Cautious progress from EU on crypto-assets and ICOs in wide-ranging Fintech Action Plan
The European Commission published an action plan for financial technology on 18 March 2018 as part of the EU’s work to complete the Capital Markets Union. The action plan covers a wide range of topics, including a proposal for an EU Regulation on crowd-funding, setting up an EU Fintech Lab and continued monitoring of developments in crypto-assets and Initial Coin Offerings (ICOs). The action plan indicates that the EU, similarly to the UK and U.S., is positioning itself as open to innovation, with the EU Fintech Lab echoing the FCA’s regulatory sandbox and the Commodities Futures Trading Commission’s (CFTC) LabCFTC. At the same time, the EU is proceeding cautiously with respect to the regulation of crypto-assets and ICOs, meaning that EU institutions wishing to trade in these products still face the task of forming their own view of how to apply the current EU regulatory regime, with the possibility that the EU could at a future date introduce specific legislation.
There are eight key themes in the action plan: (i) licensing requirements for Fintech firms; (ii) common standards and interoperable solutions for Fintech; (iii) a report for best practices for regulatory sandboxes; (iv) a technology-neutrality Suitability Review; (v) removing obstacles to the use of cloud services; (vi) an EU Public Blockchain Initiative; (vii) an EU Fintech Lab; and (viii) strengthening the cyber resilience of the EU financial sector.
No proposed regulation aimed specifically at crypto-assets and ICOs
The action plan does not propose any regulation specifically targeted at crypto-assets. Rather, it refers to the EU measures already taken, including the measures in the Fifth Anti-Money Laundering Directive aimed at virtual currency exchanges and wallet providers, the General Data Protection Regulation and the Regulation on electronic identification and trust services for electronic transactions in the internal market (the eIDAS Regulation) but considers that the case for broad legislative or regulatory action or reform at EU level at this stage is limited.
However, the action plan notes the risks presented by the strong volatility of crypto-assets, fraud and operational weaknesses and vulnerabilities at crypto-asset exchanges. In particular, in relation to ICOs, it notes that while ICOs may offer firms new and innovative ways of raising capital, they also offer clear risks to investors, including market risk, fraud and cybersecurity risks.
The proposal is therefore to assess the suitability of the current EU regulatory framework with regard to crypto-assets and ICOs with a view to ensuring on the one hand that EU firms can take advantage of technical innovations within a fair and transparent framework while addressing, on the other hand, risks relating to financial stability, market integrity, investor and consumer protection, personal data protection, money laundering and terrorist financing. The action plan notes that international coordination will be essential and the European Commission will work with supervisors and partners internationally to determine any further course of action.
Crypto-assets and ICOs under the current EU framework
The action plan does not go into detail as to how crypto-assets or ICOs would be classified under the current EU regulatory framework. However, it does refer to a statement issued by the European Supervisory Markets Authority in November 2017 reminding firms involved with ICOs that such activities may fall under existing EU legislation, depending on their precise structure and characteristics. It then goes on to note that some crypto-assets and tokens may, conversely, escape regulation and the transparency, governance and investor protection objectives that regulation pursues. The conclusion for firms currently wishing to issue ICOs or pursue other activities involving crypto-assets appears therefore to be that each activity should be assessed on a case-by-case basis against the existing EU framework (as well as national laws), on the assumption that the relevant activity could potentially be caught.
Other proposals in action plan
The action plan covers a broad range of other Fintech-related topics, including a proposal for an EU Regulation on investment based and lending based crowd funding service providers, the establishment of an EU Fintech Lab in which European and national authorities will be invited to engage with technology solution providers in a neutral and non-commercial space, and continued work on a comprehensive strategy on block chain.
This article is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication. For more information please contact Karen Birch – firstname.lastname@example.org, or tel +44 20 3088 3710.