On 19 March 2019, Consob (the Italian competent authority for the supervision on markets and listed companies) published a discussion document about initial coin offerings (ICOs) and crypto-assets exchanges (the “Document”), that may lead to the introduction of specific regulation in this field. The Document summarises the main items Consob is considering in the development of a regulatory response to ICOs. During the consultation period, which will remain open until 19 May 2019, Consob intends to carry out a public hearing. In any case, written comments may be submitted either online or by post by 19 May 2019.

As further analysed below, Consob’s proposal basically includes introducing a regulatory regime on offers of “crypto-assets” (a category that Consob intends to define) and of exchanges trading crypto-assets.  This is basically expected to cover crypto-assets that entail some form of investment, and not crypto-currencies (in respect of which, further developments are expected, also in connection with the implementation of the Fifth Anti-Money Laundering Directive (AMLD5)).

The main areas covered by the Document can be summarised as follows:

  • Rationale for intervention: among the reasons for regulation, there are: (i) the increasing diffusion of ICOs and crypto-assets available to Italian investors; (ii) the lack of an agreed definition of crypto-assets, particularly whether they qualify as securities; and (iii) the number of stakeholders involved (e.g. perspective investors, issuers of crypto-assets, promoters of products and services connected with crypto-assets).
  • Key features of the phenomenon: Consob noticed that: (i) for both offers of crypto-assets and the crypto-assets themselves there are significant similarities with offers to the public of financial instruments and products; (ii) the incorporation of a legal relationship within a token closely resembles the creation of securities (i.e. the incorporation of the underwriter’s right in the certificate); (iii) ICOs and IPOs are both directed towards the public (i.e. an indefinite number of potential investors) and include a series of activities aimed at promoting/soliciting the transaction; (iv) ICOs are characterised for the use of blockchain technology, the settlement of the token purchase through virtual currencies rather than fiat currency, the use of the worldwide web which allows promotion and solicitation cross border and the drafting of a so called white paper rather than a full prospectus.

In this context, Consob has taken into account several initiatives, at the EU level and in specific countries. For example, in France, the regulator has adopted an approach of optional authorisation and in Malta, the newly adopted regime envisages a test to be conducted directly by operators.

  • Definitions: in line with its previous approach, Consob confirmed the definition of financial products as a form of investment of a financial nature which involves the presence of three elements: (i) the use of capital; (ii) an expectation of a future financial return; and (iii) the assumption of a risk linked to the use of capital.

In this context, the distinctive features of an investment of a financial nature are the prevalence of the financial element rather than the actual power to enjoy and dispose of the goods purchased with the transaction and the promise of a return so that the envisaged increase in the value is an intrinsic element of the transaction itself.

As such, Consob suggested the definition of crypto-assets as “digital registrations which incorporate rights connected to investments in entrepreneurial projects” and the application of a new special financial regulatory regime for them. Such registrations shall be created, kept and transferred through technologies based on distributed ledgers, which, nonetheless, permit the identification of the beneficial owner of the rights in the underlying investments. In addition, the category shall include only those crypto-assets which are negotiated or will be negotiated within one or more exchanges.

As such, the distinctive elements of crypto-assets are:

  • the use of innovative technologies to incorporate in the token the rights of those who invested with the aim of financing the underlying entrepreneurial project; and
  • the destination to subsequent negotiation of tokens, whose transferability is tightly connected with the technology used and its ability to record and keep evidence of the ownership of the rights relating to crypto-assets.

In conclusion, Consob deems that a special regime of activities connected with crypto-assets allows taking into account its peculiarity, and – on the assumption that only dedicated platforms supervised by Consob are used – it avoids the application of the financial products regime.

  • Platforms for the offer of crypto-assets: Consob defined this element as “the online platform whose exclusive aim is the promotion and realization of offers pertaining to newly issued crypto-assets”.

At the national level, Consob identified the categories of regulated entities better suitable for this role in crowdfunding portals regulated pursuant to Italian financial services legislation.

In addition, Consob envisages the implementation of a set of specific investor protection rules, including the requirement to disclose information in a standardized manner to facilitate comparability between offers.

For issuers of crypto-assets, Consob deems it advisable to introduce measures concerning the selection of entrepreneurial projects which are eligible for access to the platform.

In conclusion, Consob envisages an opt in mechanism which would allow the issuers/promoter of the initiative to select the use of a dedicated regulated platform for the purpose of targeting investors in a regulated environment. Following such opt in (where the platform and the relevant manager submit an authorisation), Consob’s supervision would apply to the platform and the relevant manager as well as to the offer of crypto assets.

In any case, offers of crypto-assets outside the dedicated (and regulated) platform: (i) would remain legitimate unless falling within the scope of the existing legislation on offers of financial products (an Italian category broader than financial instruments); and (ii) need to be clearly identifiable as not covered by the safeguards (in terms of investor protection) applying to those offer made in a regulated environment.

It remains understood that to the extent the offer qualifies as an offer of financial products, the relevant regulatory regime will apply, as per current legislation.

  • Exchanges of crypto assets: Consob highlighted the distinction between: (i) platforms with order book (where a proper book of negotiation provides for order matching); (ii) platforms which allow direct trading or peer to peer trading; and (iii) platforms where traders negotiate exclusively with the relevant dealer, who organizes its own book. The common model is the one where the platform provides trading services as well as storage services (through the so called wallet).

As such, Consob defines the exchanges system of crypto assets as “the set of rules and automated structures, which consents the collection and diffusion of negotiation proposals pertaining to crypto assets as well as the execution of such proposal, including through technologies based on distributed ledgers”.

In conclusion, a potential regulatory intervention could include, from one side, the admission on exchange system only to those offers of crypto-assets carried out through dedicated platforms and, from the other side, the enrolment, upon request of the relevant manager of the exchange system in a specific register kept by Consob, provided that the exchange system, among others, adopts:

  • transparent and non-discriminatory rules and procedures for the initial selection of crypto-assets and access to the exchange system;
  • measures for the management of conflict of interest;
  • procedures to ensure the provision of necessary information for investors and the correct settlement of the transaction.

In general terms, Consob aims at creating an incentive system – without introducing reserved activities – for the opt in (towards regulated entities) both at the level of platforms for the offer of crypto assets and at the level of exchange system.