European Commission consults on regulatory framework for cryptoassets

On 19 December 2019, the European Commission (the Commission) published a consultation document seeking views on the EU regulatory framework for cryptoassets. Other topical areas discussed include the promotion of digital finance and blockchain, and the development of a relatively new subset of cryptoassets: stablecoins. Given that there is no single, universally-agreed definition of ‘cryptoasset’, the Commission defines a cryptoasset for the purposes of the consultation as “a digital asset that may depend on cryptography and exists on a distributed ledger”.

Background

This consultation follows the Commission’s adoption of the FinTech Action Plan in 2018 for a more competitive and innovative European financial sector, in which the Commission authorised the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) to advise the Commission on the applicability and suitability of the current regulatory framework for cryptoassets. In their January 2019 advice, the EBA and ESMA acknowledged that while some cryptoassets fall within the regulatory perimeter, most are beyond the scope of EU legislation and are therefore not currently subject to important provisions on consumer and investor protection and market integrity. They also observed that some Member States have recently passed domestic legislation relating to cryptoassets, which are not harmonised, thus resulting in some disparity between national and EU laws on the issue.

Consultation

Building on the EBA and ESMA’s advice, this consultation should inform the Commission’s ongoing work on cryptoassets for:

1. Cryptoassets that are covered by EU legislation, i.e. cryptoassets that qualify as financial instruments under the Markets in Financial Instruments Directive 2004/39/EC (MiFID II) or as electronic money under the Electronic Money Directive 2009/110/EC (EMD2); and
2. Cryptoassets that are not covered by EU legislation – for these cryptoassets, the Commission is considering the specification of a common EU regulatory approach to address the aforementioned consumer and investor protection and market integrity concerns.

The consultation document consists of four sections, which seek views from stakeholders on the following:

1. The use or potential use of cryptoassets from the perspective of the general public. Specifically, the experience of purchasing and holding cryptoassets;
2. The classification of cryptoassets, including those within and outside the scope of EU financial services legislation (this is explored in further detail in sections 3 and 4);
3. A more in-depth analysis of cryptoassets that fall outside the scope of EU financial services legislation. These are further characterised as ‘payment tokens’, ‘stablecoins’, ‘utility tokens’ and ‘investment tokens’ depending on their features. The purpose of this section is for the Commission to determine whether it is necessary to establish a regulatory framework for cryptoassets that are currently unregulated under EU law; and
4. A more in-depth analysis of cryptoassets that fall within the scope of EU financial services legislation, i.e. MiFID II and EMD2. These are described as ‘security tokens’ and ‘e-money tokens’. The Commission hopes that responses to this section will inform possible changes to existing EU legislation.

Next steps

In parallel with a public consultation on digital operational resilience, this consultation on a regulatory framework for cryptoassets forms part of the Commission’s initial steps into establishing “a common approach with Member States on crypto-currencies to ensure [the Commission understands] how to make the most of the opportunities they create and address the new risk they may pose” (Ursula von der Leyen, President of the Commission). The consultation is open until 18 March 2020 and according to the Commission webpage, there are plans to adopt a proposal for a regulation establishing an EU framework for cryptoassets in Q3 2020.

Co-authored by Janice Pang.