ESMA Issues New Recommendations On Digital Assets

January 10, 2019 | AtoZ Markets-This Wednesday, the European Securities and Markets Authority (ESMA) published its recommendations on initial coin offerings (ICO) and digital assets, stressing that some of them can be qualified as MiFID financial instruments.

ESMA Splits Digital Assets Into Two Categories

The new document is addressed to the institutions of the European Union (EU). The recommendations of the markets regulator are based on work that ESMA carried out jointly with the national competent authorities (NCAs). The work carried out by the aforementioned organizations also included a survey to analyze various business models of digital assets and determine their compliance with current regulatory requirements framework.

ESMA offers two main categories of crypto assets. The first includes digital assets that can be qualified as financial instruments in accordance with the MIFID. However, there are still areas in the regulation that "will require a potential interpretation or revision of specific requirements," added the financial regulator. According to the study, NCAs mainly believe that some crypto assets that have rights to profit may qualify as MiFID financial instruments, such as transferable securities.

The second category includes digital assets that do not belong to the category of financial instruments. ESMA believes that to protect investors, they must be subject to anti-money laundering (AML) requirements.

Any Legislation Gaps Should be Resolved on the European Level

In order to ensure adequate protection of investors in the EU, ESMA proposes that the problems and any gaps in the legislation, noted by the regulator, be resolved at the European level.

Commenting on the aforementioned problem, the chairman of the ESMA, Steven Maijoor (pictured below) mentioned that the NCAs survey showed that some crypto assets "may qualify as MiFID financial instruments." In this case, Maijoor added that "the full set of EU financial rules will apply." Since the existing rules were not developed with these tools in mind, the NCA encountered problems in interpreting the existing requirements, and some requirements are not adapted to the specific characteristics of digital assets.

According to the ESMA representatives, a number of digital assets go beyond the current regulatory framework and there are significant risks for investors when investing in these crypto assets. In a document published today, the European financial regulator also believes that ICO could have real benefits, but this is only subject to the availability of appropriate safeguards.

ESMA Talking About Risks Digital Assets Involve

In addition, the European regulator also proposes that all assets and cryptocurrency-related activities have proper risk disclosures, similar to the warnings about the risks required in the forex trading and CFD industry. This, according to ESMA, will allow consumers to be aware of the risks of investing in cryptocurrency, before allocating their funds for investments.

Although cryptocurrencies have raised a lot of noise in the financial sector, the emerging industry is still small and the European financial regulator now believes that it does not cause any problems with financial stability. Nevertheless, the issue of the risks associated with the ESMA cryptocurrency is taken very seriously.

The attitude of the financial regulator to changes in the financial market is evidenced by a set of rules introduced in the EU regarding binary options, CFD and leverage restrictions in 2018. In particular, the ESMA suggests that the most significant risks for cryptocurrency investors are fraud, cyber attacks, money laundering and market manipulation.

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