On 19 December 2019, the European Commission (Commission) launched a public consultation on the future EU framework for markets in crypto-assets. Launched in parallel with a public consultation on a digital operational resilience framework for financial services, both consultations are initial steps towards the implementation of the new Commission’s President, Ursula von der Leyen, objective for Europe to grasp “all the potential of the digital age and strengthens its industry and innovation capacity, within safe and ethical boundaries”. The consultation paper on crypto-assets consists of three substantive parts, which cover: (1) Classification of crypto-assets, (2) Crypto-assets that are not currently covered by EU legislation; and (3) Crypto-assets that are currently covered by EU legislation. Key points to note:

  • Classification of crypto-assets

The Commission acknowledges that while there is a wide variety of crypto-assets in the market, there is no commonly accepted way of classifying them in the EU – including the lack of a single and broadly accepted definition thereof. To this end, and for the purpose of this consultation, the Commission defines a crypto-asset as “a digital asset that may depend on cryptography and exists on a distributed ledger”. The Commission further notes that the lack of any comprehensive classification of crypto-assets leads to uncertainty in the markets, as to whether (and potentially which) such assets fall within the scope of EU financial services legislation by means of being MiFID II financial instruments. It therefore seeks stakeholder views on, among others, the usefulness, means and features of any such future crypto-assets classification.

  • Crypto-assets not covered by EU legislation

The Commission notes that while crypto-assets can bring about significant economic benefits in terms of “efficiency improvements and enhanced system resilience”, they can also cause potential challenges for their users. To this end, the Commission seeks stakeholder views on, among others, the importance of specific benefits related to crypto-assets and also specific risks related thereto. In this context, the Commission differentiates between “stablecoins” and “global stablecoins”, and seeks views on potential risks stemming from both types of crypto-assets.

More broadly, the Commission seeks views whether a bespoke EU regime for crypto-assets would “enable a sustainable crypto-asset ecosystem” and whether the use of crypto-assets in the EU would be “facilitated by the greater clarity as to the prudential treatment of financial institutions’ exposures to crypto-assets”. The consultation document includes specific questions focused on service providers related to crypto-assets, and in particular the issuance of crypto-assets, trading platforms, exchanges, provision of custodial wallet services for crypto-assets and other service providers. The Commission notes that such activities and services providers remain – with some exceptions – outside the European (and national) legislative and regulatory framework and considers that “regulation may be necessary in order to provide clear conditions governing the provisions of these services.”

  • Crypto-assets covered by EU legislation

The Commission considers “security tokens” as crypto-assets “issued on a DLT and that qualify as transferable securities or other types of MiFID financial instruments” and activities concerning such security tokens qualifying as MiFID II investment services/activities, for which authorisation is required. In summarising trends concerning security tokens, the Commission admits “the limited evidence available at supervisory and regulatory level” and that “existing requirements in the trading and post-trade area would largely be able to accommodate activities related to security tokens via permissioned networks and centralised platforms”. The consultation document includes detailed questions designed to assess legislation applying to security tokens and including, but not limited to, MiFID II, Market Abuse Regulation, Short Selling Regulation, Prospectus Regulation, Central Securities Depositories Regulation, EMIR and UCITS.

This consultation process is a first step for the Commission to prepare potential initiatives in the area of crypto-assets regulation in the EU and further consultation may take place over the coming months. The current consultation remains open until 19 March 2020.