Thursday, 22 October, 2020
The Digital Regulator
The proposed EU framework for crypto-assets
The EU’s regulatory crypto-asset landscape has so far been characterised by fragmentation and uncertainty. This has hindered the scaling-up and development of crypto-asset products and services. The European Commission (EC) reacted to this situation on 24 September 2020, by issuing a Digital Finance PackageDigital Finance Packagelink1 (DFP) that includes a proposal for an EU regulatory framework on crypto-assets aimed at seizing related opportunities in a risk-controlled environment. The DFP also includes strategy papers for digital finance and retail payments, a proposals for a framework on digital operational resilience, as well as a proposal for a pilot regime for market infrastructures based on the distributed ledger technology (DLT).
A closer look at the proposals for crypto-assets—which include stablecoins, significant stablecoins, and crypto-asset service providers—reveals an approach based on the principles of ‘same activity, same risk, same rule’, proportionality and complementarity. The proposals are comprehensive and would implement, de facto, the current financial regulatory framework for crypto-asset products and services. This would also create additional duties and accountabilities for all concerned national and regional regulatory bodies. While the intention is laudable and much needed, the timeline for implementation (2024) is too far off, and the nature and extent of the proposed requirements raise the issue of adequacy vis-à-vis the reality of an industry that is, at best, embryonic. The proposal risks the deterrence—instead of the promotion—of the industry if not implemented in a way that encourages and attracts entrepreneurs.
The month of September 2020 witnessed other noteworthy regulatory developments in the digital space, such as the Swiss canton of Zug accepting corporate and individual tax payments in bitcoin and ether, the Swiss Financial Market Authority (FINMA) authorising Sygnum bank’s Organised Trading Facility (OTF), the Swiss Parliament completing the approval process for the blockchain law, and several regulators deliberating actions about central bank digital currencies (CBDCs).
EC proposal for an EU framework on crypto-assets
As part of the DFP, the EC proposes an EU regulatory framework on crypto-assetsEU regulatory framework on crypto-assetslink1. This includes a digital finance strategy, a retail payments strategy, proposals for an EU regulatory framework on digital operational resilience, and a proposal for a pilot regime for market infrastructures based on DLT to complete the DFP. The goals of the crypto-assets proposal are to address the current fragmented environment, facilitate the scaling-up of crypto-asset products and services, create legal certainty, improve consumers’ choice while ensuring their protection, market integrity, and financial stability. The proposal complements existing EU-wide regulations that already apply to crypto-assets, such as the anti-money laundering (AML) / combating financing of terrorism (CFT) provisions and the Markets in Financial Instruments Directive (MiFID), and it is based on the principle of ‘same activity, same risk, same rule’. While the proposal includes provisions on e-money tokens, the focus in what follows is limited to the requirements proposed for the issuance of crypto-assets, stablecoins, significant stablecoins, and for crypto-asset service providers.
The issuer of a stablecoin is subject to certain provisions that, interestingly, intersect to an extent with the Swiss FinTech license and Banking Law requirements. Thus, the issuer shall always meet an own funds obligation equal to or higher than i) EUR 350,000 or ii) 2% of the average amount of the reserve assets. The reserve assets shall be segregated from the issuers’ own assets (and held at a credit institution of an authorised crypto-asset service provider); they will not be encumbered or pledged. The reserve management shall be organised to ensure the ability of the issuer to meet any redemption request promptly. The reserve assets shall be invested only in highly-liquid financial instruments with minimal market and credit risks, and all profits or losses shall be borne by the issuer. The issuers of stablecoins are prohibited from paying interest to the holders.
Significant stablecoins: A stablecoin is classified as a significant stablecoin when certain conditions are met. These conditions include the size of the customer base (must not be smaller than 2 million), value of the stablecoins issued (market cap must not be lower than EUR 1 billion), number of transactions (must not be smaller than 500,000 per day), value of transactions (must not be lower than EUR 100 million per day), size of the reserve assets (must not be smaller than EUR 1 billion), significance of cross-border activities (must involve at least seven member states), and degree of interconnectedness with the financial system. The responsibility to classify a stablecoin as a significant stablecoin is with the EBA. When a stablecoin is deemed significant, EBA assumes supervisory responsibilities and organises a supervisory college. Issuers of significant stablecoins are subject to additional obligations compared with issuers of non-significant stablecoins. These incremental obligations include the requirement to hold the stablecoins in custody with multiple crypto-asset service providers and to assess and monitor the liquidity needs to meet redemption requests.
This section focused on a subset of the DFP and—within the subset of the framework on crypto-assets—on the proposal addressing crypto-assets, stablecoins, significant stablecoins, and crypto-asset service providers. A single market for crypto-asset products and services is much needed, given the existing significant fragmentation and regulatory uncertainty characterising the EU. This proposal is based on the proportional application of the principle of ‘same activity, same risk, same rule’. It complements provisions such as in the areas of AML / CFT and MiFID, which already apply to crypto-asset products and services. Due to its comprehensive nature, the proposal de facto extends the current financial regulatory framework to crypto-asset products and services. The proposal’s nature and extent suggest the risk that it may deter rather than promote the development of an industry that is currently, at best, embryonic. The implementation date of 2024 is too far off, and the process must ensure that entrepreneurs are encouraged and supported in their endeavours.
Other noteworthy developments
Switzerland achieved several milestones during September 2020 in the areas of taxation, tokenisation, and legal certainty.
Several jurisdictions world-wide have deliberated further CBDCs, increasing the likelihood that a CBDC solution will be implemented soon.
The EC has released a proposal for an EU regulatory framework on crypto-assets. This move was largely expected and much needed given the significant fragmentation and regulatory uncertainty generated by the unilateral initiatives of member states. An EU regulatory framework on crypto-assets shall allow a single market to seize crypto-finance opportunities in a risk-controlled environment. The proposals are comprehensive and would implement, de facto, the current financial regulatory framework for crypto-asset products and services. This framework’s implementation is expected to occur by 2024. In the interim and during the accompanying legislative and implementation processes, it is imperative that crypto-finance entrepreneurs are encouraged and supported in their endeavours instead of being deterred by the overwhelming nature and extent of the proposed requirements.
September 2020 was characterised by several noteworthy regulatory developments in the digital space. In Switzerland, the canton of Zug announced that it will accept corporate and individual tax payments in bitcoin and ether, the FINMA authorised Sygnum bank’s OTF, and the Swiss Parliament completed the approval process for the blockchain law.
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