Crypto-assets: EBA’s views on to the application of the EU financial regulatory framework

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Crypto-currencies – Crypto-assets – EBA – Financial regulation
The set-up and implementation of cryptocurrency-related transactions require a, not always simple, legal assessment as to whether such transactions are subject to financial regulation. In practice, knowing whether cryptocurrency-related transactions or related activities are subject to financial regulation (or not) is quite important from a practical viewpoint since the application of financial regulation may lead to such activities or transactions being subjected to specific requirements (e.g. licensing obligations, specific conditions to respect while conducting the activity, specific rules of conduct to respect).

Upon a request from the European Commission and following the need for further investigation on crypto-assets identified in the FinTech Action Plan and FinTech Roadmap, the European Banking Authority (hereinafter “EBA”) published, on 9 January 2019, a report setting forth the findings of the investigation on crypto-assets it conducted in 2018. The report gives valuable indications as to whether crypto-assets fall within the scope of financial regulation.

The report was drafted, because the rapid increase in both the types of crypto-assets and the purposes for which they can be used raised questions as to the applicability and appropriateness of the current EU financial regulatory framework, in particular taking into account the risks to consumers (e.g. due to the absence of appropriate notifications on the risks associated with crypto-assets), market integrity (e.g. integrity of pricing) and the potential use of crypto-assets in money laundering activities.

The EBA report pertains to so-called “crypto-assets”. Traditionally, crypto-assets only included tokens for payment-type purposes (the so-called “virtual currencies”, also referred to as "cryptocurrencies" or "payment/exchange tokens"). Nowadays, the term “crypto-assets” also entails “investment” or “securities” tokens representing debt or capital claims on the issuer and “utility” tokens used to provide access to applications or services (typically related to DLT).

In the report, the EBA verifies whether Directive 2009/110/EC (second Electronic Money Directive or EMD2) and/or Directive 2015/2366/ EU (second Payment Services Directive or PSD2) apply to crypto-assets and, more precisely, whether crypto-assets qualify as ‘electronic money’ and/or as ‘funds’. According to the EBA, the qualification needs to be made on a case-by-case basis, each time taking into account the characteristics of the crypto-assets involved. According to the EBA Crypto-assets may qualify as electronic money if they i) are stored electronically, ii) have monetary value, iii) represent a claim on the issuer, iv) are issued in exchange for received money with the aim to perform a payment transaction and v) are accepted by other persons than the issuers. In case crypto-assets qualify as electronic money , a licence as electronic money institution for electronic money is required for the issuer of such crypto-assets and PSD2 is likely apply to the payment services related to such crypto-assets.

In the report, the EBA also states that activities and transactions related to crypto-assets generally fall outside the scope of the current EU financial regulatory framework, as a result of which consumers are not sufficiently protected (in particular concerning specific services relating to crypto-asset custodian wallet provision and crypto-asset trading platforms). The EBA points out that the regulatory approach in the EU is diverging due to the fact that member states are starting to implement specific national regulation.

Taking the above-mentioned undesired outcomes into account, the EBA advises the European Commission to carry out further analysis in order to determine whether any regulatory action at EU level covering activities and transactions related to crypto-assets would be required to cover.

To be continued.

Régine Feltkamp, Gerrit Hendrikx & Guillaume Milde