On 9 January 2019, the European Securities and Markets Authority (ESMA) published advice on ICOs and cryptoassets to the European Commission and other EU institutions. This development is very much part of the international trend in favour of regulating cryptoassets. The advice identifies gaps and issues with current EU regulation (or, rather, the absence of it). For those cryptoassets which are caught by financial regulation, ESMA describes the current regime as inadequate, as it was not designed for such an asset class. In addition, for cryptoassets falling outside regulation, ESMA notes that investors are without sufficient protection and exposed to risk (i.e. fraud, cyber-attacks, money laundering, and market manipulation). Consequently, ESMA considers that, at a minimum, AML regulation should be extended to cryptoassets and ICOs, as well as requiring appropriate disclosures to investors. Crucially, compared to the present – state by state – patchwork approach, ESMA makes clear that it favours an EU-wide policy. (If you want to learn more about DLT / blockchain/cryptoassets, read our guide Unhashing Blockchain.)
At the same time, the EU’s banking and payments supervisory authority, the European Banking Authority (EBA), has published its own report on cryptoassets ,with advice to the Commission. This is generally consistent with ESMA’s work. However, given that cryptoassets generally fall outside the scope of financial regulation, the EBA wants the Commission to carry out a comprehensive cost/benefit analysis to see what, if any, action is justified at the EU level, before taking any further steps. In any event, the EBA recommends that banks adopt FATF’s latest AML recommendations and any future standards when handling cryptoassets. In addition, the EBA will continue to monitor financial institutions’ cryptoasset activities, including practices on consumer-facing disclosure.
Perhaps in part due to recognition that regulatory sandboxes and innovation hubs are an important incubators of DLT, the technology behind cryptoassets, the Securities and Markets Stakeholder Group to the European Securities and Market Authority has recently called for more co-ordination among regulators. This would see regulators keeping ESMA informed about the operating conditions of their sandbox or hub, as well as steps taken to protect investors and outcomes. As a measure this appears fairly innocuous, but coupled with possible ESMA’s Guidelines on cryptoassets, it could be more significant in terms of moving towards more harmonised EU regulation in this area.
These latest EU initiatives follow-on from the publication of the UK’s “Cryptoassets Taskforce report and recommendations on the regulation of cryptoassets in October 2018. The Taskforce, which comprises HM Treasury, the Bank of England and the Financial Conduct Authority (FCA), was established in the Spring of 2018 against a backdrop of increasing involvement by mainstream market firms with cryptoassets and a developing related derivatives market. There is much common ground between the Taskforce and EU authorities.
The Taskforce noted the potential benefits of cryptoassets, but placed considerable emphasis on the risks posed. In this respect, although the UK Government has reiterated its ambition for the UK to be among the world’s most innovative economies, the report points to evidence of consumer harm and risks to market integrity. On the positive side for the UK’s DLT and cryptoassets sector, the Taskforce indicated that more regulatory certainty on cryptoassets will be provided over the coming months, which is to be welcomed.
All these recent reports confirm that the risks posed and (to a lesser extent) the opportunities presented by cryptoassets are fast rising up the political and regulatory agenda. There is growing pressure on government and regulators to act.
The adage that technology has made the world smaller is truer than ever in the context of DLT and cryptoassets. As do ESMA and the EBA in respect to the EU, the Taskforce argues for a consistent international approach to ensure global “regulatory coherence” and avoid arbitrage in markets. The UK will lobby for higher standards and increased regulation through international bodies such FATF, the G-20 and Central Bank Governors, IOSCO and the Financial Stability Board. The FCA and other regulators will also be able to work through the newly established Global Financial Innovation Network (GFIN), which acts a forum for joint work and discussions on technologies such as DLT and cryptoassets.