ESMA and EBA’s report on crypto-assets

Published on 9 January 2019

The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) have recently released reports – and advice to the European Commission – on crypto-assets and Initial Coin Offerings. Based on the assessments of various competent authorities, these reports indicate that currently crypto-assets-related activity in the EU remain relatively limited and do not give rise to implications for, or risks to, financial stability. However, some crypto-assets/activities do not appear to fall within the scope of current EU financial services law and are highly risky, wherein risks particularly arise with regard to consumer protection, operational resilience, and market integrity. These reports note that the proliferation of legislative and supervisory actions by some Member States gives rise to risks for the level playing field and argue that an EU-wide approach is relevant.

On the one hand, ESMA, in its report has outlined the circumstances under which crypto-assets may qualify as transferable securities or other types of MiFID financial instruments, how the current financial services rules apply to crypto-assets, and the challenges that arise as a result, including:

• The Prospectus Directive,
• The Transparency Directive,
• MiFID II,
• The Market Abuse Directive,
• The Short Selling Regulation,
• The Central Securities Depositories Regulation, and
• The Settlement Finality Directive.

In addition, ESMA provided its position on the gaps and issues that EU policymakers should consider, and if relevant and subject to further cost-benefit analysis, seek to address. It has also highlighted that all crypto-assets and related activities should be subject to AML provisions.

On the other hand, the EBA in its report has examined:

• The applicability of the EMD2 and PSD2 to crypto-assets and issues arising in relation to crypto-asset custodian wallet provision and to crypto-asset trading platforms,
• The recommendations adopted by the FATF in October 2018 to mitigate the risks of money laundering and the financing of terrorism arising from specified activities involving, in FATF terminology, virtual assets, and
• The extent to which institutions (credit institutions and investment firms), payment institutions and electronic money institutions are engaging in activities involving crypto-assets and regulatory and supervisory implications.

Similarly to ESMA, the EBA has advised the European Commission to carry out a cost/benefit analysis to assess, on a holistic basis, whether EU-level action is appropriate and feasible at this stage to address the issues identified. Such a cost/benefit analysis should go beyond the financial sector and extend to aspects relating to the environmental impact of some crypto-asset activity, and called on the Commission to take steps to promote consistency in the accounting treatment of crypto-assets.

The EBA identified several steps that it will take in 2019 to enhance monitoring crypto-asset activities of financial institutions, including with regard to consumer-facing disclosure practices.

PwC welcomes these developments and believes that greater regulatory certainty would not only provide the much-needed impetus for the growth of the crypto-asset markets but also stimulate higher adoption of the blockchain and distributed ledger technology. We will continue to follow these developments closely and strive to provide the most up-to-date information to our clients and stakeholders.

Sources:

https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf