One of the biggest obstacles in the cryptocurrency space is regulation and an overall lack of clarity regarding how virtual currencies are defined. This has led to confusion as to which regulations apply to crypto-assets.
An aspect of regulation that has caused uncertainty within the markets are crypto contracts for difference (CFDs) and whether they are reportable under EMIR and MiFID II (MiFIR).
Speaking on the ambiguity surrounding crypto regulation, the Co-CEO of TRAction Fintech told Finance Magnates: “Due to technology often moving faster than regulation and the relative infancy of the product, there is still a lot of confusion over the reportability of Crypto and Crypto derivatives. It doesn’t help that Brexit, leverage restrictions and SFTR have been hogging all the ‘regulatory spotlight’ lately, leaving the issues around Crypto somewhat neglected.”
Even the European Securities and Markets Authority (ESMA) recognizes the difficulties of applying crypto assets to European regulation, as the regulation wasn’t designed with these instruments in mind.
In January of last year, Steven Maijoor, Chair of ESMA, said in a statement: “Our survey of NCAs highlighted that some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply.”
“However, because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets.”
Do cryptos need to be reported?
As highlighted by TRAction Fintech, a financial technology service provider specializing in regulatory over the counter (OTC) derivatives transaction reporting, in order to be reportable under MiFIR, the instrument has to be traded on a trading venue, or the underlying asset has to be traded on a trading venue, within the European Economic Area (EEA).
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At present, the only venue-listed cryptocurrency is a Bitcoin Future, and this is listed outside of the EEA, on CBOE and CME. Therefore, the company doesn’t currently see cryptos as reportable under MiFIR.
Although cryptos might not be reportable under European regulation, crypto CFDs are another story, due to the fact that a CFD is a derivative. As outlined by TRAction, as only derivatives are reportable under EMIR, only the CFD on a cryptocurrency is deemed reportable.
“Due to the fact the EMIR Reporting Rules were not designed with these instruments in mind, there isn’t a category that perfectly fits a cryptocurrency and therefore some interpretation is required in order to report these instruments,” the company said in a statement.
“At this stage, the wider derivative industry and Trade Repositories suggest reporting under the commodity asset class as a cryptocurrency does not (yet?) have an ISO standard currency code, which is required, for it to be reported as a currency.”
What should investment firms do next?
In its statement seen by Finance Magnates, TRAction outlines a list of next steps that firms offering cryptocurrencies in the EEA region should follow. Namely, investment firms should ascertain whether they have offered or transacted in any cryptocurrency derivatives or CFDs.
If a firm has done so, they must check if they have been reported, and in the instance where any crypto CFDs haven’t been reported, they should consider whether all previous transactions should be backloaded under EMIR and MiFIR. Furthermore, investment firms may need to lodge a breach report to their NCA.