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ESMA: Initial Coin Offerings & Crypto-Assets

On 9th January 2019 the European Securities and Markets Authority (ESMA) published their guidance on “Initial Coin Offerings” and “Crypto-Assets”.
Below is a summary of the key takeaways from ESMA’s guidance.

Initial Coin OfferingThe crypto-assets sector remains modest in size and does not raise financial stability issues.

While ESMA sees the potential benefits of the underlying technology, particularly with regards the tokenisation of assets, it is concerned about the risks that crypto-assets pose to investor protection and market integrity such as a fraud, cyber-attacks, money laundering and market manipulation.

ESMA considers it important to take a technology-neutral approach, to ensure that similar activities and assets are subject to the same or very similar standards regardless of their form.

ESMA believes there is not a ‘one size fits all’ solution when it comes to legal qualification of crypto-assets.

It suggests the need for a harmonised approach as it acknowledges that some Member States have or are considering bespoke rules at a national level for crypto-assets which could lead to an un-level playing field across the EU.

A survey of the National Competent Authorities (NCAs) was conducted by ESMA in 2018 to establish whether certain samples of crypto-assets may be considered securities and/or financial instruments. The six crypto-asset samples considered had differing characteristics which ranged from investment-type, to utility-type and hybrids of investment/utility/payment-types. The key points from the survey were:

(i) NCAs are the competent authorities to assess whether crypto-assets are regulated financial instruments in their jurisdiction;

(ii) it was recognised that pure payment-type crypto-assets, such as Bitcoin, were unlikely to qualify as financial instruments. This type of crypto-assets account for approximately half of the total market value of crypto-assets;

(iii) most NCAs assessed that:

  • both investment-type crypto-assets considered could be deemed as transferable securities and/or other financial instruments;
  • two of the three hybrid crypto-assets considered could be deemed as transferable securities and/or other financial instruments; and
  • the only utility-type crypto-asset considered was not deemed to be transferable securities and/or other financial instruments;

(iv) a majority of NCAs considered that crypto-assets which provide profit rights, without necessarily having ownership or governance rights attached, were transferable securities;

(v) no NCA labelled the utility-type crypto-asset as a transferable security and/or financial instrument suggests that pure utility-type crypto-assets may fall outside of existing financial services regulation;

(vi) vast majority of NCAs did not believe that any national rules (i.e. legislation not derived from EU regulations and directives) in place would capture any of the six case studies; and

(vii) the vast majority of NCAs considered that the qualification of all crypto-assets as financial instruments has unwanted collateral effects suggesting that it is necessary to distinguish between the various types of crypto-assets.

Where crypto-assets are classified as transferable securities and/or financial instruments, those individuals and/or entities involved in the issuance, sale, transfer or safekeeping of such crypto-assets should be aware of the implications of the financial services regulatory framework and possible regulatory obligations they may be subject to. Token/Coin issuers, cryptocurrency exchanges and custodian service providers in particular could be required to comply with such regulations.

– by Roy Balestrino.

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