On 9 January 2019, the European Securities and Markets Authority (ESMA) published its advice to the EU institutions (the European Commission, the Council of the EU and the European Parliament) on initial coin offerings (ICOs) and crypto-assets.

Prior to the publication of the advice ESMA has been working with Member State national competent authorities (NCAs) on analysing the different business models of crypto-assets, the risks and potential benefits that they may introduce, and how they fit within the existing regulatory framework. This work included a survey of NCAs last year.

The advice outlines ESMA’s position on the gaps and issues that exist in the rules within ESMA’s remit when crypto-assets qualify as financial instruments and the risks that are left unaddressed when crypto-assets do not qualify as financial instruments. The advice is organised as follows:

  • section (ii) – legal basis of the advice;
  • section (iii) – sets out the rationale of the advice;
  • section (iv) – outlines key concepts and provides an overview of the crypto-asset ecosystem;
  • section (v) – assesses the risks and issues that regulators should consider when dealing with crypto-assets;
  • section (vi) – looks at the circumstances under which crypto-assets may qualify as MiFID financial instruments and the challenges that arise as a result;
  • section (vii) – looks at the regulatory implications when a crypto-asset qualifies as a financial instrument; and
  • section (viii) – outline’s ESMA’s position on the gaps and issues that EU policy makers should consider, and if relevant and subject to further cost-benefit analysis, seek to address.

In section (vii) ESMA discusses its survey of NCAs last year. The survey questions were designed to determine the way in which a given Member State had transposed MiFID II into its national law and, based on that transposition, whether a sample of six crypto-assets issued in an ICO qualified as ‘financial instruments’ under their respective national laws. The detailed survey results are provided in Annex I. An overview of European national regimes for crypto-assets is set out in Appendix 5 of the advice.

In relation to the above final bullet point, ESMA makes a number of points including:

  • greater clarity is needed around the types of services/activities that may qualify as custody/safekeeping services/activities under EU financial services rules in a distributed ledger technology (DLT) framework. ESMA’s preliminary view is that having control of private keys on behalf of clients could be the equivalent to custody/safekeeping services, and the existing requirements should apply to the providers of those services;
  • greater certainty is needed around the concepts of settlement and settlement finality as applied to crypto-assets. ESMA believes that there may be a need to distinguish between permissioned and permissionless DLTs in that respect;
  • certain risks have been identified that are specific to the underlying technology that might require new/enhanced requirements. In particular, ESMA believes that there should be a means to ensure that the protocol and smart contracts underpinning crypto-assets and crypto-assets activities meet minimum reliability and safety requirements;
  • some amendments to the pre- and post-trade transparency requirements applicable to venues trading crypto-assets are needed, as the current requirements are tailored to traditional financial instruments; and
  • further analysis on the interaction between crypto-assets qualifying as financial instruments and other financial instruments would be needed to determine whether there are gaps with respect to the Market Abuse Regulation and the Short Selling Regulation.

In the final part of section (vii) ESMA discusses two options – (i) implementation of a bespoke regime for specific types of crypto-assets; or (ii) do nothing.