Cryptoassets continue to be a hot topic for financial services regulators. On 19 October 2018, it was the turn of the Securities and Markets Stakeholders Group (“SMSG“), which represents various stakeholders’ interests to the European Securities Markets Authority (“ESMA“). The SMSG published a report setting out its advice to ESMA on how to contain the risks of cryptoassets and ICOs.

Token classification

Interestingly, in carrying out its review, the SMSG found it helpful to rely on the Swiss regulator FINMA’s classification of cryptoassets, i.e.:

  • Payment tokens – these are a means of payment, where the holder has no claim on the issuer e.g. Bitcoin
  • Utility tokens – these give access to a particular good or service, rather than being accepted as payment for any other application
  • Asset tokens – these represent assets such as an entitlement to or participation in real undertakings, such as interest payments or dividends (think of these as equities, bonds or derivatives)

Country comparison

The report includes a useful annex which summarises the regulatory approaches to ICOs and digital currencies in 36 countries across Europe. The SMSG then categorises the countries into 3 groups, as follows. (This classification is consistent with market perception and demonstrates why the blockchain sector in the UK believes that the UK should be doing more to encourage blockchain and cryptoasset business.)

  1. Evident proactive approach (7 jurisdictions): These jurisdictions have expressly set out in some form the extent to which tokens in an ICO should be considered financial instruments, and thus the extent to which they are covered by financial services regulation: Malta, Switzerland, Lithuania, Gibraltar, Jersey, Isle of Man, and France (in process).
  2. Careful consideration (15 jurisdictions): These jurisdictions have opted for a ‘wait and see’, case by case, approach to the classification of cryptoassets: Austria, Belgium, Bulgaria, Denmark, Estonia, Finland, Germany, Ireland, Luxembourg, Netherlands, Portugal, Spain, United Kingdom, Lichtenstein and Guernsey.
  3. Undefined approach (14 jurisdictions): No clear stance on ICOs/cryptoassets is available on the national security authority’s website: Croatia, Czech Republic, Greece, Hungary, Italy, Latvia, Poland, Republic of Cyprus, Romania, Slovakia, Slovenia, Sweden, Norway and Iceland.

The SMSG rightly suggests that the divergent regulatory approaches across the EU represents a major hurdle to the creation of an internal market for cryptoassets in the EU, and creates an uneven playing field.

In addition, while the SMSG found that nearly all securities authorities had issued public warnings on cryptoasset investment risks, it, like many others, believes that “they have had insufficient effect“. The SMSG recommends that ESMA clarify, as a priority, the application of financial regulation to cryptoassets, so that there is a clear regulatory framework which protects investors. This would also be welcomed by many in the sector who are keen for regulatory certainty.

Benefits and risks of cryptoassets

Arguably the SMSG is less dismissive than some regulators of the proposed benefits of cryptoassets. However, unsurprisingly, there is more focus on the risks in the report. For example, it suggests that payment tokens can be used for criminal purposes, consume too much energy, and their secondary market is susceptible to market abuse. In its view, utility tokens have inherent counterparty and performance risk. When it comes to asset tokens, it is notable that SMSG asserts that it cannot identify any societal advantage of issuing asset tokens over traditional securities (i.e. ICOs over traditional IPOs). The SMSG takes the view that issuers who prefer an ICO over an IPO only do so to avoid regulation and investor protection.

Regulatory analysis

The SMSG carries out a useful analysis of thee application of MiFID II, the Prospectus Regulation (“PR“) and the Market Abuse Regulation (“MAR“) to different cryptoassets, by applying and drawing analogies to the definitions of ‘financial instruments’ and ‘transferable securities’.

In order to come to its conclusions, the SMSG considered the following issues:

  1. Does it give the owner an entitlement against the issuer?
  2. Is it transferable?
  3. Is it scarce?
  4. Does it give decision making power on the project of the issuer?

Conclusions and advice

The SMSG’s conclusions and recommendations for ESMA were as follows.

Type of Token Conclusion Advice
Payment Token
  • Not currently covered by MiFID II, PR or MAR.
  • Transferable payment tokens are increasingly seen as investment products, which create large investor protection and market abuse concerns.
ESMA should consult with the European Banking Authority (EBA) and raise the issue with the European Commission.
Utility Token


  • If non-transferable, then these do not need to be covered by MiFID II, as they would only be usable directly between the owner and issuer.
  • If transferable, then they risk becoming an investment product, and the same investor protection and market abuse concerns apply as to payment tokens.
ESMA should consult with the EBA and raise the issue with the European Commission.
Asset Token If the tokens:

  • give a right to a financial entitlement and are transferable, these are covered by MiFID II and the PR as ‘transferable securities’;
  • give a right to an entitlement in kind and the owner gets decision making power, then these look like shares. If transferable, they are ‘transferable securities’ subject to MiFID II and the PR;
  • give a right to an entitlement in kind, give no decision making power, and are non-transferable, then these look like prepaid assets which do not (and do not need to) fall under MiFID II; and
  • give a right to an entitlement in kind, give no decision making power, and are transferable, their treatment depends on the token’s structure and underlying asset.In short, the SMSG came to the conclusion that tokens that look like asset-linked notes or commodity derivatives are covered by MiFID II. Tokens that look like non-commodity derivatives would not fall under MiFID II.
ESMA should provide guidance on whether MiFID II does in fact apply in these scenarios.

The report goes into further detail on the categorisation of different asset tokens under financial services regulation, and sets out additional issues on which ESMA should provide guidance.

Sandboxes and innovation hubs

In what seems like a bit of a departure from the cryptoasset focus of the report, the report also considers the role of sandboxes and innovation hubs across Europe. (Annex 2 of the report provides a useful summary of existing hubs.) The SMSG concludes that these initiatives are useful. Although it does not believe that hubs should be overly coordinated across Europe, it does recommend that ESMA set some minimum criteria for national authorities in terms of the information to be  provided to ESMA, transparency to the public, and reporting.


The report provides a useful analysis of cryptoassets regulation across Europe. Given the recommendations, it seems increasingly likely that we will see greater regulatory certainty of cryptoassets in Europe in due course. This would a useful development which would be welcomed by many in the sector.

We now wait to see how ESMA responds.



Sue McLean is a partner in the IT/Commercial Practice Group in Baker McKenzie's London office. Sue advises clients on technology, sourcing and digital media business models and deals, as well as the legal issues relating to the implementation of new technologies. Sue advises clients (both customers and suppliers) on a wide range of technology matters including outsourcing, digital transformation, technology procurement, development and licensing, m/e-commerce, cloud computing, AI, FinTech, blockchain/DLT, social media, data privacy and cybersecurity. Sue also advises on commercial agreements and the commercial, technology and intellectual property aspects of M&A transactions and joint ventures. Sue has experience across various business sectors, including the financial services, consumer, TMT, travel and life sciences industries. She regularly speaks and writes about the impact of disruptive technologies and has a regular blog for Computerworld.