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.