Moving Forward With Crypto-Assets in the European Union

Moving Forward With Crypto-Assets in the European Union

When it comes to cryptocurrency and fitting into the existing framework of regulations, a lot of countries are having to rework how their financial systems handle such business models and their approach to crypto-assets. The ESMA is needing to the same.

Many securities organizations have their hands in cryptocurrency, desperately trying to regulate it for investor protection, but investors are resistant to this control. The appeal of cryptocurrency is its decentralization and investing in crypto-assets is growing more rapidly than anyone thought it would.

Advice to European Union Institutions

Considering the benefits and risks cryptocurrency may introduce, the European Securities and Markets Authority (ESMA) continues to work with National Competent Authorities (NCA). Yesterday, the ESMA published advice to European Union (EU) institutions including Commission, Council, and Parliament based on initial coin offerings and other crypto-assets.

This advice pinpoints existing EU regulations that are applicable to crypto-assets, as long as those crypto-assets qualify can be used as financial instruments. It also attempts to provide the EMSA’s thoughts on the shortcomings and issues with the current EU framework.

Concerns in the Existing Framework

A survey of NCAs in 2018 revealed several concerns in the financial regulatory framework when applying it to crypto-assets. These issues include:

  • Interpreting existing requirements and applying them to MiFID-qualified crypto-assets requires accommodations that were not in place before
  • There are no rules regarding crypto-assets that are not considered financial instruments, exposing investors to significant risks

The ESMA suggests that all Anti Money Laundering (AML) requirements should apply to any activity involving a crypto-asset. A risk disclosure should make consumers of cryptocurrency aware of the risks before they commit funds.

Investor Protection

Chairman Steven Maijoor suggests that NCAs face challenges involving applying existing regulations to crypto-assets because, even though these crypto-assets may qualify as financial instruments according to MiFID, the rules were not made to be used in this way.

He argues they still must be adapted to the instrument and the situation. When these crypto-assets don’t fall under the qualifications for a financial instrument, they include risks for investors who don’t have protection when using or investing in the crypto-asset.

What Now?

Investors don’t always understand the risks of investing in crypto-assets. When they aren’t made aware, they become vulnerable to attacks. Some of this can be addressed in the formation of new regulations or providing investors with the knowledge they need via a risk disclosure.

To level the playing field and protect investors in the EU, the gaps and issues in regulations must be addressed and corrected.The EU must consider how it can further analyze these issues and monitor the most recent developments in cryptocurrency, all while working with NCAs and other global regulators.

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