanges and custodians will have to register with the relevant AML authority in their jurisdiction, identify users, monitor transactions, report suspicious activity, and give national investigators greater access to information.

Whereas the regulation of single crypto-asset (e.g. bitcoin) might be impossible, the entities dealing with ICOs crypto-assets could more be subject to stricter scrutiny and disclosure rules if the financial instruments definitions in MiFID II were expanded to include ICOs and crypto-assets. This space will continue to develop and there may be opportunities for regulatory arbitrage until such time as ESMA takes action.