EBA and ESMA crypto asset reports
Comments by the supervisory authorities
Digitalisation in the financial services sector is gaining momentum. Digital assets (also called crypto assets) are one of the key areas where this applies. Technology has already made much possible. Supervisory legislation, civil law and market standards are responding to the new opportunities.
Both the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published reports on 9 January 2019 in which, as demanded by the EU Commission’s FinTech Action Plan in 2018, they primarily analyse current EU legislation regarding Initial Coin Offerings (ICOs) and crypto assets. The EBA and ESMA are presenting proposals for further analyses and measures in order to react to the dynamic developments crypto assets are undergoing.
Treatment of crypto assets in EU regulations and challenges posed
The EBA’s report deals with the structural importance of crypto assets to banks, payment institutions and electronic payment organisations as well as the proposals by the Financial Action Task Force (FATF) in October 2018 to cut the risks of money laundering and financing terrorism. The EBA makes recommendations for action to the EU Commission based on its observations.
The ESMA report on the other hand is based on a survey carried out in summer 2018, in which it asked the National Competent Authorities (NCAs) to categorise a sample of crypto assets based on the regulations valid at the time. Shortcomings and problems in the current regulatory framework within ESMA’s remit were identified and recommendations for action drawn up based on the survey’s findings.
EBA: crypto assets – no risks identifiable for financial stability yet
The EBA notes that EU legislation on EU financial services law does apply to crypto assets classified as financial instruments or electronic money. However, at the same time, the EBA believes that much of crypto asset activity is not covered by existing EU financial services legislation. There are, for example, possible consumer protection risks as well as accounting and tax ambiguities where crypto assets are concerned. Although crypto assets can be very risky, there are no identifiable fundamental risks to financial stability to date. Furthermore, the member states treat crypto assets differently. As a result, the EBA suggests the following measures:
- In order to clarify whether uniform regulation of crypto assets at EU level is necessary, the EBA recommends performing a cost-benefit analysis that covers more than the financial sector and pursues the overarching goal of evaluating the feasibility and usefulness of possible EU measures.
- The EBA also advises the EU Commission to take recommendations made by the FATF into account, which has published a comprehensive package of recommended measures aimed at preventing money laundering, financing terrorism and weapons of mass destruction.
- The EBA also recommends treating crypto assets consistently from an accounting standpoint.
- The EBA has also said that it aims to improve monitoring of crypto-asset activities and consumer-facing disclosure practices for the rest of the year. In this respect, it intends to publish a monitoring template that the NCAs can issue to each of the banks to scrutinise crypto-asset activity.
- Furthermore, the EBA intends to review the business practices of banks, payment service providers and electronic money organisations with regard to informing consumers about crypto-asset activities and to update the EU Commission on the work of the Basel Committee on Banking Supervision (BCBS), which is also investigating the prudential treatment of crypto assets held by banks.
ESMA: based on a survey conducted in summer 2018
In the summer of 2018, the NCAs took part in an ESMA survey, which is part of the ESMA report. The NCAs were presented with a set of six sample crypto assets and asked to classify them according to existing regulations (primarily based on the national implementation of the Markets in Financial Instruments Directive – MiFID) and state whether a financial instrument existed. The sample crypto assets are real crypto assets that can be open to European investors and are very similar to investment and utility-type assets as well as hybrid forms (consisting of the previously mentioned assets and payment-type crypto assets).
ESMA noticed that the NCAs had not uniformly adopted the term financial instruments into national law when implementing EU law. The implementations covered a wide spectrum and ranged from broad interpretations to restrictive lists of examples. It went on to state that classification as to whether a financial instrument exists depends largely on the interpretation of the respective NCA and the specific national adoption of EU law. If the crypto assets are financial instruments, the existing regulations apply: e.g. MiFID II, the Prospectus Directive, the Market Abuse Directive or the Transparency Directive. However, ESMA realises that existing regulations can’t always easily be brought to bear on crypto assets, so that a lack of provisions in the regulatory framework might occur. For example, there’s the issue of whether safekeeping private keys for customers constitutes a safekeeping service or how what are known as “miners” as the transaction party can be taken into account in the legislation. ESMA believes that regulations are required in the whole of the EU due to the cross-border nature of crypto assets and in order to create a level playing field throughout the European Union.
It also identified the need to take action on cyber security. ESMA would like to see a minimum level of reliability and security maintained for smart contracts and protocols. What’s more, using existing reporting templates for crypto assets might prove impossible due to technicalities such as the fact that current reporting templates are based on common identifiers, like the ISIN code, which crypto assets don’t have.
Crypto assets that are not classified as financial instruments or electronic money might be overshadowed by the current regulatory regime. EU legislation on financial services doesn’t apply to these sorts of crypto assets and has an impact on consumer protection (e.g. cyber security, existing imbalances in terms of information between issuers and investors, money laundering, market manipulation and fraud).
Risk-avoidance solutions could entail specific rules for crypto assets that are not defined as financial instruments or electronic money. As regards anti money laundering (AML), ESMA and EBA agree that the existing AML directive should also cover crypto assets. ESMA also advocates encouraging transparency and consumer protection as investors are often unable to adequately assess the risk associated with these assets on the basis of ICO white papers. ESMA agrees with the EBA that crypto assets have not posed a threat to the stability of the financial system to date. As the amendments considered could tie up resources significantly, ESMA suggests that, at this stage, buyers should merely be warned of the risks associated with crypto assets.
We’ll be keeping an eye for you on everything the EBA, ESMA and FSB are working on as well as the resulting regulatory endeavours and legal reforms. We’d be delighted to provide you with solutions geared to your needs in order to implement requirements in the future. Just get in touch with us.
Veröffentlichung der finalen EBA-Leitlinien (EBA/GL/2019/01) vom 17. Januar 2019