ESMA’s 49-page “Advice on ICOs and crypto-assets” issued on Wednesday is a useful review of the legal state of play (and not too long to flick through) which adds nothing that is new. It notes that crypto-assets come in various forms:
- some intended to be currencies (like Bitcoin);
- effectively payments in advance for goods or services (“tokens”);
- equity-like investments, including some profit-sharing entitlement;
- hybrids of the above…
and that the third category probably qualifies as a “financial instrument” under MIFID II; whereas the first and second probably do not. However, it all depends on the precise nature of the asset, and also how the relevant EU Directives are interpreted by the various EU28 national regulators. This is critical, because if what is created in an ICO does fall under MIFID II, the range of laws that would apply is wide: prospectus regulations (where the usual bond issue exemptions, such as professionals, minimum face amount and so on, probably would not apply since ICOs are typically not designed to take advantage of them), MIFID II, the Market Abuse Directive, CRR, and so on; and not only would these laws apply to firms providing related services or activities, in some respects they could be difficult or onerous to comply with, or may simply be traps for unwary firms. It notes that some crypto trading platforms have copied securities market practices e.g. on AML and KYC, whereas others are amateurish, agnostic or worse. Where a crypto-asset is a “financial instrument”, there are some ambiguities in the law (because the law was not designed with DLT and so on in mind); and where the asset is not, it means the public is not protected by investor protection laws and acquires an interest in these assets at its peril. ESMA unsurprisingly recommends more regulation. On the same day the EBA also issued a report which considered, in particular, the Electronic Money Directive and the Payment Services Directive in the context of crypto-asset wallets and crypto-asset trading platforms. It too sees risks and ponders whether further legislation is the right approach. The ESMA and EBA reports are consistent with what the UK Cryptoassets Taskforce concluded in its October 2018 report. So, no surprises here.
Head of Knowledge Management (Finance and Projects)
Mark Daley joined DLA Piper in 2015 after over thirty years’ experience as a debt finance lawyer in private practice in London and Hong Kong.