The European Securities and Markets Authority (ESMA) has released its advice to the European Union Institutions on initial coin offerings.
This advice, which is presented to the EU Commission, Council and Parliament, clarifies the existing EU rules which are pertinent to crypto-assets which qualify as financial instruments. It also offers ESMA’s position on gaps and issues currently in EU financial regulatory framework for the consideration of EU policy makers.
ESMA has been working with National Competent Authorities (NCAS) to analyse the differing business models of cryptos and the risks or benefits they present. It also explored how this all fits within the existing regulatory frameworks.
Through the combination of this analysis and a survey of NCAs last year, ESMA has recognised some concerns in the existing regulatory framework in regard to crypto-assets.
These issues fall under two categories. The first is “For crypto-assets that qualify as financial instruments under MiFID, there are areas that require potential interpretation or re-consideration of specific requirements to allow for an effective application of existing regulations.”
The second category is around where these assets do not qualify as financial instruments as the lack of rules leaves investors open to ‘substantial risk.’ At the least, the ESMA believes AML requirements should apply to all crypto-assets, or related activities. Appropriate risk disclosure should also be in place to help consumers understand risks before investing.
Going forward, the advice will enable the EU institutions to consider ways to address the gaps and potential conduct further analysis.
ESMA chair, Steven Maijoor 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.
“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 order to have a level playing field and to ensure adequate investor protection across the EU, we consider that the gaps and issues identified would best be addressed at the European level.”
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