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The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have both published reports today, January 9, calling for a European Union-wide approach to cryptocurrency and ICO regulation to help ensure investor protection.
The EBA's results of its assessment of European Union (EU) laws and how they relate to crypto assets found that "a significant portion of activities involving crypto-assets do not fall within the scope of the current EU financial services law." The EBA believes this lacuna in EU legislation leaves the door open for consumer protection issues to arise, and may create an uneven playing field amongst members of the union.
The report provides an example of this: Belgium's ban on the selling and trading of non-mainstream or non-standard assets, such as derivatives based on cryptocurrencies. The EBA says the UK is looking at a similar prohibition, but because regulations aren't uniform across the EU, companies may opt to run their businesses in more loosely regulated parts of the EU, creating a disadvantage for EU countries with stricter regulations.
The report calls on the European Commission, the EU's executive branch, to carry out a cost/benefit analysis to see if regulatory action across the EU is "appropriate and feasible at this stage." This research should "extend to aspects relating to the environmental impact of some crypto-asset activity."
The EBA will do its part by working to develop a "common monitoring template which competent authorities can choose to issue to institutions, payment institutions, and electronic money institutions … to monitor the level and type of activity underway."
As for the ESMA, its report advises the European Commission, Council, and Parliament on how to address the gaps in crypto asset and ICO regulations within the EU.
ESMA finds that some crypto assets may qualify as financial instruments under the markets in financial instrument directive (MiFID), which protects investors by requiring organizations to disclose information, including data on trading activity, and ensuring that organized trading takes place on regulated platforms. ESMA advises the above EU institutions to reconsider specific MiFID requirements to allow for more effective applications of the existing regulations on crypto assets.
ESMA also asks that EU policymakers consider the need for transparency requirements for ICOs. The report states:
"To date, the quality, transparency, and disclosure of risks in so-called ICO 'white papers' varies greatly and often emphasizes likelihood of financial returns to encourage speculative 'investment' behaviour by consumers, even where a crypto-asset lacks the legal characteristics to be a financial instrument."
ESMA's goal in establishing cryptocurrency regulation is not mass crypto adoption as an alternative to fiat currency. It even warns that wide regulation of crypto assets may result in "legitimising crypto-assets and encouraging wider adoption," and that any devised regulatory framework should "also protect the integrity of existing capital markets."
ESMA advises the European Commission, Council, and Parliament to focus on providing buyers with information about the risks associated with crypto assets that may not be considered financial instruments, rather than offering buyers a more "elaborate regime" that focuses on crypto assets that are financial instruments.