The securities watchdog in Europe – ESMA (European Securities and Markets Authority) gave the nod to regulate the ICO tokens and most of the cryptocurrencies under the prevailing rules. It is necessary as transferable assets like Bitcoin (BTC) are used in payments. They are considered as assets and hence regulation is needed to mitigate the security risks such as those seen in capital markets.
According to the report of SMSG (Securities and Markets Stakeholders Group) released on October 19, 2018, ESMA should consider including crypto assets in the existing Markets in Financial Instruments Directive II (MiFID II) regulations of the EU. However, ESMA doesn’t have powers to make the changes in EU regulation. Therefore, ESMA should consult the European Banking Authority to take up this issue with the European Commission.
New Regulations for Transferable Crypto Assets
The new rules are for transferable tokens only. For example, Filecoin Crypto project issues transferable ‘utility tokens’ and hence carries a potential security risk for the investors. Such transferable crypto assets should be brought under the control of MiFID II.
SMSG said a decision is to be taken for the third category – asset tokens that are used to prefinance the new business since that may be categorized as either transferable securities or financial instruments. An appropriate regulation will be applied to such asset tokens depending on whether they have financial entitlements and transferable securities. They will have the features of shares or bonds and transferable tokens shall be subject to MiFID II regulations.
ESMA should come out with a clear definition of the transferable security in the guidelines. It should also clarify on the asset token that has the financial entitlement under the MiFID transferable security. According to SMSG, no regulation is needed for non-transferable asset tokens. The report also favors the creation of innovation centers for the token based startups. ESMA need to ensure transparency, quality, and legal security for the national initiatives.
Legal Framework to Prevent Money Laundering and Criminal Activities
As criminals are using the latest cryptocurrencies are being used by criminals, more tight securities regulations are needed to prevent activities like money laundering, tax evasion, and terror financing. The market value of virtual currencies being misused worldwide is estimated at Euro 7 billion.
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