EU securities group advises ESMA on how to contain ICO and crypto risks

The Securities and Markets Stakeholder Group has issued a report, in which it makes three main recommendations to the European Securities and Markets Authority 

What has happened?

A group that  advises the European Securities and Markets Authority (ESMA) has issued a report on steps the authority can take to contain the risks linked to initial coin offerings (ICOs) and cryptoassets, in addition to existing regulations.

What does this mean?

The report by the Securities and Markets Stakeholder Group (SMSG) focuses mainly on risks for investors, since "there are no obvious stability risks yet" in respect of ICOs and cryptoassets.

The report specifies that most cryptoassets are covered by the Unfair Commercial Practices Directive, but only to the extent that the issuer is a business and the buyer a consumer.

The report starts with a fact-finding exercise, first defining the relevant concepts, including "virtual currency" or "token", before providing a taxonomy of cryptoassets.

This is followed by a review of recent ICOs and market developments in respect of cryptoassets and of the most important existing regulations in 36 jurisdictions.

The second part of the report builds up to advice to ESMA on the questions of whether and how ICOs and/or cryptoassets should be regulated and also reviews the potential benefits and risks of payment, utility and asset tokens.

"In order to determine whether asset tokens are covered by MiFID II, the Prospectus Regulation, and the Market Abuse Regulation (MAR), the SMSG has attempted to determine whether they are financial instruments (for MiFID purposes and the MAR) and transferable securities (for purposes of the Prospectus Regulation)."

The SMSG added that this proved a challenging exercise as the exact scope of those concepts is uncertain.

Advice to ESMA

The SMSG advised ESMA to provide level 3 guidelines or to aim for 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;
  • interpretation of the MiFID II definition of ‘commodities’, since this is key to determine whether an asset token with features typical of a derivative is a MiFID II financial instrument;
  • interpretation of the multilateral trading facility (MTF) and organised trading facility (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;
  • fact that when issuers of asset tokens are to be considered to organise an MTF or an OTF in accordance with the above, the MAR applies to such MTFs and OTFs; and
  • fact that in all situations where an asset token is to be considered a MiFID II 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 licence as such, unless they qualify for an exemption under MiFID II.

The SMSG also concluded that payment tokens are not currently covered by MiFID II, MAR or the Prospectus Regulation.

However, since some transferable payment tokens, such as bitcoin, are increasingly considered as investment products, risks arise that are similar to the risks on the capital markets (in terms of investor protection and market abuse).

The SMSG said that it should therefore be considered whether it would be useful to include payment tokens in the MiFID II list of financial instruments.

This is, however, not in ESMA's power "since it would require a change in the level 1 Text of MiFID II".

The SMSG therefore urged ESMA to consult with the European Banking Authority on this matter and take this up with the European Commission.

Finally, given the use of sandboxes and innovation hubs in the development of the ICO/cryptoasset sphere, the SMSG urged ESMA to provide guidelines with minimum criteria for national authorities that operate or want to operate a sandbox or innovation hub.

Next steps

If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.

John Salmon


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