SMSG published Initiative Report on Initial Coin Offerings (ICOs) and Crypto-Assets

On 19 October 2018, the Securities and Markets Stakeholder Group (SMSG) published its Initiative Report on Initial Coin Offerings (ICOs) and crypto-assets. The aim of this report is to give advice to the European Securities and Markets Authority (ESMA) on steps it can take to contain the risks for investors of ICOs and crypto-assets on top of existing regulation.

Besides general definitions, the report contains a classification of tokens. Remarkably, the SMSG adheres in its report to the token classification of the Swiss Financial Market Supervisory Authority FINMA, which distinguishes between payment-, utility- and asset-tokens.  

In addition, the SMSG carried out a desktop-research exercise to map relevant legislative developments or regulatory approaches taken by national securities supervisory authorities in the EU and EEA member states in regard to ICOs and digital currencies. In total, the research covers thirty-six jurisdictions. The countries covered can be broadly classified into three categories:

1. Evident proactive approach (7 jurisdictions): Those countries who have expressly legislated or specifically developed methodologies for assessing how and to what extent ICOs could be considered as financial instruments (Malta, Switzerland, Lithuania, Gibraltar, Jersey, Isle of Man, with France in the process)
2. Careful consideration (15 jurisdictions): Those countries not specifically restricting ICOs or crypto-assets initiatives but taking a measured approach to related proposals on a case by case basis (Austria, Belgium, Bulgaria, Denmark, Estonia, Finland, Germany, Ireland, Luxembourg, Netherlands, Portugal, Spain, United Kingdom, Lichtenstein and Guernsey)
3. Undefined approach (14 jurisdictions): Those countries for which there is no clear information as to their stance in these areas (Croatia, Czech Republic, Greece, Hungary, Italy, Latvia, Poland, Republic of Cyprus, Romania, Slovakia, Slovenia, Sweden, Norway and Iceland).

The SMSG advises the ESMA to provide level 3 guidelines or the aim at supervisory convergence on:

• the interpretation of the MIFID definition of “transferable securities”, and clarify whether transferable asset tokens in certain situations are subject to MiFID II and the Prospectus Regulation;
• the interpretation of the MiFID definition of “commodities”, since this concept is crucial to determine whether an asset token is a MiFID financial instrument or not;
• the interpretation of the MTF and OTF concepts, clarifying whether the organisation of a secondary market in asset tokens in certain situations is indeed an MTF or an OTF;
• whether asset tokens are MiFID financial instruments if the issuers organize a secondary market;
• the fact that when issuers of asset tokens are to be considered to organize an MTF or an OTF in accordance with the above, the MAR applies to such MTFs and OTFs.
• the fact that in all situations in which an asset token is to be considered a MiFID financial instrument, persons giving investment advice on those asset tokens or executing orders in those asset tokens, are to be considered investment firms, which should have a licence as such, unless they qualify for an exemption under MiFID II.

The SMSG recognizes that the ESMA is not competent to change the Level 1 MiFID II text listing the MiFID II financial instruments, but urged the ESMA to send a letter to the Commission asking it to consider adding these tokens to the MiFID list of financial instruments.

The SMSG also stated in its report that sandboxes and innovation hubs should not be over-regulated. Nevertheless, the ESMA should provide guidelines with minimum criteria for national authorities which operate or want to operate a sandbox or innovation hub.