- The European Union will complete new “historic” legislation on Bitcoin and cryptocurrencies this autumn.
- Under the new regulations, Bitcoin and other cryptocurrencies will be classified as financial instruments throughout Europe.
The regulation of crypto-assets in the EU has, to date, consisted of a patchwork of national rules, with EU regulation only applying where crypto-assets fell within existing legislative frameworks. But pending the outcome of a European Commission consultation and the response to that feedback, it seems likely that 2020 will be an important year for the development of a more harmonised approach to the regulation of crypto-assets.
Stable coins that include a reference to one or several existing legal currencies, such as Libra, pose specific issues, which were summarised in detail in the G7 Working Group report on stable coins published in October 2019 and resulted in a ban in the EU. On December 5, 2010, the EU Council and Commission jointly stated that no global “stablecoin” arrangement should begin operation in the European Union until the legal, regulatory and oversight challenges and risks have been adequately identified and addressed.
Until recently, the regulation of crypto-assets was primarily left to national initiatives, with States adopting diverging approaches. However, a fundamental distinction seemed to emerge between crypto currencies on the one hand and tokens on the other hand. As summarised by the EU Parliament in its April 2020 study on crypto-assets:
“Cryptocurrencies (or coins), such as Bitcoin and Litecoin, are those crypto-assets that are designed or intended to perform the roles of currency, i.e.to function as a general-purpose medium of exchange, a store of value and a unit of account. They are intended to constitute a peer-to-peer alternative to government-issued legal tender. Tokens, on the other hand, are those crypto-assets that offer their holders certain economic and/or governance and/or utility/consumption rights. Broadly speaking, they are digital representations of interests, or rights to (access) certain assets, products or services. Tokens are typically issued on an existing platform or blockchain to raise capital for new entrepreneurial projects, or to fund start-ups or the development of new (technologically) innovative services.”
In a number of jurisdictions around the world, the emergence of crypto-assets gave rise to specific legislative and regulatory responses aimed at addressing the most urgent issues raised by their development, albeit sometimes only partially given the difficulty to proceed with their legal qualification. In fact, all crypto-assets have different functionalities, and their inclusion within the existing regulatory framework requires a case-by-case analysis. This approach is clearly the one retained, for example, by the Swiss FINMA in its ICO guidelines published in February 2018 or the UK FSA, for whom “whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case. Many ICOs will fall outside the regulated space. However, depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities”.
Most of the legislative and regulatory work so far thus focused on investor protection in the context of ICOs and, to a lesser extent, money-laundering issues. For example, in France, the PACTE (Action Plan for Business Growth and Transformation) law was adopted in April 2019 and established a legal framework for fundraising via the issuance of virtual tokens (ICOs) and digital asset service providers (“DASPs”). In the United States, the approach was rather to focus on substance over form with the consequence that US securities laws will be applicable for most ICOs. As stated by the SEC Chairman in a December 2017 statement, “replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance”. Based on this approach, the SEC initiated several enforcement actions against ICO issuers that had failed to register their offering in accordance with US securities laws.
To address the more general issues raised by crypto-assets in the EU, on 19 December 2019, the European Commission launched a public consultation into a Directive/Regulation establishing a European framework for markets in crypto-assets.
The introduction to the consultation notes that crypto-assets have “the potential to bring significant benefits to both market participants and consumers” but also acknowledges the potential difficulties presented, including the challenge to financial stability that arises from the emergence of “stablecoins” as a new subset of crypto-assets.
The consultation builds on advice obtained from the European Banking Authority and the European Securities and Markets Authority on the applicability and suitability of the existing financial services regulatory framework to crypto-assets and will inform the Commission services’ ongoing work on crypto-assets. The consultation document notes that this includes a possible common regulatory approach at EU-level for crypto-assets that are not currently covered by EU legislation.
The consultation document is a working document and does not constitute a formal proposal by the European Commission. However, the consultation document provides a useful indication of the main areas of focus for the Commission and areas identified for potential regulatory reform:
- Clarity (either by way of guidance, regulation, or a combination of the two) as to the classification of crypto-assets potentially distinguishing between “payment tokens”, “investment tokens”, “utility tokens”, and “hybrid tokens”;
- A bespoke regime for crypto-assets not currently covered by EU financial services legislation, which may or may not include certain types of crypto-assets (such as utility tokens);
- Greater regulatory requirements on crypto-asset service providers (issuers of crypto-assets, exchanges, trading platforms, wallet providers, etc.).
- Requirements to ensure the proper identification of transacting parties in crypto-assets;
- A widening of the AMLD definition of virtual currency, classification of obliged entities and conditions for regulation and licensing of providers;
- Increased oversight and supervision of crypto-asset service providers; and
- Amendments to existing legislation (including, inter alia, MiFID, the Market Abuse Regulation and Short Selling Regulation) to ensure appropriateness for security tokens and the use of distributed ledger technology.
The consultation document is a working document and does not constitute a formal proposal by the European Commission.
National implementation of amendments to the Anti-Money Laundering Directive
Concurrently, the implementation in the EU in the Anti-Money Laundering Directive (“AMLD”) contains a number of changes which will further impact crypto-asset professionals. The amendments to the previous iteration of the AMLD include:
- A new definition of virtual currencies;
- The inclusion of virtual currency providers and custodian wallet providers as obliged entities (which means that they will be subject to the requirements of the AMLD, including the need to apply customer due diligence measures and the need to report suspicious transactions); and
- The requirement that exchange platforms and custodian wallet providers be registered.
A report by the Cyprus Mail reveals that a new legislation on Bitcoin and other cryptocurrencies could be introduced in Europe. Ready for this autumn, the legislation will seek to give legal clarity to activities related to crypto trading. In addition, the new legislation aims to encourage innovation in the crypto and blockchains sector.
The European Union has been working to create a new regulatory and legal framework on cryptocurrencies for at least a year. In that sense, the European Commission opened a consultation in December 2019 in which it publicly asked about comments on crypto regulation. The consultation was answered by private companies as important as PayPal and Google. After the consultation was closed, the Executive Vice President of the European Commission, Valdis Dombrovskis, stated:
Lack of legal certainty is often cited as the main barrier to developing a sound crypto-asset market in the EU. This is a good chance for Europe to strengthen its international standing and to become a global standard-setter, with European companies leading new technologies for digital finance.
Bitcoin and cryptocurrencies are to be classified as financial instruments
According to the report, the president of the Brussels-based Blockchain Federation, Bruno Schneider-Le Saout, called the new legislation “historic”. The president of the Blockchain Federation further said the new legislation will support European digital finance for many years to come and added:
The new legislation will provide legal certainty, which is needed both for crypto-assets that are not covered by existing EU financial services legislation and for the application of DLT in financial services and the tokenisation of traditional financial instruments.
Schneider-Le Saout stated that it is crucial that cryptocurrencies will be classified as financial instruments. This would allow this asset class to be included in the European Union’s legal instruments regulating the markets.
Another important element of the crypto ecosystem, the security tokens, will be subject to more stringent scrutiny. Therefore, the new legislation proposes to create areas where this asset class can be studied. These territories are called “sandboxes” and have their predecessors in an experiment currently being conducted by the UK.
Consumers will quickly benefit from the introduction of the new legislation, as Schneider-Le Saout pointed out. The legislation proposes to create a single market in which this asset class will be sold throughout Europe. It is therefore expected that a regulation will be written to “harmonize” the requirements that providers of crypto products and services will have to meet.
When introduced, the new legislation will replace the already existing legal frameworks at national level and will apply to all cryptocurrencies. Among the most important issues, the legislation covers the following: requirements for stablecoin issuers, requirements for cryptocurrency service providers, a definition of crypto assets, the scope, among others.
The legislation is expected to be completed by the end of the third quarter of this year.