European decision-makers and regulators are progressing towards an EU approach for dealing with cryptoassets, digital assets that use cryptography such as Bitcoin and represent a booming market still viewed with concern by financial supervisors.
EU finance ministers will discuss this issue on Friday afternoon (7 September) and will monitor how member states are handling these assets. Their discussion will come on top of the efforts led by the EU financial watchdogs to rein in this market.
The European Securities and Markets Authority (ESMA) recently surveyed member states to see whether they consider cryptoassets as financial instruments and whether they fit into the existing EU regulation (MiFID).
The European Banking Authority is reassessing these assets in view of the growing interest from banks, despite the early warnings about possible risks.
“Currently there is a diversity of approaches, but at some point, we need to forge an approach,” an EU official told EURACTIV.com.
Although officials and experts agree that some regulation would be needed down the road, they noted that more work needs to be done to determine what assets should be regulated.
Cryptoassets include cryptocurrencies, private means of payment but also used as speculative products as has been the case of Bitcoin; and initial coin offerings (ICOs).
ICOs fund new activities against the promise of future utilities (utility tokens), financial returns (securities tokens), while some other tokens are not tied to future commitments but can be exchanged, such as Bitcoins.
The fast development of ICOs has struck officials in Europe.
“It has grown dramatically,” noted Peter Kerstens, the Commission’s top advisor for Fintech, in a debate hosted by the European Parliament’s innovation group on Tuesday.
This year, ICOs have already raised around $18 billion, compared with around $5.5 billion last year and a few hundred million in 2016.
While it is very hard for startups to raise a few million euros, ICOs can attract investors to raise capital with great success. But there are concerns regarding their transparency and the risk that some of these offerings are fraudulent.
The definition of ICOs as financial instruments depends on national law, given that it is not considered in MiFID.
The Commission is not expected to come up with a proposal on how to deal with cryptoassets at least until the ESMA concludes its assessment of the national frameworks by the end of this year, an EU official said.
While the EU watchdogs continue their mapping exercise, in the European Parliament, MEP Ashely Fox proposed to include ICOs of up to €8 million in the crowdfunding proposal.
But the issue is not only what should be regulated but also when supervisors should intervene.
The Commission is wary of a too early regulation that could kill this booming financial field and expel this market to other jurisdictions.
As member states are starting to regulate cryptoassets, some including enabling frameworks like France or Malta, the EU executive also defends the benefits of having an EU approach that could not only spur innovation in this field but help to address some of the risks.
“It is a balancing act,” an EU official described.
In a paper to be discussed by the ministers on Friday, Bruegel think-tank concluded that cryptoassets should be regulated. But the authors argued that “EU policymakers need to agree on the right moment to move supervision of cryptoassets from the national level to the EU level”.
While the paper notes that diverging supervisory practices could bring “significant downsides”, it adds that different national practices could allow experimentation to see what supervisory approach is the most appropriate for this fast-changing technology
The cryptoasset market witnessed a significant change in its market valuation. After a peak of above $800 billion early this year, it fell to around US$200 billion in August.
Still, the Financial Stability Board believes that cryptoassets do not have a systemic importance yet, even less in Europe.
But the huge variations in market valuation, as was the case of Bitcoin, led regulators worldwide to warn of the risks of these assets.
The general manager of the Bank for International Settlements (BIS) said Bitcoin represents a “combination of a bubble, a Ponzi scheme and an environmental disaster,” given the massive energy needed to digitally generate (or ‘mine’) cryptocurrencies.
The Commission, ESMA and the European Banking Authority have also issued warnings over the past months to consumers, market players and banks to refrain from holding cryptocurrencies.
“We have been pretty negative”, an EBA official said during the European Parliament’s group discussion.
But the EU’s bank regulator is once again looking “very carefully” at issues like the prudential treatment and the appropriate framework, given the banks’ interest to hold cryptocurrencies despite the negative recommendation.
Banks do not want the cryptoassets in order to make money, but to understand better the technology and to engage in ICOs, the EBA official explained.