Consob’s final report on initial coin offers (ICOs) and crypto-assets exchanges
On 2 January 2020, following the publication of a discussion document on 19 March 2019 (on which you can find our previous article here), Consob (the Italian regulator supervising financial markets and listed companies) released its final report on initial coin offerings (ICOs) and crypto-assets exchanges (the “Final Report”). The Final Report results from a consultation process aimed at the possible introduction of specific regulation on this matter, which would apply on an opt-in basis.
Taking into account the recent start of a public consultation on a EU regulatory framework for crypto-assets, launched on 19 December 2019 (documents available here), it remains to be seen whether the Italian lawmakers and regulator will issue a domestic, opt-in, regime for the Italian market, pending approval of binding EU measures, or whether the Fin Report will simply contribute to the wider debate for a European harmonized regulatory framework.
The Final Report is structured with 4 sections, taking into account (i) key definitions of the phenomenon, (ii) aspects pertaining to platforms for the offer of crypto-assets, (iii) exchanges for crypto-assets, and (iv) characteristics of custody services.
Key definitions in the Final Report
Consob clarified that the potential regulation would only apply to a crypto-asset that does not qualify as a financial instrument under MiFID II.
Consob confirmed potential overlaps between the new notion and the domestic notion of “financial product” (an article about one of those decisions is available here), so opting-in for the new specific regime, if and when approved, would provide certainty and simplification over the regime for “financial products”.
In addition, since the definition of crypt-asset embed the use of digital registration, the Final Report confirmed the possibility to rely on blockchain – as a specie of the broader category of distributed ledger technology (DLT) – but excluded, for the moment, the possibility to use other forms of technology.
Consob confirmed the view that the specific regime should apply only to ICOs being related to “entrepreneurial projects”, i.e. where: the token incorporates the right to a future asset, either in the form of a financial gain or in the actual use of a good or a service. On the other hand, in Consob’s view the envisaged regime should not apply to tokens that incorporate existing rights (e.g. real estate rights, property of art masterpieces).
Under the Final Report, the ability to identify the beneficial owner in the crypto assets’ underlying investments is no longer considered a necessary requirement for the application of the envisaged regime. Conversely, a necessary condition is the destination of crypto-assets to negotiation, since this feature would offer protection to those who purchase tokens with the intention to make a profit by selling them on the trading platform. More specifically, the destination to negotiation shall be: (i) disclosed through the preliminary informative document on the offer (so called white paper), and (ii) foreseen from the creation of the instrument, for the ad hoc regime to be applicable.
Platforms for the offer of crypto-assets
To incentivise ICO promoters to undertake the opt-in mechanism (which would allow the issuers/promoter to select the use of a dedicated and regulated platform for both the offer and the subsequent negotiation), Consob highlighted that such opt-in would provide an exemption from the application of existing legislation relating to prospectuses and distance marketing offers for those crypto-assets that qualify as financial products.
Although the close link between a platform dedicated to the offer and that authorised to negotiate crypto-assets raised some concerns among respondents, Consob decided to adopt a solution which would grant the liquidity of the investment in the crypto-asset and the trustworthiness of the platform for negotiation. More specifically, Consob provides that tokens subject to offer shall be admitted to negotiation on a crypto-asset exchange platform duly enrolled in the register kept by the authority or on a foreign exchange subject to similar requirements to those applicable to an Italian exchange, and in any case following agreement between Consob and the relevant competent foreign supervisory authority.
In relation to the specific features of issuers/promoters, Consob excluded the introduction of organizational and capital requirements by favouring disclosure and transparency towards investors. For this purpose, the Final Report envisaged that the white paper would illustrate key aspects of the transaction (e.g. token utility, use of the resources and return), of the crypto-asset (e.g. number, valorisation, incentive mechanism) and of the platform where negotiation will take place as well as any relevant update on this information.
Conversely, platform manager shall maintain responsibility for the assessment of the envisaged transactions’ validity, taking into account the type of investors targeted with the relevant offer. As such, the platform manager shall ensure technological reliability of the platform itself. This obligation would in any case be graduated in relation to the value of the token issued.
Finally, Consob excluded the introduction of a series of exemption linked to the proportionality principle on the basis that the opt-in mechanism is already an expression of the proportionality principle.
Exchanges of crypto-assets
In relation to business models, Consob endorsed a technology-neutral approach so as to allow exchange systems based on different models to benefit from the legislation currently under discussion. This is based on the assumption that the exchange manager, among others: (i) is clearly identifiable and has full responsibility, also vis-à-vis third parties, for the correct functioning of the exchange, and (ii) is able to identify the participants to the platform.
With regard to the requirements for enrolment of the exchange systems in the register kept by Consob, the Final Report left the specific details to secondary legislation.
Finally, following comments from respondents, Consob allowed the possibility to negotiate on a regulated platform a crypto-asset originally not intended to be negotiated, subject to the fulfilment of transparency obligations through the disclosure of an adequate information set.
A specific novelty of the Final Report, which has been suggested by various respondents, is the introduction of a custody services regime (e.g. wallets) separate from the management of a crypto-assets exchange. Consob endorsed this suggestion also clarifying that: (i) two separate registers will be kept by the authority (one for exchange and the other for the custody services provider), and (ii) requirements applying to those providing custody services are independent from those applying to an exchange manager, with the consequence that the performance of both activities would require compliance with both sets of requirements, to be further detailed in next steps.