On Thursday 24 September, the European Commission presented its strategy on digital finance, which will guide its actions until 2024 to “embrace digital finance for the benefit of consumers and businesses” (see EUROPE 12562/10). On the same day, it also tabled its long-awaited legislative proposals to put an end to the “wild west” of crypto-assets.
As expected, the Commission distinguishes between crypto-assets that are already governed by European legislation, as they can be qualified as financial instruments, and those that are not (see EUROPE 12559/20).
For this second category, the Commission proposes a tailor-made scheme that would cover not only entities that issue crypto-assets, but also all undertakings providing services related to these crypto-assets, such as, for example, undertakings that store their customers’ crypto-assets, undertakings that enable them to buy or sell crypto-assets or trading platforms for crypto-assets.
The new rules would allow operators authorised in one Member State to provide their services throughout the EU via a “passporting” system, provided that they meet certain capital, asset custody and investor rights requirements against the issuer.
They will also have to publish a ‘white paper’ containing all relevant information on the crypto-asset issued, including a detailed description of the issuer, the project and the intended use of the funds as well as the risks.
The Commission does not propose to ban issuance of crypto-assets backed by significant assets, such as the so-called ‘stablecoins’, in the EU, but proposes to subject them to stricter requirements in terms of governance, conflicts of interest and investment, among other things. The issuers of these crypto-assets will also have more information to provide in their white paper, for example information on any potential claims, the Commission says.
In particular, issuers of asset-backed crypto-assets must maintain adequate liquidity arrangements with the asset servicing providers that buy and sell these tokens. The token holders would have the right to withdraw directly from the issuer in the event of a material change in value and, in the event that the issuer ceases operations, contractual provisions would have to be put in place to ensure that any potential gain is paid to the token holders.
Issuers of electronic money tokens will be subject to both the requirements set out in this proposed Regulation and the requirements of the Electronic Money Directive.
Compliance with all these requirements would, in principle, be supervised by the authorities of the Member State where the service providers are based. If monitoring is split between several competent authorities because the activities cross borders, then it will be up to the Member States concerned to designate a single contact point.
Large, asset-backed crypto-assets, in contrast, would be supervised by a new college of supervisors, chaired by the European Banking Authority (EBA), which would include, inter alia, the national authority of the Member State where the issuer of the crypto-assets has been authorised, the European Securities and Markets Authority, the European Central Bank or any other EU central bank involved. The EBA would also have the power to conduct investigations and impose fines.
Large issuers of electronic money tokens would be subject to dual supervision by the competent national authorities and the EBA.
It remains to be seen whether these requirements will be strong enough in the eyes of some Member States, who wish to hinder the development of Facebook’s stablecoin, the libra (see EUROPE 12338/2).
Pilot regime
For issuers that already fall within the scope of existing EU legislation, the Commission is proposing a pilot regime for market infrastructures that wish to attempt to trade and settle transactions in financial instruments in the form of crypto-assets.
This pilot regime will be designed as a ‘sandbox’ that allows for temporary derogations from existing rules, so that regulators can gain experience in the use of distributed registry technology in market infrastructures, while ensuring that they can address risks to investor protection, market integrity and financial stability.
See legislative proposals: https://bit.ly/36bdWAO (Original version in French by Marion Fontana)