Regulation of crypto-assets to progress in Europe

D&I Quarterly Q1/2019

Posted on

29 Mar


D&I Quarterly

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D&I Quarterly.

This article is part of a selection of our experts’ articles published during Q1 here at D&I Insight, our platform for insight into all the latest in law and business.

What is a crypto asset?

ESMA defines crypto-asset as a type of private asset that depends primarily on cryptography and distributed ledger technology as part of its perceived or inherent value and that is neither issued nor guaranteed by a central bank.

ESMA divides crypto assets into four categories:

  • Investment-type crypto assets have some profits rights attached, similar to equities, equity-like instruments or non-equity instruments.
  • Utility-type crypto assets provide some utility or consumption rights, such as the ability to use them to access or buy some of the services or products offered by the ecosystem.
  • Payment-type crypto assets have no tangible value except for the expectation they may serve as a means of exchange or payment for goods or services external to the ecosystem.
  • Hybrids of the above types of crypto assets.

This classification is important because it determines the rights and obligations of the crypto asset’s issuer and other associated parties. For example, if an investment-type crypto asset classifies as a transferable security or other financial instrument, then the full set of EU financial regulations may apply. In Finland, financial markets are supervised by the Finnish Financial Supervisory Authority.

Dittmar & Indrenius > Insight > Regulation of crypto-assets to progress in Europe

Both blockchain technology as well as its most famous application, Bitcoin, have stirred a great deal of interest and hype during the past few years. It is expected that the market volumes and the investor base involved in crypto-investments will expand from the original tech-savvy community to a broader audience, including both retail and institutional investors. In anticipation of such development and indicating increasing maturity of crypto- and blockchain-based services, European supervisory authorities have now issued reports on regulation of crypto assets.

In January 2019, the European Securities and Markets Authority (“ESMA”) and the European Banking Authority issued papers advising EU regulators on the regulation of crypto assets and initial coin offerings, ICOs. The purpose of these reports was to clarify the applicability and suitability of the EU financial regulatory framework to crypto assets and provide recommendations for regulatory adjustments.

As the existing EU financial regulatory framework has not originally been designed to capture crypto assets, there has been a certain level of ambiguity around the applicability of these rules on crypto transactions. In its opinion, ESMA emphasises that the rules should be technology-neutral and ensure that similar activities and assets are generally subject to the same regulatory standards regardless of their form. Where crypto-assets do not qualify as MiFID financial instruments and unless they qualify as electronic money, they are likely to fall outside of the existing EU financial regulatory framework. This means also that investors will not benefit from the safeguards that these rules provide. Therefore, it is essential for the companies operating in this field and investors looking into investments in this space to understand the applicable regulatory framework, and perhaps more importantly the implications of the non-applicability of the existing regulatory framework, and further for the companies to ensure that they follow the regulatory requirements applicable to their operations.

The European Commission has already taken steps to remedy shortcomings identified in the existing rules by, in the first phase, broadening the scope of application of anti-money laundering legislation to catch virtual currency exchanges and custodian wallet service providers, but it is expected, based on ESMA’s conclusion that an EU-wide approach to currently unregulated crypto assets would be necessary, that the EU legislator will continue imposing an increasing number of regulatory requirements for crypto assets and related services, such as adequate risk disclosures and conflict of interest rules.

We expect such development to generally make the crypto-sector more approachable for traditional institutional investors specifically in relation to crypto assets constituting MiFID financial instruments -­ a trend that is likely to be key in ensuring robust market conditions and the sector’s credibility on an ongoing basis.

In addition, from a Finnish law perspective, uncertainty remains around tax treatment of investments in crypto-assets, in particular as the Finnish tax authority is yet to issue guidelines on the taxation of crypto assets constituting MiFID financial instruments. In practice, it is currently necessary to seek a case-specific advance tax ruling. For Finnish companies to further develop applications relying on crypto technologies and Finland to become an attractive jurisdiction for innovative financial services developed on a sustainable basis, clarity of such investments’ tax treatment is essential.

D&I’s lawyers regularly advise clients on matters relating to conduct of regulated activities, licensing requirements and blockchain technology and are happy to discuss any questions you may have.

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