The European Securities and Markets Authority (ESMA) has advised the EU commission to consider a pan-European approach to crypto regulations. The report distinguished between crypto assets that qualify as financial instruments and those that don’t.

European regulators have come under pressure. As the blockchain industry is growing, sovereign countries have noticed the potential of the technology and are moving ahead.

Lichtenstein and Switzerland have already created crypto-friendly regulations. As a result, Liechtenstein’s capital city Vaduz and the “Crypto Valley” in the Swiss city of Zug have become blockchain hubs.

French regulators have also been calling for blockchain regulations. Some have even suggested the European Central Bank should create their own cryptocurrency.

But European lawmakers have not moved one iota.

“The EU will be acting carefully in this area,” said the Irish finance minister after an EU finance ministers meeting in November. Fair enough, but so far, the EU has not acted at all.

Not everyone agrees with the current state of EU regulations. The European Securities and Markets Authority (ESMA) – the EU-wide financial markets watchdog – has now suggested changes.

In a report published to EU institutions on the 09th of January, the ESMA has kicked-off a so far non-existent regulatory debate: We need a uniform EU-wide approach to regulate crypto assets, concludes the report.

The status quo: MiFID only covers a small percentage of crypto assets

MiFID stands for “Markets in Financial Instruments Directive” – a European Union law that provides harmonized regulations for investment services across the entire European Economic Area (EEA).

The EEA includes all EU member states, as well as Iceland, Norway and Liechtenstein.

Investment vehicles that qualify as financial investments under MiFID are subject to the full set of European financial markets regulations.

While some crypto assets qualify as financial instruments under MiFID, many do not. Those that don’t, are currently unregulated.

Steven Maijoor, Chair of the ESMA, said, “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.”

MiFID needs re-consideration

The ESMA advices to re-consider which crypto assets qualify as financial instruments under MiFID.

Steven Maijoor says, “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 [National Competent Authorities] face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets.”

Hence, when it comes to crypto assets, current MiFID regulations are not clear and leave room for interpretation. As a result of the legal limbo, regulatory actions at the national level differ across the continent.

For example, national regulators disagree on how to treat crypto-assets with profits rights attached. Some countries believe such assets should qualify as MiFID financial instruments, while other countries take a different view.

Thus, EU-wide regulations are needed to create uniformity.

The report concludes, “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.”

Risk disclosure and AML regulations for unregulated crypto assets

The ESMA also recommends changes for crypto-assets that do not qualify as financial investments under MiFID: no specific regulations, but risk disclosure and Anti-Money-Laundering (AML) compliance.

The reason why the ESMA does not recommend a specific regulatory framework for non-MiFID crypto assets, is because it would encourage their wider adoption.

Additional regulations for non-MiFID crypto assets would move them “into a similar regulatory remit as the one for crypto-assets that are financial instruments.”

The ESMA mentioned cyberattacks, fraud, and market manipulation as areas of concern and calls for appropriate risk disclosures, so consumers are aware of the risks before they invest.

Similar risk disclosures are currently required in forex and CFD trading. So it’s not that big of a deal.

Moreover, the ESMA wants the EU to extend existing AML regulations to all crypto assets. AML regulations have been subject to controversy in the crypto community for a long time.

EBA wants EU regulators to determine “appropriate EU-level response”

On the same day that the ESMA report was published, the European Banking Authority (EBA) also published its own report to the EU commission – the EU body that drafts EU regulations.

The report showed similarities to the ESMA report. While the EBA acknowledged that the current size of the crypto market in the EU can hardly pose any risks for financial stability, the report also stated:

“[…] because some crypto-assets/activities do not appear to fall within the scope of current EU financial services law and are highly risky, as identified in this report, risks arise with regard to consumer protection, operational resilience, and market integrity.”

Another pain point of the EBA is unfair competition in the EU, which is a result of the lack of uniform regulations.

While the report does not specifically mention Liechtenstein and Switzerland, this comment was most likely also having Vaduz and the Crypto Valley in mind. Jealous? …

The EBA’s conclusion is that the EU should carry out a “cost/benefit analysis” to determine whether EU-level regulations are needed. Such a cost/benefit analysis should factor in the “potential application of DLT and crypto-assets beyond the financial sector” and “the environmental impact of some crypto-asset activity.”

Hence, the EBA goes beyond cryptocurrencies and looks at blockchain technology in general. However, the EBA does not suggest any concrete regulations. It solely urges the EU-commission to look at the issues.

Mixed reactions from blockchain businesses

When it comes to regulations, the blockchain community is split into two camps.

Blockchain businesses that seek integration into the traditional economy are generally in favor of regulations. Without a clear legal framework, conducting business in mainstream industries is difficult, as corporations have to adhere to strict compliance standards.

Also, attracting institutional investors is nearly impossible without legal certainty and a clear set of rules in place.

“We believe that investors coming into cryptocurrency deserve the exact same protections as investors in more traditional markets, adhering to the same standards, practices, regulations and compliance protocols,” says Chris Roan from the crypto exchange Gemini.

But others don’t believe in regulations and defend the original idea of decentralization and independence from government interference.

“Saying crypto needs rules is like saying the poor need sanctions. Here’s a rule: no more rules,” says Jesse Powell, CEO of Kraken.

Future outlook: a regulated European crypto market?

If EU institutions take actions on the ESMA and EBA reports, the industry will see a clear separation of regulated and unregulated crypto market segments. Just like on traditional capital markets, where there are regulated market segments and unregulated OTC segments.

The regulated crypto market, which is rather small at the moment, could in future include a wider range of crypto assets. The unregulated sector will be put under increased AML control and risk disclosure rules.

Liechtenstein has implemented the MiFID in national law and complies to EU AML standards. Thus, changes in European Law are likely to affect Liechtenstein-based businesses as well. But that doesn’t stop Liechtenstein from incorporating its own Blockchain Act.

As a concluding remark, here is a shout-out to the EU-commission: Once you conduct your “cost/benefit” analysis, come visit us in Vaduz and have a look how things are being done over here. We’ll give you a copy of the Blockchain Act.

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