The Oncoming European Crypto Regulation
The FTX scandal continues to unravel, with no shortage of conspiracy theories surrounding it. A quick scroll on Twitter is enough to get up to speed with the latest ones, including my favourite, whereby Jonah Hill will be starring as Bankman-Fried in the next Netflix release.
As we are in the business of European rules, we could not pass this opportunity to make a parallel with some other similar scandals of the recent past and the implications they had on the expansion of the European rulebook on financial services. Many would not disagree today that the introduction of AIFMD in Europe was triggered in large part also by the Madoff scandal.
The case of crypto seems to be different than the one of the managers of alternative investment funds in our view. As part of its digital finance package, the European Commission had already introduced a European Crypto Regulation to govern digital assets, their issuers and service providers in the space. With the approval of the final draft made in October this year, it won’t be long for the new harmonised EU framework to be officially rolled out in Europe.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with European Crypto Regulation.
European Crypto Regulation between Innovation and Tradition
To the contrary of the AIFMD, which was not a planned regulatory exercise, the European Crypto Regulation instead is part of a bigger endeavour of the European Commission called digital finance package, whose goal is to create the conditions for the financial sector in Europe to benefit from the new technologies that are transforming already other industries. Accordingly, the digital finance package, amongst with a digital finance strategy as well as a retail payment strategy, also contains legislative proposals on crypto assets.
The European Crypto Regulation, however, remains traditional for what concerns the framework to be adopted for the issuance of crypto assets, for instance. This is due to a specific approach within the European regulation on financial services, seen already in many other instances, where successful mechanisms are adapted to govern new realities. The issuance of crypto assets in Europe will follow a regime very similar to the one of the Prospectus Directive for the issuance of securities, with an obligation to prepare a white paper, notify it to authorities as well as publish it. The notification of the white paper will also allow for the offer of crypto assets throughout Europe on a cross-border basis.
In a similar fashion to the issuance of securities under the Prospectus Directive, there will be exceptions to the obligation of a white paper on issuers of crypto assets, based on number of targeted investors as well as size of the issuance over the course of a set period of time.
An Issue of Legal Status
One of the issues with crypto assets is related to their legal status, which as many would agree has important implications on both the regulation applicable to crypto assets and their offers as well as the ensuing level of transparency and protection afforded to investors. This is one of the main takeaways from the ESMA Advice on Crypto Assets, where the issue of legal status is tackled also from the perspective of the need for a European Crypto Regulation.
In essence, it is not entirely correct to say that crypto assets and their offers are under no regulation nowadays in Europe. For what concerns those crypto assets that can be considered as transferable securities under MiFID, for instance, the rules under the Prospectus Directive will be applicable to their public offers in Europe. At the same time, though, for those crypto assets which instead do not fit under the definition of transferable securities, there is currently a lack of European regulation applicable, making them subject to local national law in Europe. The European Crypto Regulation will fill the gap in this specific space, introducing uniform rules applicable in Europe to all the non-transferable securities crypto assets.
Interestingly, besides introducing a general definition, the European Crypto Regulation distinguishes crypto assets in i) utility tokens; ii) asset reference tokens; iii) electronic money tokens, with the rules introduced by the European Crypto Regulation being applicable only to crypto assets which are not asset reference tokens and electronic money tokens.
Conclusions
Love it or hate it, the European Commission seems to be betting on the fact that crypto assets are here to stay and is adding another chapter to the already vast European rulebook on financial services with its European Crypto Regulation, to be rolled out officially sometime soon. In addition to the regulation per se, there will be of course an array of ancillary texts, including second level regulation and technical standards. Even though the approval process of the regulation could be finalised in the course of 2023, it might take some more time to finalise the required ancillary regulation. On this point, worth also noting that, for it being a regulation, it will be implemented across Europe with no margin for gold-plating.
The introduction of the European Crypto Regulation is interesting also for other reasons. Amongst them is the opportunity to take a look at the current state of national legislation on crypto assets in Europe. We notice that there are some European Member States, like Germany for instance, already advanced on regulating crypto assets with their national regulation. This shows not only some degree of sophistication on the topic but is also a clear indication more openness for this type of business. Analysing the state of national crypto asset regulation across Europe will prove to be a very useful exercise, especially helpful for those crypto asset issuers who are looking at a domicile in Europe where to establish their operations.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with European Crypto Regulation.