What has happened?
At the end of last year, the European Commission published a consultation on an EU framework for markets for cryptoassets.
What does this mean?
In its consultation, the Commission said that cryptoassets, which here are defined as "a digital asset that may depend on cryptography and exists on a distributed ledger", have the potential to bring significant benefits to market participants and consumers.
For example, initiation coin offerings (ICOs) and security token offerings (STOs) allow for a cheaper, less burdensome and more inclusive way of financing SMEs by streamlining capital-raising processes and enhancing competition.
Further, the tokenisation of traditional financial instruments could also open up opportunities for efficiency improvements across the trade and post-trade value chain, which should help with more efficient risk management and pricing.
"If the adequate investor protection measures are in place, cryptoassets could also represent a new asset class for EU citizens," the Commission said.
Further, payment tokens could also present opportunities in terms of cheaper, faster and more efficient payments, by limiting the number of intermediaries.
The Commission said that it has been looking closely at cryptoassets since publishing its FinTech Action Plan in 2018, in which it had mandated the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to assess the applicability and suitability of the current regulatory framework for cryptoassets.
In their ensuing January 2019 advice, the two authorities pointed out that some cryptoassets fall within the scope of EU legislation, "effectively applying it to these assets is not always straightforward".
Moreover, some provisions in existing EU legislation may stop the use of certain technologies, including distributed ledger technology.
The EBA and ESMA also pointed out that most cryptoassets are outside the scope of EU legislation and therefore not subject to provisions on consumer and investor protection and market integrity, among others.
The two authorities also said that certain Member States have introduced legislation on cryptoassets, meaning that there is no harmonised EU framework.
Building on the advice from the two authorities, the consultation should inform the Commission's work on cryptoassets:
- for cryptoassets covered by EU rule, as they qualify as financial instruments under MiFID II or as electronic money under the Electronic Money Directive (EMD2), the Commission has screened EU legislation to assess whether it can be effectively applied; and
- for cryptoassets not covered by EU legislation, the Commission is considering a possible proportionate common regulatory approach at EU level to address potential consumer/investor protection and market integrity concerns, among others.
The consultation contains four sections, seeking the views of stakeholders on:
- various general questions from the perspective of the general public to gain feedback on the use or potential use of cryptoassets;
- whether and how to classify cryptoassets, for both those that fall under existing EU legislation and those that do not;
- views on cryptoassets that fall outside the scope of EU financial services legislation. Here, cryptoassets designate all cryptoassets that are not regulated at EU level, mentioning payment tokens, stablecoins, utility tokens and investment tokens. This sections aims to determine whether an EU regulatory framework is needed for these cryptoassets; and
- views on cryptoassets that fall within the scope of EU legislation, ie under MiFID II and EMD2. Here, they are described as security tokens and e-money tokens. Responses to this section should enable the Commission to assess the impact of potential changes to EU legislation.
The consultation also drew the spotlight on stablecoins, noting that if they were to reach a global scale, they would raise additional challenges in terms of financial stability, monetary policy transmission and monetary sovereignty.
The consultation closes on 18 March 2020.