On the 20th August 2019, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) issued a joint letter in response to a letter by the European Commission dated 19th July 2019.
The Commission’s letter had been sent in response to the reports published by EBA and ESMA in January 2019.
The EBA published a report advising the Commission on crypto-assets, with a particular focus on the applicability of current European Union legislation in relation to crypto-assets. The report concluded that certain crypto-assets may be classified as ‘electronic money’ under EMD2[1] and thus provision of services in relation to such crypto-assets would require authorisation as an electronic money institution. With regard to the applicability of PSD2[2], crypto-assets are not banknotes, coins or scriptural money, therefore, unless such crypto-assets are classified as electronic money, they would fall outside the meaning of ‘funds’ as defined in PSD2. This essentially means that any services falling within the scope of Annex 1 of PSD2 provided in relation to crypto-assets qualifying as electronic money must be regulated in accordance with PSD2. However, most crypto-assets fall outside the scope of these Directives and thus remain unregulated, posing risks to financial stability. It was thus the EBA’s advice to the Commission that a cost/benefit analysis is carried out to determine what action should be taken at the EU level.
ESMA’s report advised the Commission on Initial Coin Offerings (ICOs) and crypto-assets, and in particular provided clarification regarding whether crypto-assets are classified as financial instruments under MiFID II[3]. In order to determine the legal status of crypto-assets, ESMA worked closely with National Competent Authorities (NCAs) to identify the classification of crypto-assets in several Member States depending on their transposition of MiFID II into national legislation. The results showed that certain crypto-assets might constitute transferable securities as well as other types of financial instruments and would thus potentially be subject to existing legislation. This poses potential risks such as inconsistent regulation of crypto-assets across the EU and gaps in current regulation due to inadaptability to DLT. In order to address these issues, ESMA advised the Commission to consider setting up an ad hoc regime for the regulation of crypto-assets which are not classified as financial instruments, and it also suggested that at minimum, Anti Money Laundering (AML) legislation should be applicable to all activities involving crypto-assets. Finally, ESMA recommended adopting risk disclosure requirements to ensure investor protection.
The letter then describes the work that EBA and ESMA are currently undertaking, such as continuously monitoring the market for developments. In addition, the Authorities are currently co-ordinating with the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Financial Action Task Force (FATF), the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) with the intention of forming a common approach on an international plane on issues such as the regulation of crypto-exchanges.
At the EU level, ESMA and EBA will be initiating a stocktaking exercise of regulation of crypto-assets in Member States, with a section of questions focused specifically on the regulation of stablecoins. Furthermore, stablecoins will be a key topic for discussion at the European Forum for Innovation Facilitator (EFIF) in September, among other financial technologies in order to enhance regulators’ knowledge of the industry and promote a common regulatory approach.
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[1] The second Electronic Money Directive (Directive 2009/110/EC).
[2] The second Payment Services Directive (Directive 2015/2366/EU).
[3] The second Markets in Financial Instruments Directive (Directive 2014/65/EU).
