In the fall, the EU Commission is set to complete its work on digital finance, and the result will be a clear definition for cryptocurrency in European law.
“Lack of legal certainty is often cited as the main barrier to developing a sound crypto-asset market in the EU. This is a good chance for Europe to strengthen its international standing and to become a global standard-setter, with European companies leading new technologies for digital finance,” Commission Executive Vice President Valdis Dombrovskis said in a speech in June of this year.
For the past year, the Commission has been holding a consultation for experts around Europe to make recommendations. Out of this consultation has come a ‘non-paper’ as the Commission calls it, with clearly determined priorities:
- Definitions for all types of crypto, including stablecoins and security tokens;
- Changes to the Markets In Financial Instruments Directive II (‘MiFID II’ Directive 2014/65/EU) to include crypto assets;
- A regime for blockchain-based platforms.
“We expect this legislation to be historic for Europe,” comments Bruno Schneider – Le Saout, chairman of the Brussels-based European Blocktech Federation. “These laws will support digital finance across the EU for many years to come.”
Schneider-Le Saout – who helped to write the current French legislation governing crypto – points to several critical changes that this legislation will bring.
“The new legislation will provide legal certainty, which is needed both for crypto-assets that are not covered by existing EU financial services legislation and for the application of DLT in financial services and the tokenisation of traditional financial instruments,” he says.
“Then, there is the qualification of crypto-assets as ‘financial instruments’ which is crucial as it places crypto-assets within the extensive set of European and national legal instruments that regulate the EU financial market – most notably Mifid II,” Schneider-Le Saout explains.
There is also the need for a strict definition and legal framework for the security token – a crypto-asset that acts more or less like an equity share in a company. The proposed legislation suggests the creation of a ‘sandbox,’ a kind of legal testing ground (the UK’s authorities created this concept and have an active ‘sandbox,’) in which the activity of these tokens on the blockchain can be studied.
And the proposed legislation includes specifics about how blockchain-based market structures should be regulated – currently the operation of cryptocurrency exchanges is not well covered and has led to numerous scams and exchange failures, as Schneider-Le Saout notes.
One of the most important aspects of the legislation is to create a Single Market for crypto-assets, so that they can be sold across all EU borders.
The proposal suggests writing a Regulation to establish harmonised requirements at EU level for issuers that seek to offer their crypto-assets across the Union and crypto-asset service providers wishing to apply for an authorisation to provide their services in the single market, the non-paper says.
This initiative would replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation. The legislation would be designed around five main building blocks: Scope, subject matter and definitions, requirements on issuers, requirements on issuers of stablecoins, requirements for crypto-asset service providers, dedicated rules to ensure market integrity, and supervision of issuers along with powers of national competent authorities to ensure market integrity.
The target for the adoption of the proposals by the Commission is the third quarter of 2020, but there may be coronavirus-related delays, according to the Commission press office.