ESMA stresses need for amendments to pre- and post-trade transparency requirements for crypto-asset trading venues

Maria Nikolova

ESMA considers that some amendments to the pre- and post-trade transparency requirements applicable to venues trading crypto-assets are needed, as the current requirements are tailored to traditional financial instruments.

MiFID II implementation likely to be set back even further

The European Securities and Markets Authority (ESMA) today publishes its Advice to the European Union (EU) Institutions – Commission, Council and Parliament – on initial coin offerings and crypto-assets.

ESMA has identified a number of concerns in the current financial regulatory framework regarding crypto-assets. These gaps and issues fall into two categories:

  • For crypto-assets that qualify as financial instruments under MiFID, there are areas that require potential interpretation or re-consideration of specific requirements to allow for an effective application of existing regulations; and
  • Where these assets do not qualify as financial instruments, the absence of applicable financial rules leaves investors exposed to substantial risks. At a minimum, ESMA believes that Anti Money Laundering (AML) requirements should apply to all crypto-assets and activities involving crypto-assets. There should also be appropriate risk disclosure in place, so that consumers can be made aware of the potential risks prior to committing funds to crypto-assets.

ESMA believes that some amendments to the pre- and post-trade transparency requirements applicable to venues trading crypto-assets are needed, as the current requirements are tailored to traditional financial instruments. This would require amendments to MiFIR Level 1 legislation and related Level 2 provisions.

In the first place, any meaningful pre- or post-trade transparency requirements would have to be based on a shared understanding of the type of crypto assets traded. In addition, as pre- and post- trade transparency requirements are currently based on liquidity and size-of the order/transaction criteria, this would require setting out liquidity thresholds and size thresholds at Level 2 for those new instruments, which would represent a significant challenge should the same approach continue to prevail.

A raft of issues are associated with crypto-assets that do not qualify as MiFID financial instruments. Unless they qualify as electronic money, they are likely to fall outside of the existing EU financial services rules, in which case investors will not benefit from the safeguards that these rules provide. ESMA is aware that some Member States are considering bespoke regimes for those crypto-assets that do not qualify as MiFID financial instruments. While ESMA understands the intention to provide for both a protective and supportive approach to these instruments, ESMA is concerned that this does not provide for a homogeneous framework across the EU.

Against this background, ESMA envisages two options.

The first option is to implement a bespoke regime for specific types of crypto-assets, that is, for those crypto-assets that do not qualify as financial instruments. Such a bespoke regime, which would require Level 1 measures, would allow tailoring the rules to the specific risks and issues posed by those crypto-assets that do not qualify as financial instruments or electronic money. It may also provide for different requirements depending on the features of these crypto-assets, as some may be further away from traditional financial instruments than others and therefore not raise the same risks and issues, e.g., ‘pure’ utility-type crypto-assets, which appear to have little relation to financial markets and can only be redeemed for certain goods or services (e.g. non-tradable vouchers) and certain payment-type crypto-assets.

Surprisingly enough, the second option is to “Do Nothing”. Under this scenario, financial regulators may consider that certain crypto-assets fall outside of their remit, and in turn should take no further action. ESMA warns that this option does not address the known investor protection and market integrity concerns. ESMA therefore believes that the option for a bespoke regime for specific types of crypto-assets is the most appropriate course of action.

Let’s note that ESMA’s restrictions on the offering of CFDs to retail investors also cover CFDs on crypto-assets.

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