The European Securities and Markets Authority published its advice to the different institutions of the European Union (Commission, Council, and Parliament) on initial coin offerings and cryptocurrency assets.
While stating that the sector remained modest in size with no current risk in terms of financial stability, the ESMA voiced concern about perceived risks posed to investor protection and market integrity.
Beyond that, the report actually advised against legitimizing cryptocurrencies and cited a survey saying that all crypto-assets should be subject to anti-money laundering legislation.
The ESMA stated:
“Wider regulation of crypto-assets and related activities may have trade-offs, such as risking legitimizing crypto-assets and encouraging wider adoption.”
The watchdog cautioned that the capital markets must be protected and that the policy for any crypto asset that is not a financial instrument should simply be to warn investors against buying them, for fear that any excess regulation could “bring them into a similar regulatory remit as the one for crypto-assets that are financial instruments.”
“There are a wide range of crypto-assets being issued and only a fraction of them are likely to qualify as MiFID financial instruments.”
While lamenting the fact that regulation encouraged adoption and legitimized cryptocurrencies in the eyes of the law, the ESMA nevertheless pointed to a recent survey of national crime agencies which advised that all crypto-assets should fall under AML laws, citing:
“A broad consensus on that at minimum all activities involving crypto-assets should be subject to anti-money laundering laws (on which see further the EBA’s report and advice on crypto-assets.”
The ESMA itself identified “the most significant risks as fraud, cyber-attacks, money laundering, and market manipulation.”
The report mentions that some member states are creating their own regulations for ICOs, and plainly recommends EU intervention.
“Considering the novelty of the phenomenon, the evolving business models and the fact that the existing regulatory framework was not designed with these innovations in mind, we believed it appropriate for ESMA to examine and advise policy makers on the risks and issues raised by ICOs and crypto-assets and the extent to which these are addressed by the existing regulatory regime.”
While acknowledging that some of the emerging crypto-assets do not fall under any regulatory jurisdiction, the ESMA claims that to do nothing endangers investors and markets alike.
The organization recommends EU policymakers implement a “bespoke regime for specific types of crypto-assets” and advises the EU to consider reviewing the scope of AML requirements taking account of market developments regarding exchanges and ICO financial services providers among others, as well as legislating for proper risk disclosure in ICOs, pointing out that white papers have often been sparse in information in the past.
The report broadly points to what is being seen in other regions as well – tightening cryptocurrency regulations with the stated goal of protecting investors and local economies.
However, the ESMA report could prove particularly significant if acted upon. To date, the EU has had some of the most welcoming cryptocurrency and blockchain regulatory policies in the world, allowing hubs like the Netherlands, Luxembourg, and Liechtenstein to flourish and contribute to the sector.
Many smaller EU states seized the opportunity to create their own bespoke legislation to attract investors and companies, forming multiple blockchain hubs – it remains to be seen to what extent the EU may intervene on local member state regulation following the ESMA report.
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