7 November 2018

Uniform interpretation of crypto assets at hand?

An important voice has joined the pending discussions regarding the nature of crypto assets, i.e. virtual currencies, various tokens and initial coin offerings (ICO). In mid-October, a working group of the European Securities and Markets Authority (ESMA) published its own report providing a legal analysis of the matter.

Filip Horák

The report does not represent ESMA’s official opinion or guidance; it contains recommendations of the Securities and Markets Stakeholders Group, ESMA’s working group consisting of market representatives, academics and consumer organisations. The report provides that, considering their volume, crypto assets do not currently represent a systemic risk for financial markets but may significantly affect investors-consumers, as they are associated with typical investment risks similar to those connected with traditional financial instruments. However, it is not clear whether and potentially to what extent the existing regulation of financial markets also covers crypto assets.

The report at least partially attempts to give an answer to this question. For this purpose, it divides crypto assets into several categories: payment tokens (including virtual currencies, probably the best known crypto assets), utility tokens (ensuring a certain service) and asset tokens (where assets usually represent commodities or securities), the most problematic tokens of all. The report provides information not only about the most significant risks but also about the advantages and benefits associated with the individual categories of crypto assets, which is quite valuable.

After dealing with a number of key questions regarding the nature of tokens (such as whether a token gives rise to some kind of an entitlement, whether it is transferrable, etc.), the report presents a decision matrix, i.e. stipulates the conditions under which a crypto asset can be regarded as a financial instrument (e.g. debt security or commodity derivative) that is subject to regulation.

The report also maps the securities authorities’ positions and initiatives on the matter in 36 jurisdictions, covering not only the EU countries but also traditional financial centres such as Switzerland and the islands of Jersey and Guernsey. The report authors criticise the vast diversity in the authorities’ positions, ranging from the active promotion of crypto assets (e.g. Malta) through wary benevolence (Germany or Great Britain) all the way to the Czech Republic’s playing possum, urging to adopt a common approach across the EU.

We welcome this report, as it may help tackle the existing legal uncertainty, and impatiently await further developments in ESMA.

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