EU consultation on regulatory framework for cryptoassets

On 19 December 2019, the European Commission published a Consultation Document on an EU framework for market for cryptoassets. In this article, we want to give you a brief overview of that consultation document.

Aim of consultation on cryptoassets

In the consultation on a regulatory framework for cryptoasses, the European Commission states that cryptoassets have the potential to bring significant benefits to market participants and consumers.

For example, initiatial coin offerings (ICOs) and security token offerings (STOs) allow for a cheaper, less burdensome and more inclusive way of financing SMEs by streamlining capital-raising processes and enhancing competition.

Furthermore, the tokenisation of traditional financial instruments could open up opportunities for efficiency improvements across the trade and post-trade value chain, which should help with more efficient risk management and pricing.

The Commission also states that cryptoassets could represent a new asset class if the adequate investor protection measures are in place.

In addition, payment tokens could present opportunities in terms of cheaper, faster and more efficient payments, by limiting the number of intermediaries.

Background of consultation

The Commission has been looking closely at cryptoassets since its FinTech Action Plan published in 2018. Therein, the Commission mandated the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to assess the applicability and suitability of the current regulatory framework for cryptoassets.

In EBA's and ESMA's advice from January 2019, the two authorities pointed out that some cryptoassets fall within the scope of EU legislation, effectively applying it to these assets is not always straightforward. Moreover, some provisions in existing EU legislation may stop the use of certain technologies, including distributed ledger technology. EBA and ESMA also pointed out that most cryptoassets are outside the scope of EU legislation and therefore not subject to provisions on consumer and investor protection and market integrity, among others.

Furthermore, EBA and ESMA stated that certain Member States have introduced legislation on cryptoassets, meaning that there is no harmonised EU framework.

Based on the advice from the two authorities, the Commission has, for cryptoassets covered by EU rule, in case they qualify as financial instruments under MiFID II or as electronic money under the Electronic Money Directive (EMD2), analysed EU legislation to assess whether it can be effectively applied.

Regarding cryptoassets not covered by EU legislation, the Commission considers a possible proportionate common regulatory approach at EU level to address potential consumer / investor protection and market integrity concerns, among others.

What is contained in the consultation document?

The consultation contains four sections, and the Commission sseks the views of stakeholders on the following issues:

• general questions from the perspective of the general public to gain insights on the use / potential use of cryptoassets;
• whether and how to classify cryptoassets, for both those that fall under existing EU legislation and those that do not;
• views on cryptoassets that fall outside the scope of EU financial services legislation. Here, cryptoassets designate all cryptoassets that are not regulated at EU level, mentioning payment tokens, stablecoins, utility tokens and investment tokens. This sections aims to determine whether an EU regulatory framework is needed for these cryptoassets; and
• views on cryptoassets that fall within the scope of EU legislation, ie under MiFID II and EMD2. Here, they are described as security tokens and e-money tokens. Responses to this section should enable the Commission to assess the impact of potential changes to EU legislation.

Stablecoins

The consultation also refers to stablecoins, noting that if they were to reach a global scale, they would raise additional challenges in terms of financial stability, monetary policy transmission and monetary sovereignty.

Timeframe

The consultation closes on 12 March 2020.