Markets In Crypto-Assets: FAQ On The European Commission’s Legislative Proposals – Finance and Banking


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Markets In Crypto-Assets: FAQ On The European Commission’s Legislative Proposals


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On 24 September 2020, the European Commission (the Commission)
published a proposed regulatory framework for Markets in
Crypto-Assets (Proposed Framework) as part of its Digital Finance
Strategy for Europe 2020. This FAQ addresses the background and the
key proposals contained in the Proposed Framework.

WHAT IS THE BACKGROUND TO THE PROPOSED FRAMEWORK?

Since publication of the EU Fintech Action Plan in March 2018,
the Commission has been examining the opportunities and challenges
presented by crypto-assets in financial services. Following a
review by the Commission, it found that whilst some crypto-assets
may fall within the scope of existing EU regulation (such as MiFID
II), effectively applying existing regulatory frameworks to
crypto-asset activities is not straightforward. Furthermore, some
EU Member States already have bespoke crypto-asset regulatory
regimes, risking market fragmentation, regulatory arbitrage and
distortion of the Single Market in financial services. Against this
background, the Commission is proposing a bespoke EU regulatory
framework for markets in crypto-assets that promotes markets by
embracing crypto-assets as welcome technological advances in
financial services facilitating the tokenisation of traditional
financial assets.

WHY IS THE PROPOSED FRAMEWORK BEING INTRODUCED?

The reasons cited by the Commission include legal certainty;
supporting innovation; introducing appropriate consumer and
investor protection in relation to crypto-assets; and ensuring
financial stability. The Proposed Framework is in the form of a
draft Regulation in order to achieve maximum harmonisation across
EU Member States’ regulatory treatment of markets in
crypto-assets.

ARE ‘STABLECOINS’ REGULATED UNDER THE PROPOSED
FRAMEWORK?

Stablecoins are crypto-assets that seek to retain a stable value
by referencing one or several fiat currencies or a basket of
traditional assets. The Proposed Framework regulates stablecoins
that fall within the definition of ‘asset-referenced
tokens’ and ‘e-money tokens’ with bespoke regulatory
requirements applicable to each category (see further below).
Issuers of stablecoins that are classified as ‘significant
asset-referenced tokens’ or ‘significant e-money
tokens’ will be subject to enhanced rules, for example,
relating to capital requirements and the investment of reserve
funds, and are to be supervised by the European Banking Authority
(EBA).

WHO IS THE PROPOSED FRAMEWORK APPLICABLE TO?

The Proposed Framework is applicable to, and brings in scope,
two entity types that currently fall outside the ambit of EU
financial services regulation, namely issuers of crypto-assets and
cryptoasset service providers.

Issuers of crypto-assets

  • Issuers of crypto-assets are defined as any legal person who
    offers to the public any type of crypto-asset or seeks their
    admission on a trading platform (noting that natural persons may
    not issue crypto-assets).

  • The Proposed Framework applies various authorisation
    requirements to issuers of crypto-assets, depending on the type of
    crypto-asset they are issuing (see below) and whether the issuer
    holds an existing authorisation (e.g. credit institutions that
    issue asset-referenced tokens would be permitted to issue such
    assets without obtaining a separate authorisation under the
    Proposed Framework).

Crypto-asset service providers

  • there are two sub-categories:

    • Providers of crypto-asset trading platforms are
      providers exchanging crypto-assets for fiat currencies or other
      crypto-assets by dealing on own account and ensuring the custody
      and administration of crypto-assets or the control of crypto-assets
      on behalf of third parties.

    • Providers involved in the placing of crypto-assets are
      providers that receive and transmit orders for crypto-assets,
      execute such orders on behalf of third parties and/or provide
      advice on crypto-assets e.g. custodian wallet providers.

Under the Proposed Framework, both types of crypto-asset service
provider require authorisation by their competent authority and are
subject to a supervisory regime comparable to a scaled-back and
adjusted version of the MiFID II regulatory regime. Credit
institutions and certain MiFID investment firms would be permitted
to provide crypto-asset services without obtaining a separate
authorisation under the Proposed Framework.

The European Securities and Markets Authority (ESMA) is mandated
to establish a register of all crypto-asset service providers.
Specific regulatory requirements would apply to crypto-asset
service providers under the Proposed Framework, including for the
custody of crypto-assets, the execution of orders and the giving of
advice in relation to crypto-assets.

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Originally published 14 October 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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