EU Supervisory Authority Reports on ICO and Crypto-Asset Risks and Potential Regulation

The European Securities and Markets Authority (ESMA) has published an own-initiative report prepared by its Securities and Markets Stakeholder Group (SMSG). The purpose of the report is to provide advice to ESMA on steps it might take to contain the risks of initial coin offerings (ICOs) and crypto-assets, on top of existing regulation.

In the report, the term “crypto-assets” is used to refer to coins, tokens, virtual and cryptocurrencies or other digital or virtual assets collectively. The acronym "ICO" is used to refer to an initial offering of any crypto-asset. The report sets out a taxonomy of crypto-assets, based on the distinction between payment tokens, utility tokens, asset tokens and hybrids used by the Swiss Financial Market Supervisory Authority (FINMA).

The SMSG has considered the potential benefits and risk of payment tokens, utility tokens and asset tokens. It has also conducted an analysis on whether asset tokens fall within the existing EU regulatory perimeter, by virtue of being classifiable as financial instruments (under the Markets in Financial Instruments legislation and the Market Abuse Regulation) and/or transferable securities (under the Prospectus Regulation). The SMSG has identified several areas on which ESMA could provide Guidelines or focus its supervisory convergence work.

Specifically, the SMSG advises that ESMA should issue "Level 3" Guidelines or work towards supervisory convergence as follows:

1. ESMA should clarify whether the MiFID II definition of "transferable securities" covers transferable asset tokens that have features of transferable securities and should also clarify whether these tokens fall within the remit of the Prospectus Regulation.
2. ESMA should provide further guidance on the MiFID II definition of "commodities," as this definition is relevant in determining whether or not an asset token with features typical of a derivative is a MiFID financial instrument.
3. ESMA should clarify whether the organization of a secondary market in asset tokens that qualify as MiFID financial instruments classifies as a multilateral trading facility (MTF) or an organised trading facility (OTF).
4. ESMA should clarify that, when issuers of asset tokens are to be considered to organize an MTF or an OTF, the Market Abuse Regulation will apply.
5. ESMA should clarify that MiFID II authorization as an investment firm is required (unless an exemption applies) in all cases where persons give investment advice on, or execute orders in, asset tokens that are considered MiFID financial instruments.
6. ESMA should consider writing to the European Commission to ask it to consider adding transferable payment and utility tokens to the list of MiFID financial instruments, on the basis that their transferability and fungibility give rise to investor protection concerns and market abuse risk. The effect of this change would be that secondary markets in such payment tokens would also qualify as MiFID MTFs or OTFs subject to the MAR. Advisers in respect of such tokens would also be subject to MiFID II.
7. ESMA should encourage coordination in national approaches by preparing guidelines with minimum criteria for national authorities that operate or want to operate a sandbox or innovation hub. Such criteria might include scope, operating conditions, investor protection measures and transparency.