A Europe-wide regulatory sandbox should be established for the security token industry, according to France’s Financial Markets Authority (AMF).
The independent regulator has warned “major legal obstacles” are stopping these digital assets from being exchanged freely on the continent.
According to detailed legal analysis published by the AMF, two crucial pieces of legislation mean secondary markets cannot be established for security tokens in the European Union: the Markets in Financial Instruments Directive (MiFID) and the Central Securities Depositories Regulation (CSDR.)
Together, these regulations stipulate that a centralized body must record the movements of financial securities, even though blockchain renders this requirement obsolete. Other hurdles include an obligation for securities to be settled in cash, and the need for a platform manager to be identified—something that can be “impossible for hybrid and decentralized platforms which rely on a blockchain for the execution of transactions,” the AMF said.
At a speech in Brussels on March 6, AMF Chairman Robert Ophèle warned Europe faces a “chicken and egg” paradox when attempting to accommodate markets for security tokens. On one hand, it is too early to change “important” regulations such as MiFID and CSDR because the security token market is yet to mature. However, doing nothing would risk stifling innovation.
A member of the U.S. Securities and Exchange Commission (SEC) made a similar call on Feb. 6. Cryptocurrency-friendly SEC Commissioner Hester Peirce said a three-year regulatory “safe harbor” is needed as the current situation is a “regulatory Catch-22.”
A Europe-wide regulatory sandbox
Ophèle said that the AMF is proposing a three-year “transitional solution” where eligible security token projects would fall under a limited framework that exempts them from the need to comply with problematic parts of MiFID and CSDR regulations. The so-called “Digital Lab” would pave the way for experimentation to take place—and give the EU time to figure out how current regulations need to be adapted. Companies that benefit from the sandbox would be expected to comply with “key principles of financial regulation,” and placed under increased supervision.
During his speech, Ophèle stressed that he does not believe current European frameworks are doomed to fail—nor that current intermediaries will disappear. He said blockchain may not end up being the technological revolution that renders established norms obsolete, but added: “[Blockchain] can contribute to a profound transformation of the functioning of financial services by reducing the cost of intermediation and speeding up processing. The European Union cannot afford to miss it.”
In its analysis, the AMF said there appears to be “enthusiasm” for security tokens—with blockchain professionals expressing a strong appetite for these assets. Several security token offerings have taken place across Europe, and some members of France’s parliament are lobbying for STOs to be legalized. However, the independent body believes that few—if any—of its European counterparts have properly scrutinized the legal ramifications and regulatory adaptations that security token trading platforms would require.
Underlining the urgency of being forward thinking, Ophèle drew parallels with the early days of the internet. He spoke of how email was a niche activity 30 years ago, but something that is “almost free, immediate, cross-border and for the general public” today. The executive also warned that it is plausible that the public will be unwilling to pay fees when making a transaction in 10 years’ time.
Ophèle concluded his speech by warning Europe’s “significant role” in the financial sector could diminish unless it is matched with an “ambitious European digital strategy.” The regulatory sandbox the AMF is proposing will only be possible if a new directive or piece of regulation is released by the EU.
Updated March 13, 2020 at 5:35 p.m. to correct Financial Markets Authority Chairman Robert Ophèle’s title.
C Sephton is a journalist with an interest in cryptocurrencies, personal finance, and financial inclusion—as well as the challenges the crypto industry faces in achieving mainstream adoption. He owns cryptocurrencies.