The European Union began the new year with a new focus on the regulation of cryptocurrencies, with a pair of reports finding that neither EU banking nor securities laws are currently up to the task of overseeing these new financial assets.
On Jan. 9, the European Securities and Markets Authority (ESMA) issued advice on initial coin offerings and crypto-assets to the EU’s Commission, Council, and Parliament, finding that while while some qualify as securities or other financial instruments under the existing Markets in Financial Instruments Directive (MiFID) regulations, others do not. While some regulatory updates are needed in regard to the former, the report found, when it comes to the latter group, investor protection regulations are seriously lacking.
“A number of crypto-assets fall outside the current financial regulatory framework,” said Steven Maijoor, chair of ESMA, in a statement. “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.”
In the absence of such rules, the report notes, “some [EU] Member States have or are considering some bespoke rules at the national level for all or a subset of those crypto-assets that do not qualify as MiFID financial instruments.” At a minimum, the report adds, EU law should be updated to ensure that all crypto-assets fall under anti-money laundering (AML) rules.
And even for those crypto-assets that do fall within the MiFID regulations, Member States’ various regulatory bodies (National Competent Authorities, or NCAs, in EU-speak) “face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets.” Of course, it does not help that “there is currently no legal definition of ‘crypto-assets’ in the EU financial securities laws,” the report notes.
Banking on crypto
Also on Jan. 9, the European Banking Authority (EBA) issued a report for the European Commission (EC) assessing the state of EU law as it applies to crypto-assets. Again, the authors found that EU-wide law was deficient, noting in a statement that, “typically activities involving crypto-assets fall outside the scope of EU banking, payments, and electronic money regulation and risks exist for consumers that are not addressed at the EU level.” It also highlighted the need to update AML regulations to incorporate crypto-assets.
That said, the statement noted that, “the relatively low level of crypto-asset activity currently observed in the EU does not appear to give rise to implications for financial stability.” Rather than calling for specific changes in law, it recommended a “comprehensive cost/benefit analysis, taking account of issues inside and outside the financial sector, to determine what, if any, action is required at the EU level at this stage.”
Like the ESMA report, the EBA found that various EU Member States are beginning to enact their own regulations, so that “divergent approaches to the regulation of these activities are emerging across the EU.”
In the report, the EBA notes that, “due to the absence in most jurisdictions of specific reporting requirements for crypto-asset activities of institutions, payment institutions and electronic money institutions, some [NCAs] are not well-equipped to monitor these activities and any risks arising and therefore are impeded in their capacity to take such supervisory actions as may be necessary.”
For this reason, it said, the EBA in 2019 will develop a common monitoring template which NCAs will be able to issue for the purpose of monitoring the level and type of activity underway.
The EBA report also recommended that the EC take into account an announcement last fall by the Financial Action Task Force, a global anti-money laundering organization, that by June 2019 it will issue guidelines on how national regulators will be required to license or provide oversight of cryptocurrency exchanges, encrypted wallets, and firms providing financial services for initial coin offerings, according to Reuters. The report added that the FATF announced that it will periodically review implementation of these rules, and “countries judged to be falling short could be added to an FATF blacklist that restricts access to the global financial system.”