The European Securities and Markets Authority has published a second report suggesting the EU commission to look at a common approach for crypto regulations. The second report focused on Fintech licensing, in particular of firms dealing with crypto assets.

Six months after the European Securities and Markets Authority (ESMA) and the European Banking Association (EBA) have published first reports on the shortcomings of the current regulatory environment in regards to crypto assets, they now published a report on Fintech regulations – which a similar tune to it than the first report.

In their January reports, the ESMA and the EBA focused specifically on crypto regulations and advised the EU Commission to consider a pan-European approach. They made a clear distinction between crypto-assets that qualify as financial instruments under MiFID regulations and those that don’t.

The latest report is titled Licensing of FinTech Business Models and surveys how national regulatory authorities license fintech firms. The main focus of the report is on the realm of crypto assets, where regulation is still lacking.

The report reads:

“The primary area where regulatory gaps and issues have been identified by NCAs (National Competent Authorities) and where FinTech firms do not fit neatly within the existing rules is related to crypto-assets, ICOs and DLT. NCAs called for more clarity at the EU level with respect to the definition of financial instruments and the legal nature of crypto-assets.”

EU Commission should revise MiFID to fit crypto assets

The ESMA stresses again that there is a lack of clarity which instruments qualify as financial investments and thus fall under the regime of MiFID II. The classification of a security is paramount to determine the licensing requirements of a FinTech firm, as it’s closely tied to rules regarding prospectus requirements, prohibitions of insider dealing, and market abuse and safekeeping requirements.

In this regard, the new report doubles down on what the January report had already stated: National regulators mostly classify crypto assets as securities if they are based on a traditional security, but rules may vary throughout the region, which is why a common regulatory framework is needed to level the playing field.

Bespoke rule-set for digital exchanges

The watchdog also argues that marketplaces trading security tokens qualify as Multilateral Trading Facilities (MTFs). However, current licensing, compliance, and capital requirements for MTFs are not adequate for digital exchanges. Thus, the ESMA suggests a framework of bespoke rules for platforms that list security tokens. Specifically, the ESMA recommends digital exchanges should also cater to the needs of small and medium-sized enterprises.

With this statement, the ESMA somewhat disagrees with what the Financial Action Task Force (FATF) had stated earlier this month when it requested national regulators to treat digital exchanges the same way as traditional exchanges. While the FATF has missed the point by trying to enforce a 20th-century framework on a 21st-century technology, the ESMA’s suggestions seem to be more reasonable.

Simplified STO Prospectus

On 21st July 2019, new prospectus rules have come into force, making it easier for SMEs to launch an STO. Part of this new set of rules was a so-called “EU growth prospectus” with simplified requirements.

However, the ESMA suggests that existing prospectus rules are not adequate for crypto-assets and proposes a new type of prospectus. 

Central securities depositories regulations not suitable for crypto assets

The ESMA also questions whether the current rules on central security depositories (CSDs) are suitable for crypto-currencies. It proposes to reconsider authorization and post-trading rules to blockchain-based CSDs.

To sum it up: The report goes in the same direction as the January report. The bottom-line of both reports is that crypto-assets are not sufficiently regulated in the European Union.

The reason why the ESMA has published two similar reports within six months is that they have realized the urgency and want to increase the pressure on lawmakers. Significant legal changes don’t happen overnight. It’s a slow process, but it’s good that the leading think tanks have gotten into gear. 

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