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ESMA Advised That Crypto Assets be Regulated With Existing Financial Rules

by | Oct 22, 2018

The Securities and Markets Stakeholders Group (SMSG), an organisation that advises the European Securities and Markets Authority (ESMA), has made the recommendation (in this report dated October 19th 2018) that the majority of cryptocurrencies and tokens from ICO sales should be regulated under existing EU financial rules.

In an effort to contain the risks of ICOs and crypto assets in general, the SMSG makes the point that as the major cryptocurrencies (including Bitcoin) are increasingly handled as investment vehicles, they should be considered as sharing the same risks as assets in the capital markets.

The recommendation has therefore been made that such crypto assets should fall within the EU’s Markets in Financial Instruments Directive II (MiFID II) regulations which came into effect in January of this year.

The SMSG advises the ESMA to aim for supervisory convergence of the following five issues:

(i) the interpretation of the MIFID definition of “transferable securities”, and clarify whether transferable asset tokens which have features typical of transferable securities (see IV.2.c, situations 1, 2 and 4.1) are subject to MiFID II and the Prospectus Regulation;

(ii) the interpretation of the MiFID definition of “commodities”, since that concept is crucial to determine whether an asset token with features typical of a derivative is a MiFID financial instrument or not (see IV.2.c, situation 4.2.2)

(iii) the interpretation of the MTF and OTF concepts, clarifying whether the organisation of a secondary market in asset tokens which qualify as MiFID financial instruments is indeed an MTF or an OTF (see IV.2.c, situations 1, 2, 4.1 and 4.2.2.2);

(iv) the fact that when issuers of asset tokens are to be considered to organize an MTF or an OTF in accordance with the above, the MAR applies to such MTFs and OTFs.

(v) the fact that in all situations where an asset token is to be considered a MiFID financial instrument, persons giving investment advice on those asset tokens or executing orders in those asset tokens, are to be considered investment firms, which should have a licence as such, unless they qualify for an exemption under MiFID II.

In their report’s second annex the SMSG has made the case for regulatory sandboxes and innovation hubs to be maintained as a way for innovative crypto/fintech firms to interact with regulators, helping them to navigate between countries as they aim to scale new ideas.

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