The European Securities and Markets Authority (ESMA) published a report last week on initial coin-offerings and crypto-assets.
The report outlines the work done by ESMA on analysing the different business models of crypto-assets, the risks and potential benefits they may introduce and how they fit within existing EU regulatory frameworks. It also incorporates findings from a survey of National Competent Authorities (NCA) on crypto-asset regulation conducted by ESMA in 2018.
ESMA states that where crypto-assets qualify as transferable securities, or other types of MiFID financial instruments, the full set of rules is likely to apply to them and to firms providing investment services / activities in relation to those instruments. However, ESMA notes that there is an inconsistent application of the rules and requirements by the NCAs. This is because the existing regulatory framework was not designed with crypto-assets in mind and the classification of crypto-assets as a financial instrument depends on the specific national implementation by NCAs of EU law. ESMA is concerned that this creates supervision challenges and the risk of regulatory arbitrage.
ESMA also notes that the even where current regulatory frameworks do encompass crypto-assets, the rules as they currently exist may leave certain crypto-asset specific risks unaddressed or the frameworks may not be completely adapted to the technology underpinning crypto-assets. ESMA recommends that these issues be considered and, if appropriate, addressed by the Commission and co-legislators.
ESMA notes that some Member States are considering bespoke regimes for crypto-assets which do not qualify as MiFID financial instruments. However ESMA is concerned that this will not provide for a homogenous framework across the EU. One can also see how this may increase opportunities for regulatory arbitrage. ESMA considers that the most appropriate course of action to promote a level playing field, and adequate investor protection, would be to address the gaps and issues identified at the European level.
ESMA has of course recognised that significant follow-up work will need to be undertaken in respect of crypto-regulation. Given this report and the recent report from the UK's Cryptoassets Taskforce, it will be interesting to see, in the wake of Brexit, how the UK's regulatory approach to crypto-assets will develop and align compared to the rest of the EU.
"However, because the existing regulatory framework was not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements and these may therefore not apply consistently across Member States, at the risk of creating regulatory arbitrage."