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Advisory Group Recommends EU Regulate Most Crypto Assets Under Existing Securities Rules

By NexChange
FinTech, Blockchain, Financial Services

When a federal judge in New York ruled last month that the U.S. government could proceed with a fraud case in which it alleges that an initial coin offering (ICO) is a security, it potentially gave the Securities and Exchange Commission an important precedent as it tries to solve a problem that is vexing regulators across the globe: How exactly should crypto assets be regulated?

And now a group advising the European Securities and Markets Authority (ESMA) – which serves as the EU’s securities watchdog – is recommending that most cryptocurrencies and ICOs be regulated under existing European financial rules (h/t Coindesk). In a new report, the Securities and Markets Stakeholders Group (SMSG) notes that “transferable payment and utility tokens are often used as investment products,” and that “risks arise that are very similar to risks on the capital markets (in terms of investor protection and market abuse).”

While ESMA doesn’t have the authority to set financial regulations, the SMSG recommends the watchdog write a letter to the European Commission asking that it consider adding crypto assets to the list of MiFID II (Markets in Financial Instruments Directive II) regulations. The SMSG notes that “although sandboxes and innovation hubs should not be overly regulated, some coordination is necessary.”

In its report, the SMSG provides data showing that 78% of global ICOs have proven to be scams, about 4% failed, 3% “had Gone Dead” and roughly 15% went to be traded on an exchange. A chart provided by the group shows that the dollar value of the ICOs scams was about $1,340.

“Even though the dollar value chart show that that those are ICOs of smaller size, the high level of fraud, failure and money-laundering through crypto-assets should be of high concern for the EU regulators,” the report states.

Another reason for regulating crypto assets under current securities rules, according to the report, is that the warnings to investors that have been issued by regulators across the globe bout the risks tied to ICOs and cryptocurrencies have mostly fallen on deaf ears.

Nearly all securities’ authorities have published warnings to the public about investment risks inherent to ICO and crypto assets. The majority of such warnings were issued on or a few days after ESMA’s warning in November 2017. However, some authorities have been warning consumers about cryptocurrency risks since 2013. It is striking, however, to note the high number of investors who, in the late 2017 and early 2018, bought crypto assets, often without carrying out some checks or going through the white paper. The warnings issued by national authorities and ESMA seem to have had insufficient effect. A robust regulatory framework and an effective enforcement regime, seem therefore necessary tools of investor protection in this area.
European regulators are currently mulling whether to regulate ICOs as securities on a case-by-case basis because “some ICOs resemble financial instruments, which would place them within a specific regulatory framework,” but others do not, as Coindesk reports. The question facing regulators is what to do with the latter.
Photo: Getty iStock

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