Pan-European Regulations for Crypto Assets Finally on the Table

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have advised EU institutions to create Europe-wide common regulations for crypto assets. This might be the kick-off for a European debate on crypto regulations.

The European Union (EU) has so far not put much effort into blockchain regulations. Last week, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) both published reports giving advice to EU institutions on how to regulate crypto markets.

The reports come at a time where sovereign governments are pushing their own blockchain agendas. Liechtenstein and Switzerland, both non-members of the EU, have announced to create blockchain-friendly legislation. French lawmakers have also called for regulations and issued a decree outlining the use of blockchain technology in securities management.

EBA calls for cost-benefit analysis to determine the need for European regulations

The EBA advised the EU commission — the body that drafts EU regulations — to examine the need for European crypto regulations.

In its report, the EBA points out that the lack of uniformity across EU member states might lead to the emergence of crypto havens. Companies can then exploit divergent regulations and legal loopholes to conduct criminal activities.

Therefore, the EBA urged the EU commission to conduct a cost-benefit analysis to determine if pan-EU regulations are needed. Such a cost-benefit analysis should factor in the cost of unfair competition as a result of an uneven playing field in the EU. It should also consider the environmental costs of crypto-mining.

ESMA advises EU to re-consider which crypto assets should qualify as financial instruments

On the same day, the ESMA published a separate report. Similar to the EBA report, the ESMA also vows in favor of EU-wide regulations.

The ESMA report distinguishes between crypto assets that qualify as financial instruments under the Markets in Financial Instruments Directive (MiFID) and those that don’t.

Steven Maijoor 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.”

For crypto assets that qualify as financial instruments, the full set of EU regulations apply. Hence, the ESMA does not see a need for additional regulations for such instruments.

However, the report also says MiFID was “not designed with these [crypto] instruments in mind.” Therefore, there are areas that require “potential interpretation or re-consideration of specific requirements to allow for an effective application of existing regulations.”

ESMA warns against legitimization of crypto assets that do not qualify under MiFID

The ESMA warns that additional regulations for crypto assets which do not qualify as financial instruments could encourage their “wider adoption”. The report mentioned cyberattacks, fraud, and market manipulation as areas of concern.

The ESMA advises against additional regulations for crypto assets that are not financial instruments, because that would move them “into a similar regulatory remit as the one for crypto-assets that are financial instruments.”

Instead, the ESMA believes investors should be warned against buying crypto assets that are not financial instruments as per MiFID. Also, existing Anti-Money-Laundering regulations should be extended to all crypto assets.

International regulations are needed

For those who are in favor of a regulated blockchain sector, these reports are good news. The lack of international regulations is a concern, as tokens currently have to comply to the regulations of the country where they are issued.

As a result, it is difficult for investors to participate in STOs, as regulations might not be entirely clear and transparent.

If EU institutions take these reports seriously and follow up with concrete actions, we will eventually see the emergence of a pan-European regulated market for security tokens.

It is not clear yet, what such regulations will look like. Liechtenstein’s upcoming Blockchain Act could serve as a role model.