In January 2019, the European Banking Authority (“EBA”) and the European Securities and Markets Authority (“ESMA”) both issued reports pertaining to the issues identified with respect to crypto-assets and Initial Coin Offerings (“ICOs”). The European Commission has since, published a letter (19th July) on the subject of crypto-assets, including so-called “stablecoins”.
Moreover, on the 20th of August, the EBA and ESMA have issued a joint letter in response to a letter by the European Commission (“EC”), on the subject of crypto-assets, including so-called ‘stablecoins’.
EBA Report: Crypto-assets
This report concluded that there may be certain cases where crypto-assets may be classified as ‘electronic money’ under the Electronic Money Directive (Directive 2009/110/EC). In this respect, any provision of services in relation to such crypto-assets would require authorisation as an Electronic Money Institution (“EMI”).
With regard being given to the applicability of the Payment Services Directive (Directive (EU) 2015/2366) (“PSD II”), crypto-assets are not banknotes, coins or scriptural money, thus, unless such crypto-assets are classified as electronic money, they would fall outside the meaning of funds as defined in Directive (EU) 2015/2366.
Consequently, what this means is that any services provided in relation to crypto-assets qualifying as electronic money, falling outside the scope of Annex 1 of PSD II, should not be regulated by this Directive. This poses major risks for financial stability since most crypto-assets fall outside the scope of the above-mentioned Annex and Directive and therefore remain unregulated.
In light of the above, the EBA advised to the Commission that a cost/benefit analysis is carried out to determine what action should be taken at the EU level.
ESMA’s advice: ICOs and Crypto-assets
ESMA’s report provided clarification regarding whether crypto-assets are classified as financial instruments under the second Markets in Financial Instruments Directive (MiFID II -Directive 2014/65/EU).
ESMA worked closely with National Competent Authorities to identify the classification of crypto-assets in the different Member States (“MSs”); this was mainly dependant on the respective MSs’ transposition of MiFID II into their national legislation. It was concluded that many crypto-assets might constitute transferable securities, as well as other types of financial instruments and would thus potentially be subject to already-existent legislation. Consequently, this would pose a risk of having an inconsistent regulatory framework for crypto-assets across the EU.
In order to address these issues, ESMA advised the EC to consider setting up an ad hoc regime for the regulation of crypto-assets which are not classified as financial instruments. ESMA believes that all crypto-assets and related activities should be subject to Anti-Money Laundering (“AML”) provisions and is also putting forward its recommendations for the adoption of risk disclosure requirements to ensure investor protection.
EBA and ESMA are continuously monitoring the market for any developments and co-ordinating with the Financial Stability Board, the Basel Committee on Banking Supervision, the Financial Action Task Force, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions with the intention of forming a international harmonised approach on issues surrounding regulation of crypto-assets and crypto-exchanges.
EBA and EMSA’s joint response to the European Commission: Stocktaking exercise
Later this year, the ESMA and EBA will be introducing an EU-level stocktaking exercise of national regulations relating to crypto-assets. In light of the increasing prominence of stablecoins, this exercise will consist of a specific set of predetermined questions which relate to the regulatory treatment of the same.
The topic of stablecoins will also be discussed at a European Forum for Innovation Facilitators (EFIF) event in September, along with a range of other financial technologies subject to consideration/testing in innovation facilitators. It is key that the competent authorities’ capacity to understand technologies and their application is enhanced in order to be able to promote a common regulatory and supervisory approach in this respect.
