The European Securities and Markets Authority (ESMA) has published its advice on initial coin offerings (ICOs) and crypto-assets this Wednesday, highlighting that some crypto-assets may qualify as MiFID financial instruments.
The Advice to the European Union (EU) Institutions is based on work the watchdog has been doing with National Competent Authorities (NCAs), including a survey, to analyze the different business models of crypto-assets and determine how they fit within the current regulatory framework.
ESMA has come up with two general categories. The first includes crypto-assets that could qualify as financial instruments under MiFID. However, there still remain areas in the regulation that would “require potential interpretation or re-consideration of specific requirements.”
According to the survey, NCAs largely believe that some crypto-assets, such as those with profit rights attached, might qualify as MiFID financial instruments such as transferable securities.
The second category features digital assets which don’t qualify as financial instruments. ESMA, as a bare minimum, believes that these should still be subjected to Anti Money Laundering (AML) requirements, to protect investors.
In order to ensure adequate investor protection within the EU, ESMA suggests that the issues and gaps that the regulator has highlighted should be addressed at a European level.
Commenting on the issue, Steven Maijoor, the Chair of ESMA, said: “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.”
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“Meanwhile, a number of crypto-assets fall outside the current financial regulatory framework. This poses substantial risks to investors who have limited or no protection when investing in those crypto-assets.”
In the document published today, ESMA also believes that ICOs could hold real benefits, however, this is only provided that the appropriate safeguards are in place.
Crypto Assets Need Risk Disclosures, ESMA says
The European Regulator also suggests that all crypto-assets and activities involving cryptocurrencies should have appropriate risk disclosures in place, similar to the risk warnings required in the foreign exchange and CFD trading industry.
These risk warnings, according to ESMA, would allow consumers to be made aware of the risks of investing in cryptocurrencies before committing funds to the investment.
Although cryptocurrencies have been making a lot of noise in the finance sector, the nascent industry is still only modest in size and, at present, the regulator believes it doesn’t raise any financial stability issues.
However, it does pose risks to investors, a matter that ESMA takes very seriously as can been seen with the suite of regulations it introduced in the EU regarding binary options, CFDs and leverage restrictions in 2018.
Specifically, ESMA suggests that the most significant risks for investors in cryptocurrencies are fraud, cyber-attacks, money laundering, and market manipulation.